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The United States has approximately 360 commercial sea and river ports. While no two ports in the United States are exactly alike, many share certain characteristics that make them vulnerable to terrorist attacks: they are sprawling, easily accessible by water and land, close to crowded metropolitan areas, and interwoven with complex transportation networks designed to move cargo and commerce as quickly as possible (see fig 1). They contain not only terminals where goods bound for import or export are unloaded or loaded onto vessels, but also other facilities critical to the nation’s economy, such as refineries, factories, and power plants. To reduce the opportunity for terrorists to exploit port vulnerabilities, port stakeholders are taking mitigation steps. For example, port stakeholders have installed fences, hired security guards, and purchased cameras to reduce the potential for unauthorized entry and help prevent vulnerabilities from being exploited. To help defray some of the costs of implementing security at ports around the United States, the PSGP was established in January 2002 when the Transportation Security Administration (TSA) was appropriated $93.3 million to award grants to critical national seaports. In November 2002, the Maritime Transportation Security Act (MTSA), which codified the program, was enacted. Since the supplemental appropriations act for fiscal year 2002, the appropriations acts have provided annual appropriations for the PSGP. FEMA is responsible for designing and operating the administrative mechanisms needed to implement and manage the grant program. The Coast Guard—which is generally the lead federal agency for port security—provides subject matter expertise for the maritime industry and participates in project award decisions. From fiscal year 2002 through fiscal year 2011, nearly $2.5 billion has been allocated to the PSGP, as shown in table 1. In recent years, we, the Congress, the President, the Secretary of Homeland Security, and others have endorsed risk management as a way to direct finite resources to areas that are most at risk of terrorist attack. Risk management is a continuous process that includes the assessment of threats, vulnerabilities, and consequences to determine what actions should be taken to reduce one or more of these elements of risk. One way in which DHS has applied risk management principles to the PSGP is through the use of a risk model to assess the relative risk posed to ports throughout the nation and to help determine PSGP eligibility and funding levels. The PSGP risk methodology is similar to the methodology used to determine funding eligibility for other DHS state and local grant programs. The model consists of three variables: threat (the relative likelihood of an attack occurring), vulnerability (the relative exposure to an attack), and consequence (the relative expected impact of an attack). Data for each of these variables are collected from offices and components throughout DHS, as well as from other data sources, and then, using the model, each port is ranked against one another and assigned a relative risk score. At the recommendation of the Coast Guard, DHS considers some ports as a single cluster—known as a port area—due to geographic proximity, shared risk, and a common waterway. Based on risk, each port area is placed into one of three funding groups— Ports not identified in Group I, II, or III are Group I, Group II, or Group III.eligible to apply for funding as part of the “All Other Port Areas” Group.Figure 2 below shows the location of port areas for groups I and II—the two highest risk groups that receive the bulk of grant funding. To promote a regional approach to risk management in the highest risk port areas, FEMA required—beginning with the fiscal year 2007 supplemental guidance—that all Group I and II port areas—the highest risk port areas—develop and implement a Portwide Risk Mitigation Plan (PRMP). The primary goal of a PRMP is to provide a port area with a mechanism for considering its entire port system strategically as a whole, and to identify and execute a series of actions designed to effectively mitigate risks to the system’s maritime critical infrastructure. DHS creates PSGP grant guidance annually which provides the funding amounts for each group, eligible applicants, and the application materials for funding under the program. As shown in figure 3, there are three stages of the PSGP grant cycle: allocation, award, and distribution. Each port area’s allocation is driven by the results of the PSGP risk analysis model. However, the allocation process varies among groups as described below. Groups I and II: The risk model determines the port areas at high risk of a terrorist attack and DHS places them in either Group I (highest risk group) or Group II (next highest risk group). In fiscal year 2011, there were 7 port areas in Group I and 48 port areas in Group II. Each port area in these groups is allocated a specific amount of funding based on its risk score. Group III: Group III ports represent the next risk grouping of port areas based on the risk model scores. For fiscal year 2011, there were 35 port areas in Group III. However, unlike Groups I and II, these port areas do not receive a specific allocation based on risk. Instead, DHS allocates a set amount of funding to Group III as a whole and port areas within Group III compete against each other for this funding based on risk and project effectiveness. All Other Port Areas: Port areas not evaluated using the risk model, but which operate under an Area Maritime Security Plan (AMSP),are eligible to compete for funding with the All Other Port Areas Group––in a manner similar to Group III, but without using risk scores as a factor in project selection. After DHS announces the allocation amounts for all of the groups through the release of the grant guidance, applicants must apply for funding–– either through the fiduciary agent or directly to FEMA––within 45 days of the release of the grant guidance. Applicants are entities within a port area—such as port authorities, facility operators, and state and local government agencies—that provide port security services. During the award process, DHS and the U.S. Department of Transportation (DOT) evaluate the port areas’ projects and determine which projects to fund. Before the projects reach DHS and DOT for review they are vetted locally. The local evaluation process––known as field-level review––for Groups I and II differs from that of Group III and All Other Port Areas Group as described below. Groups I and II: Beginning with the fiscal year 2007 supplemental guidance, port areas in Groups I and II received a single direct funding allocation based on risk. Once the allocation is made, stakeholders in the port area then undergo a collaborative process to determine the projects to fund with the grant allocation. To help manage the new direct allocation process, DHS introduced the use of fiduciary agents to help manage the PSGP at the local level and ensure that all port partners were incorporated into the planning and grant allocation processes. For Group I and II port areas, FEMA awards the port area allocation to each port area’s selected fiduciary agent. According to the grant guidance, while the fiduciary agent acts as the principal point of contact with FEMA for application, management, and administration of the Group I and II grant awards, the fiduciary agent is not the sole decision maker regarding the use of the PSGP grants. Instead, a field-level review process is conducted by the applicable Coast Guard Captain of the Port (COTP) in coordination with DOT, the Maritime Administration, and appropriate personnel from the Area Maritime Security Committee (AMSC) including federal, state, and local agencies. At the completion of the field-level review process, the COTP—through the fiduciary agent— submits to FEMA a prioritized list of projects for funding ranked from highest to lowest in terms of their contributions to risk reduction and cost effectiveness. Once the COTP submits this information, DHS begins its national review process for Group I and II port areas. Group III and All Other Port Areas: Unlike Groups I and II, grant projects in Group III and the All Other Port Areas Group are determined through a competitive process. Port entities in these two groups submit their project proposals directly to DHS for review. DHS reviews the projects for eligibility, and approved projects are grouped by port area and sent to the corresponding COTP for further review. At this point, the process mirrors the Group I and II process. Before grant awards are finalized, project proposals undergo a national review process conducted by the National Review Panel (NRP), a group of subject matter experts from DHS and DOT. During the national review process, the NRP reviews all submitted projects for eligibility, and makes a final funding recommendation to the Secretary of Homeland Security. PSGP funds cannot be distributed to grantees to begin projects until DHS ensures the grantee’s compliance with federal grant management requirements. FEMA’s GPD is responsible for ensuring that all grant projects adhere to federal grant requirements, including all EHP requirements. For example, the National Environmental Policy Act requires DHS to analyze the possible environmental impacts of each project funded by a DHS grant. In addition to federal requirements, DHS also directs all applicants to provide detailed budgets for the requested funds at the time of application. Until FEMA is satisfied that all requirements have been met, no grant funding can be distributed to begin projects—rather the grant funding is considered “unavailable.” Once FEMA makes funds available to grantees, port entities must complete the grant project within the designated 3-year performance period. For example, for fiscal year 2009 projects, the performance period began on June 1, 2009. During this grant period, the City of Houston received approval for the second phase of a radio system project. By the time the project cleared local and federal review and funds were made available it was March 16, 2011––leaving the city about 14 months to implement the project before the performance period end date of May 31, 2012. For fiscal years 2010 and 2011, DHS allocations of PSGP funds were based on DHS’s risk model and implementation decisions, and were made largely in accordance with risk. For example, we found that allocations to port areas were highly positively correlated to port risk, as calculated by the risk model. In addition to the risk scores of the port areas, DHS made two implementation decisions when finalizing grant allocations for fiscal year 2011. First, DHS opted to direct the majority of available funding to the highest risk port areas. Second, DHS chose to limit fluctuations in grant funding from year to year to any given port area.available grant funding to the 7 Group I port areas in fiscal year 2011, Overall, as shown in table 2 below, DHS directed 60 percent of which represented about 54 percent of the total risk for port areas, according to the model’s determination of risk. In fiscal year 2010, Group I was allocated 60 percent of grant funding and accounted for 43.5 percent of the risk. Group II was allocated 30 percent of grant funding and accounted for 53 percent of the risk. Group III was allocated 5 percent of grant funding and accounted for the remaining 3.5 percent of the risk. their group for a portion of the group’s total funding—which was about $11.8 million for each group in fiscal year 2011. In addition to directing the majority of available grant money to the highest risk port areas, DHS also opted to provide stability in the funding levels of Group I and II port areas through another implementation decision. To achieve this stability, DHS utilized funding “floors” in the fiscal year 2011 risk model, which limited how much a port area allocation could decrease from year to year, despite changes in risk identified by the model. A senior FEMA official reported that floors were used in the fiscal year 2011 PSGP risk model to mitigate wide fluctuations in funding so that port areas could better plan for long-term security improvements. This official also noted that floors have been used in the PSGP risk model since fiscal year 2008 and were also used in the fiscal year 2011 Homeland Security Grant Program (HSGP) risk model. In the fiscal year 2011 model, DHS set the funding floor for Group I port areas at 25 percent—meaning that the port area’s funding level could not decrease by more than 25 percent from its fiscal year 2010 allocation regardless of how much its risk profile changed. Similarly, for fiscal year 2011, DHS set the funding floor for Group II port areas at 50 percent— meaning that the port area’s allocation could not decrease by more than 50 percent from its fiscal year 2010 allocation regardless of changes in risk. According to FEMA data, if the floors had not been used in fiscal year 2011, the allocations to 3 Group I port areas would have fallen by more than 25 percent and the allocations to 8 Group II port areas would have fallen by more than 50 percent. However, due to the use of funding floors, these 11 port areas collectively received fiscal year 2011 allocations that were about $11.6 million—or about 26 percent—higher than their risk profiles would have indicated. See table 3 below. In fiscal year 2011, DHS modified how port vulnerability—the relative exposure to an attack—is calculated in the PSGP risk model, but additional changes could improve how vulnerability is measured in the model. Prior to fiscal year 2011, the PSGP risk model held vulnerability constant, rather than accounting for differences across ports. We have reported on the value of measuring vulnerability in risk analysis models in In June 2008, we reported that DHS chose to hold two prior reports.vulnerability constant and consider all states and urban areas equally vulnerable in the HSGP risk analysis model, which reduced the value of the model in estimating risk.In June 2009, we reported that DHS also chose to consider all transit agencies equally vulnerable in its Transit Security Grant Program (TSGP) risk analysis model. Regarding both models—which are similar in structure to the PSGP risk model—we recommended that DHS formulate a method to measure vulnerability in a manner that captures variations across jurisdictions, and apply this vulnerability measure in future iterations of the grant allocation model. To respond to these recommendations and other external feedback regarding the grant programs, and to produce a more complete risk picture, DHS modified the vulnerability index in the fiscal year 2011 PSGP model such that vulnerability is no longer held constant. Instead, the new vulnerability index recognizes that different ports can have different vulnerability levels. In the fiscal year 2011 PSGP model, port vulnerability is assessed using four data components thought to influence a port’s vulnerability to attack, as shown below in table 4. The fiscal year 2011 PSGP risk model is provided in full in appendix II. Although FEMA has taken the first step towards improving how port vulnerability is measured in the PSGP risk model, further improvements are needed to ensure that the vulnerability score for a specific port is responsive to changes in security that may occur in that port—such as the implementation of new security measures. The fiscal year 2011 vulnerability index does not provide a mechanism to account for how new security measures—such as the installation of cameras or the provision of additional training to security officials —affect a port’s vulnerability, even if those security measures were funded using PSGP grant dollars. This limitation is due to the fact that the data elements within the vulnerability index are counts of activities, which recognize the number of activities that may occur—such as how many ferry passengers board a ferry—but do not account for the protective actions taken to secure them. For example, if a port installed security cameras throughout a ferry system to monitor vessel or ferry passenger activity, one would expect to reduce the ferry system’s vulnerability to attack. However, because the “ferry passenger” data element within the model’s vulnerability index is simply a count of passengers utilizing the ferry system and is not a reflection of the security measures in place to protect the ferry system, the new camera system would not reduce the port’s vulnerability score as calculated by the risk model. Thus, with this type of measure, in this example, a port could only reduce its vulnerability score by reducing the number of passengers utilizing the ferry system. The model’s robustness is thereby limited because activity counts do not reflect improvements made to port security. It is important to note that some security improvements may be captured by the inclusion of the Coast Guard’s Maritime Security Risk Analysis Model (MSRAM) results in the PSGP risk model.which are updated annually—provide information to the model on the percentage of national high-risk assets that reside within each port. However, MSRAM does not account for all types of security improvements because it is an asset-based model that assesses improvements to individual port assets such as a ferry terminal or a chemical plant. As such, MSRAM is not designed, for example, to evaluate security projects that may affect multiple assets in a port. The National Infrastructure Protection Plan states that when measuring vulnerability, one should describe all protective measures in place and how they reduce vulnerability. FEMA officials reported that capturing data on all security improvements would be challenging due to the need to collect and validate data for all ports included in the PSGP risk model. However, FEMA officials acknowledged the importance of incorporating completed security projects as part of the vulnerability component of the risk model and stated that FEMA will continue to refine its vulnerability assessments. Without accounting for the reductions in vulnerability achieved through new security measures implemented in a port, including those funded through the PSGP, the robustness of the risk model may be limited and not accurately reflect the relative risk of port areas throughout the nation. Instead, the risk model would likely continue to recognize the same ports as the highest risk, regardless of the security improvements made in those ports. In addition, by not accounting for security improvements resulting from PSGP grants, the security benefits of the PSGP are also not recognized. Incorporating completed security projects into the vulnerability component of the risk model could help increase its robustness and more accurately direct allocations to the highest risk port areas. While FEMA officials reported that developing an improved vulnerability index that incorporates the effect of security improvements would be a challenging process, there are interim measures that FEMA could take to ensure that the most precise data available are being used to populate the existing vulnerability index. FEMA made some progress in this regard by modifying how the HAZMAT Population data component was calculated in the fiscal year 2011 model. Rather than measuring only hazardous materials imports, as was done in the fiscal year 2010 and prior models, the modified measure also accounts for the transit of hazardous materials through a port where the port is not their final destination, providing added precision to the model. However, there are more precise data available that FEMA is not currently utilizing for at least one additional data component within the vulnerability index—foreign vessel calls. The Coast Guard established its High-Interest Vessel (HIV) Program to address increased U.S. maritime security requirements in the aftermath of the terrorist events of September 11, 2001. The program targets HIVs, or those that might pose high relative security risks to U.S. ports. frequencies of high-risk vessel arrivals, although it would require the Coast Guard to extract data from multiple sources to conduct a port-by- port analysis. The National Infrastructure Protection Plan states that DHS is responsible for using the best available information to conduct risk analysis and risk management activities. FEMA officials reported that they considered using HIV data in fiscal year 2011 but determined that due to time constraints, it would be more straightforward to use a count of foreign-flagged vessels during the first iteration of the vulnerability index. However, FEMA officials reported that they will continue to research additional data elements for inclusion in future year risk models. Using data from the HIV Program—which the Coast Guard already collects—in future iterations of the risk model could position FEMA to better capture the vulnerability of port areas posed by vessels arriving from foreign ports and thereby improve the precision of allocations to high-risk port areas. FEMA awarded nearly $1.7 billion in port security grants in fiscal years 2006 through 2010. As shown in figure 4 below, grantees have “drawn down” about one-quarter of funds—or about $395 million. Further, about half of the funds are “available” to grantees to begin work on projects. However, about one-quarter of funds are “unavailable” to grantees. As shown in table 5 below, FEMA awarded nearly $1.7 billion in port security grants in fiscal years 2006 through 2010; however, less than 24 percent—or about $395,000 million—had been drawn down as of September 2011. Although draw down rates are often cited as a measure of progress in improving port security, FEMA officials stated that draw down rates are not an accurate reflection of progress made in improving port security because grantees do not always draw down their funds promptly. Thus, even though progress may be underway in improving port security, until the grantee draws down their funds, this progress is not evident. FEMA officials reported that grantees may not draw down their grant funds right away for two main reasons. First, as a reimbursement grant program, grantees are not eligible to draw down awarded PSGP funds until they have incurred a cost. FEMA officials reported that costs for PSGP grants are often not incurred until late in the grant performance period. For example, grantees may choose to wait until project completion before paying contractors to ensure that the project is completed according to the terms of the contract. Thus, the draw down of grant funds would occur late in the performance period, after project completion. Second, grantees may choose not to draw down funds immediately after incurring a cost. Instead, the grantee might choose to wait until the end of the performance period to draw down funds or choose to draw down funds at select points throughout the year. Often, according to FEMA officials, this delay is due to the parameters of local accounting systems or the need to seek approval from local government entities before requesting reimbursement. As a result of these two factors, grantees have likely made more progress towards implementing grant projects to improve port security than is reflected in the draw down numbers, according to FEMA officials. To encourage grantees to draw down funds more promptly, FEMA’s GPD released an information bulletin in January 2011 requesting that whenever possible, grantees draw down funds no less than on a quarterly basis. According to the information bulletin, more frequent draw downs would provide a more accurate representation of FEMA grant fund usage. According to FEMA data on monthly draw down rates over time, there was an initial increase in draw down rates for some grant years after the information bulletin was released, but draw down rates have since leveled off. Of the nearly $1.7 billion in port security grants that FEMA awarded to port areas in fiscal years 2006 through 2010, more than $400 million—or about 24 percent—remained unavailable to grantees as of September 2011, as shown in table 6 below. Grantees cannot use unavailable funds to begin work on security projects. There are two types of unavailable funds—funds that are “unused” and funds that are “on-hold.” Unused funds—which exist only in Group I and II port areas—are funds which the port area has been awarded but has not yet used for specific projects. For example, as shown in table 6 above, approximately $242 million in grant funding awarded to Group 1 port areas was unavailable as of September 2011. Of this, about $116 million—or 48 percent—was unavailable because the funds have not been used for specific projects.on-hold funds—exist in all four funding groups, and result when FEMA has approved the use of grant funding for a specific grant project, but compliance with postaward requirements—such as environmental and The second type of unavailable funds— budgetary reviews—has not been completed.requirements are met, these grant funds remain “on-hold.” Each type of unavailable funding—unused and on-hold—results from a different set of challenges, as discussed below. One challenge that PSGP program officials reported contributed to delays in using awarded grant funds was the implementation of the Port-Wide Risk Mitigation Plan (PRMP) requirement. This PRMP requirement was announced in August 2007 for the fiscal year 2007 supplemental grant round and was part of a broader FEMA effort to shift the grant program from supporting asset-specific projects—such as fences around a facility—that benefited just one facility, to supporting more regional, portwide projects—such as interoperable communication systems—that would benefit an entire port area. This new requirement caused delays because port areas were not eligible to submit specific projects to FEMA for approval until their PRMP was approved, and many PRMP submissions and approvals were delayed. The fiscal year 2007 supplemental grant guidance included a time line and specific deliverables to guide port areas in the plan development and approval process.finalized by May 2008. However, only 3 of the 11 port areas we interviewed had an approved plan in place by this time. Plans for the remaining 8 port areas were approved between July 2008 and September 2009. In June 2011, a senior FEMA official told us that FEMA did not hold stakeholders to the time lines for plan development because the time lines were unreasonably aggressive for some port areas. Another senior FEMA official stated that FEMA did not want to rush the plan development process because that could have been detrimental to the quality of the plans. Due to the delayed plan submissions, FEMA faced challenges in approving draft plans. For example, the senior FEMA official Based on this time line, all port area PRMPs should have been reported that it was difficult to convene the review panel to approve plans on a sporadic basis. Thus, rather than hold weekly or biweekly meetings to discuss one or two plans, which would pose a burden on their federal partners on the review panel, FEMA instead held review panel meetings every 2 months. As a result, the official reported that it took longer than expected to approve risk mitigation plans which then delayed the submission of grant projects from port areas. Until a port area’s PRMP was approved, it was not eligible to submit projects to FEMA for approval. As a result, the delays associated with PRMP approval contributed to delays in the use of grant funds. For example, the PRMP for the Columbia-Snake River System was not approved until September 2009, meaning that the port area could not submit projects to FEMA for approval for more than 2 years after the fiscal year 2007 supplemental grant guidance was released, creating delays in the use of grant funds in this port area. Fiduciary agents and FEMA officials reported that the initial delays resulting from delays in PRMP approval were exacerbated by the fact that multiple grant rounds—beginning with the fiscal year 2007 supplemental grant round when the PRMP requirement was announced—were underway by the time port area PRMPs were approved and that these grant rounds had varying cost-share requirements. In the case of all 11 port areas in our review, multiple grant rounds had been announced— through the release of grant guidance—before the port area’s PRMP was approved, as shown in figure 5. For example, both the fiscal year 2007 supplemental and the fiscal year 2008 grant rounds had been announced—in August 2007 and February 2008 respectively—before the first PRMPs—for the New York-New Jersey port area and the New Orleans port areas—were approved in April 2008. In some cases, additional grant rounds were announced before port area PRMPs were approved. For example, as shown in figure 5, four grant rounds (fiscal year 2007 supplemental, fiscal year 2008, fiscal year 2009, and ARRA) were announced before the Columbia-Snake River Port Area’s PRMP was approved in September 2009. With multiple grant rounds open, applicants could choose under which grant year to apply for funding. Fiduciary agents and FEMA officials reported that the cost-share requirement was a significant factor in applicant decisions regarding under which grant year to apply for funding. As shown in table 7 below, the PSGP has traditionally required a cost- match, but this requirement has been modified or waived in numerous grant rounds as a result of legislative action. Fiduciary agents in 8 of 11 port areas in our review reported a lessened demand for grant funds in grant years where there was a cost-share requirement, particularly for fiscal years 2008 and 2009. Fiduciary agents cited a variety of challenges with the cost-share requirement, including: (1) applicants were aware of long delays in the distribution of grant funds and faced difficulty preserving the cost-share obligation in their entity’s budget while pending receipt of awarded grant funds, (2) facility owners who were compliant with security requirements under MTSA were hesitant to invest their own money for additional security projects beyond the requirements, and (3) applicants were unable to afford the cost-share requirement due to the economic downturn. For example, one fiduciary agent reported that while she generally supports a cost-share requirement because it ensures stakeholder buy-in, the cost-share requirement has been challenging due to the poor economic environment. As a result of the cost-share, this fiduciary agent reported conducting three distinct rounds of project solicitations in the fiscal year 2008 grant round in order to generate enough demand to spend the port area’s entire allocation. We reported in October 2010 that a cost-share requirement is a key factor for effective federal grants because it ensures that federal grants supplement—rather than substitute for— stakeholder spending. We further reported that a cost-share requirement is reasonable given that grant benefits can be highly localized. As a result of the inconsistent cost-share requirement, several fiduciary agents told us that applicants were more likely to request funding under the grant rounds with the most lenient cost-share requirement or delay project submission while waiting to learn whether or not the next round of grants would include the cost-share requirement. This uncertainty about the cost-share requirement created a disincentive for grant applicants to request funding during cost-share years. For example, the fiduciary agent in one port area told us that the port area received project proposals totaling twice the port area’s total allocation for fiscal year 2011. Thus, projects had to be denied for fiscal year 2011 funding during the field- level review, even though more than $9 million in fiscal year 2008 and 2009 grant money remained unused. As shown in table 8 below, a greater portion of money from cost-share years remains unused as compared to money from non-cost-share years, even though cost-share grant years preceded the non-cost-share grant year. For example, about 22 percent of grant funding awarded to Group 1 port areas during cost- share years remains unused, as compared to less than 4 percent during fiscal year 2010, when the cost-share requirement was waived. Fiduciary agents reported that the lengthy cost-share waiver process— used by applicants seeking an exemption from the required cost-share— further exacerbated the impact of the cost-share requirement under the PSGP. Grant applicants unable to meet the cost-share requirement are eligible to apply for a waiver. The waiver approval process requires 22 steps—which include approval by leadership within FEMA’s GPD, approval by FEMA’s Administrator, and finally, approval by the Secretary of Homeland Security. According to statute, the Secretary can grant a waiver of the cost-share requirement if she determines that a proposed project is meritorious but cannot be undertaken without additional federal support. However, 5 of the 11 fiduciary agents we interviewed told us that they had concerns with the cost-waiver request process—including with the length of time required for a decision. For example, one fiduciary agent—who oversaw a cost-waiver application that took about 7 months to be approved—told us that the cost-waiver request process was time- consuming and confusing. According to FEMA officials, an unknown portion of this 7-month approval process was spent ensuring that the fiduciary agent had submitted all of the required documentation and thus, the actual approval time once the request was finalized was less than 7 months. The cost-share requirement was waived for all applicants under the ARRA, fiscal year 2010, and fiscal year 2011 grant cycles. However, grant applicants may continue to submit cost-share waiver requests for new projects to be funded under the fiscal year 2007 supplemental, fiscal year 2008, and fiscal year 2009 grant cycles—which were cost-share years—if money in their port area remains unused from those years. As shown earlier in table 8, about $110 million in PSGP funds awarded to Group I port areas from fiscal year 2007 through 2009—years in which the cost-share was required—remains unused. As port areas solicit projects for these unused funds, some applicants may submit cost-share waiver requests as well. For example, one fiduciary agent from a Group 1 port area reported that her port area recently completed the field-review process to identify projects to fund using their unused fiscal year 2009 grant monies. As a result, the port area submitted 10 projects to FEMA for approval in October 2011, of which 8 projects include a cost-share waiver request. Although FEMA has taken steps to improve the cost-waiver process, it continues to be lengthy and additional efforts may help expedite these reviews. In July 2009, FEMA issued an information bulletin to clarify the process that grantees should follow when submitting cost-share waiver requests. Since the issuance of this information bulletin, FEMA has received a total of 31 cost-share waiver requests—of which, 22 were approved. In November 2009, following a Fiduciary Agent Workshop, FEMA released written responses to questions posed at the workshop. In this document, FEMA stated that a decision on a waiver request could be expected approximately 30 days after all documentation was provided to FEMA in accordance with the process outlined in the July 2009 information bulletin. However, according to FEMA records, for cost-share waivers reviewed since December 2009 DHS took—on average—126 days to approve a request once all of the required information had been received. Approval time lines ranged between 55 days and 268 days for these waiver requests. Of the 126 days, on average, it took 74 days from the date requests were considered complete to achieve approval by GPD’s leadership. It took an additional 52 days, on average, to complete the remaining 11 steps of the waiver process—including approval at the Administrator of FEMA level and the Secretary of Homeland Security level. According to DHS, due diligence requires both component and department level clearances, including secretarial clearance, in order to responsibly award funding. This process ensures that PSGP projects meet program goals and objectives. However, FEMA records show that no approval recommendations from GPD leadership were overturned as a result of the additional 52 days, on average, of required review. Further, only 1 of the 31 waiver requests submitted since the July 2009 information bulletin was issued has been denied—and it was denied at the GPD level. Standards for Internal Control in the Federal Government state that “pertinent information should be identified, captured, and distributed in a form and time frame that permits people to perform their duties efficiently.” FEMA officials told us that FEMA has taken internal actions to improve the review process such as meeting with other key offices involved in the waiver process in the spring of 2011 to discuss and standardize information requirements for the waiver package. FEMA officials reported that they believe that this effort has helped improve some aspects of the process, but further action may be required to streamline the process. Additionally, fiduciary agents remain wary of the cost-waiver request process. For example, one fiduciary agent told us that its field review team—including the COTP—would be unlikely to recommend a project for funding if that project relies on a cost-share waiver. Another fiduciary agent told us that there is little interest in the fiscal year 2009 funds due in part to the lengthy waiver review process. Without a more efficient review process, certain grant applicants that cannot fund the cost-match requirement may not receive grant funds to implement their projects, or may not even apply for funds. Evaluating the waiver review process could help to ensure that the process is completed in a timely manner. In addition to funding that is unavailable because it is unused, some funding is also unavailable because it is on-hold due to delays in achieving compliance with postaward requirements and challenges with FEMA’s grant management system. After FEMA approves the use of grant funds for a specific project, stakeholders reported that additional delays in making funds available resulted from compliance with postaward requirements. FEMA cannot make grant funds available to grantees to begin work on approved projects until all postaward requirements, including budgetary and environmental reviews, are met. One cause of delay was inefficiency in the reviews conducted pursuant to the National Environmental Policy Act, which requires a review of the impacts of proposed actions as well as reasonable alternatives to those actions. Grantees submit Environmental and Historical Preservation (EHP) information to the Grant Program Directorate––Environmental and Historical Preservation (GPD-EHP) office for review. If the project does not require a detailed EHP analysis, it can be reviewed and approved by a GPD analyst. However, projects that require a more detailed analysis are reviewed either by the GPD-EHP team or passed to a FEMA regional environmental officer depending on the scope of the review. Fiduciary agents we interviewed in 5 of 11 port areas reported that slow EHP reviews caused delays. During a July 2009 FEMA-sponsored stakeholder conference, participating port areas stated that the EHP submission and review process associated with the PSGP was causing delays, which increased project costs and limited what grantees could accomplish with grant funds. The group requested the establishment of a more structured postaward time line, including deadlines for EHP reviews, so that grantees would be better able to plan their projects. A senior FEMA official reported that delays in EHP reviews were due to the fact that prior to 2008, GPD had not historically conducted EHP reviews on preparedness projects and thus, had no established program for doing so. This official further reported that creating an “EHP Team” within GPD with the assistance of subject matter specialists via technical support contract and standardizing the format for project submittals has helped expedite EHP reviews. According to FEMA officials, the delays caused by inefficient review processes have been amplified by FEMA’s reliance on an antiquated data management system. As we reported in our June 2009 report on the Transit Security Grant Program, FEMA did not have a mechanism for systematically collecting data on the status of individual grant projects through the review process. For example, although FEMA has systems to track the financial information related to its grants programs, these systems did not allow FEMA to track the status of grant reviews, such as EHP reviews. According to FEMA, the data management system used to manage the Transit Security Grant Program is also used to manage the PSGP and no changes have been made to the system since our 2009 report. As such, GPD officials reported that each PSGP program analyst maintained separate spreadsheets that tracked the grants for which they were responsible. Using numerous data systems and spreadsheets resulted in inefficiencies and, in some cases, lost data, as program analysts had to search across systems for information or were reliant on systems––such as the Homeland Security Information Network––that lost application information. The overall result was a data system that did not provide information in a timely manner and that could not be used effectively to manage the grant lifecycle. DHS and FEMA have taken a number of steps to address unavailable balances. To ensure that grant awards were used for specific projects in a timely manner, FEMA implemented project submission deadlines beginning in fiscal year 2010. Prior to this, FEMA did not have deadlines for submitting projects which resulted in money being unused for projects and therefore unavailable until the port area could identify enough projects to fund––a process that, in some cases, took years to complete. Starting in fiscal year 2010, port areas had 45 days from the initial fiduciary agent application deadline to submit specific project proposals. In fiscal year 2011, FEMA took an additional step to shorten application time frames by requiring all Group I and II port areas to submit specific project proposals at the time of the fiduciary agent’s application. According to FEMA officials, this change will ensure that grant money allocated in the future will be immediately used, which will expedite the grant distribution process. DHS has also taken a number of steps to address the delays in the EHP review process that contributed to funds being on-hold. See table 9 for a list of key DHS actions: As a result of these changes, some fiduciary agents reported improvement in the EHP review process; however, these views could not be verified using FEMA data. Specifically, 5 of 11 fiduciary agents reported that the EHP review process has improved. For example, 1 fiduciary agent believed that the EHP process has improved primarily because of FEMA’s categorization of projects according to the amount of expected impact they would create. However, due to data reliability issues with FEMA’s EHP data––there were too many missing EHP dates for an accurate analysis––we were not able to confirm whether the EHP process was improving. Because of limitations with FEMA’s existing grant management system, all EHP data are managed on separate spreadsheets maintained by program analysts and these spreadsheets have varying levels of completeness. FEMA officials acknowledged the limitations with their data, including the omission of key dates in the EHP review process, such as the date when the EHP information was submitted for review or the date when the project’s EHP review was approved. However, FEMA officials noted that the evolution of the Non Disaster Grants (ND Grants) system, which is discussed below, may allow for better tracking of EHP submissions and approvals in the future. To address challenges exacerbated by the antiquated data management system used to manage the PSGP, DHS took the first step towards consolidating its data management system in fiscal year 2011 by implementing the first of two planned phases of the ND Grants system. According to FEMA, the ND Grants system is intended to consolidate FEMA’s disparate data systems and improve the ability of FEMA grant managers to track grants through the review and approval process. In February 2011, FEMA anticipated that the ND Grants system would be fully completed by the end of fiscal year 2014. Given the early stages of this process, it is too early to assess the extent to which the ND Grants system will alleviate data management challenges. In July 2011, during the course of our review, FEMA finalized eight performance measures designed to track how well FEMA GPD administers and manages the PSGP. According to FEMA documents, these measures include the percent of: (1) grant funds released to grantees within 300 days, (2) grant awards programmatically monitored annually, (3) grant funds programmatically monitored annually, (4) grant awards financially monitored annually, (5) grant funds financially monitored annually, (6) corrective actions completed within the fiscal year issued, (7) preparedness grant awards processed within 150 days, and (8) grant closeouts completed within 120 days from the end of the period of performance. According to FEMA officials, data collection for these eight measures will begin in the fiscal year 2012 grant cycle and the 2012 baseline data will be used to develop targets for each measure beginning with the fiscal year 2013 grant cycle. For more information on these measures, see appendix V. In addition to these eight measures, FEMA officials reported that four additional measures are under development. By implementing these internal measures, FEMA officials should be better positioned to determine whether the changes they have made in recent months are sufficient to better ensure more efficient grant administration going forward or whether additional actions are required. However, since targets for the eight measures will not be established until at least fiscal year 2013, and the four additional measures remain under development, it is too early to know how effective they will be in helping FEMA to assess its performance and improve its grant management. FEMA has not evaluated the effectiveness of this program in strengthening critical maritime infrastructure against risks associated with potential terrorist attacks because it has not implemented measures to track progress toward achieving program goals. In 2006, the Department of Homeland Security’s Office of Inspector General reported that as the PSGP continues to evolve, an important challenge DHS should undertake is the measurement of its impact. The Inspector General also reported that DHS has raised the overall bar of preparedness through the port security grants but it is not clear that DHS knows how much actual risk reduction has been achieved. Four years later, in January 2010, FEMA formed a task force to develop draft performance measures for the PSGP. This task force conceptualized 11 potential measures of effectiveness for the PSGP; however, baseline data needed to implement the measures did not exist for all 11 draft measures. According to FEMA documentation, baseline data existed for 2 of the 11 measures, additional data collection would be needed to populate 3 measures, and 6 measures would require further refinement or coordination with federal partners. In December 2010, FEMA transferred responsibility for developing performance measures from GPD to FEMA’s National Preparedness Directorate, specifically the National Preparedness Assessment Division (NPAD).the development of effectiveness measures within the directorate containing assessment experts. However, this may have contributed to delays in developing performance measures because the staff at NPAD, including the new Director, who began in March 2011, needed time to familiarize themselves with the grant program and draft measures. In July 2011, a senior NPAD official told us that the division was briefed on the FEMA officials report that this change was made to consolidate draft measures developed by the GPD task force, but they were considering developing different measures as well. In October 2011, the same official told us that the division had developed a number of prospective performance measures for the PSGP, but that FEMA was still reviewing the draft measures. As a result, the official told us that it has not been determined whether the performance measures will be included in the fiscal year 2012 guidance. Additionally, FEMA did not have a plan in place, with milestones, to ensure the implementation of such measures. According to best practices for project management, the development of a project management plan—which defines how the project is executed, monitored and controlled, and closed—is a key element of project management. Best practices for project management also call for milestone dates, among other factors, in carrying out a project successfully. As a result, FEMA’s progress toward implementing measures to assess whether the program is achieving its stated purpose remains unclear. Port areas have unique characteristics—they are centers of commerce, hubs of transportation, and often close to major population centers. These characteristics result in specific vulnerabilities that must be addressed to avoid the human or economic losses that would result from a terrorist attack. The Port Security Grant Program (PSGP)—administered by FEMA and supported with subject matter expertise from the Coast Guard—is one tool DHS uses to protect critical maritime infrastructure from these risks. Risk management has been endorsed by the federal government to help direct finite resources to areas of greatest risk and grant programs have provided substantial resources toward this effort. We found that PSGP allocations were highly correlated to risk for the grant years we examined and DHS has taken steps to strengthen the PSGP risk allocation model by improving the quality and precision of the data inputs. However, additional efforts—such as accounting for how new security measures affect port vulnerability and using the most precise data available in the risk model—could further strengthen the model and build upon the progress made. While the allocation process has been risk- based, FEMA has faced significant challenges administering the grant program. For example, FEMA awarded nearly $1.7 billion in port security grants for fiscal years 2006 through 2010; however, draw down levels for the PSGP are low—with about one-quarter of fiscal year 2006 through 2010 grant monies drawn down as of September 2011. While FEMA may not consider draw down levels to be an accurate measure of progress made in improving port security, this measure has become the de facto yardstick for assessing progress in securing our ports because no other measures exist. Additionally, about a quarter of the awarded funding remains unavailable due to delays in using grant funds, challenges with the cost-match and associated waiver process, and challenges that grantees have had complying with postaward requirements. As a result, about $400 million in awarded grant funding remains unavailable to grantees for port security projects. FEMA has taken steps to improve the availability of funds and has developed internal performance measures to begin evaluating its administration of the grant program. However, FEMA has not evaluated the effectiveness of the program because it does not have measures to track progress towards achieving program goals. To establish a more accurate measurement of grant effectiveness, FEMA should expedite its efforts to implement performance measures for the PSGP. Initial steps have been taken to develop performance measures for the PSGP, but the time frame for implementing them is unclear. Without a plan, there is little assurance that these measures will be implemented in a timely way to assess the program’s effectiveness in ensuring that critical port infrastructure is protected. We are making four recommendations to help strengthen the implementation and oversight of the PSGP. To strengthen DHS’s methodology for measuring vulnerability in ports, and to improve the precision of grant allocations to high-risk port areas, we recommend that the Secretary of Homeland Security direct the FEMA Administrator to: Develop a vulnerability index that accounts for how security improvements affect port vulnerability, and incorporate these changes into future iterations of the PSGP risk model. Coordinate with the Coast Guard to determine the most precise data available to populate the data elements within the vulnerability index and to utilize these data as an interim measure, until a revised vulnerability index is developed. To ensure that waiver requests—including those submitted under previous cost-share years in which money remains unassigned and those that may be submitted in future grant rounds if a cost-share requirement is applied—are evaluated promptly, we recommend that the FEMA Administrator—in conjunction with the Office of the Secretary of Homeland Security—evaluate the waiver review process to identify sources of delay and take measures to expedite the process. To strengthen the administration, oversight, and internal controls of the PSGP, and to streamline processes, we recommend that the Secretary of Homeland Security direct the FEMA Administrator to develop—in collaboration with the Coast Guard—time frames and related milestones for implementing performance measures to monitor the effectiveness of the PSGP. We provided a draft of this report to DHS for review and comment. DHS provided written comments on November 14, 2011, which are reproduced in full in appendix VI. DHS concurred with the findings and recommendations in the report, and stated that FEMA is taking actions to implement our recommendations. DHS concurred with our first recommendation that it develop a vulnerability index that accounts for how security improvements affect port vulnerability, and incorporate these changes into future iterations of the PSGP risk model. DHS stated that although incorporating the effects of completed security projects on vulnerability is complex, the inclusion of this type of metric remains a key goal of the PSGP risk methodology and is revisited annually. However, DHS did not provide details regarding its plan to implement this recommendation. DHS concurred with our second recommendation that FEMA coordinate with the Coast Guard to determine the most precise data available to populate the data elements within the vulnerability index and to utilize this data as an interim measure until a revised vulnerability index is developed. Specifically, DHS stated that FEMA will continue to coordinate with subject matter experts, including the Coast Guard, to determine the best data available for use in the vulnerability index. Further, DHS stated that FEMA and the Coast Guard will continue discussions regarding data elements to be used in future grant years, and that these meetings will focus on what data elements are currently available for use as an interim measure while additional enhancements to the vulnerability component are developed. Such action should address the intent of this recommendation. DHS concurred with our third recommendation that FEMA evaluate the cost-share waiver request process in conjunction with the Office of the Secretary of Homeland Security to identify sources of delay and take measures to expedite the process. Specifically, it reported that FEMA and DHS are exploring the best solution to reduce delays and expedite the cost-share waiver request evaluation process and will work to implement appropriate process improvements as they are identified. Such action, when implemented, should address the intent of this recommendation. Finally, DHS concurred with the fourth recommendation that it develop time frames and related milestones for implementing performance measures to monitor the effectiveness of the PSGP. Specifically, DHS stated that FEMA’s Grant Programs Directorate (GPD) is in the process of developing external measures to determine how effective grantees are in managing and administering the grants and that these external measures will be completed by January 1, 2012. DHS also stated that specific measures to monitor the performance of the PSGP are being developed within FEMA. Further, DHS stated that FEMA is also developing performance objectives for core capabilities, as required by Presidential Policy Directive 8 and the new National Preparedness Goal, and will be reviewing all prevention and protection measures, including those for PSGP. Finally, DHS stated that FEMA’s National Preparedness Directorate will work with GPD and the Coast Guard in fiscal year 2012 to develop some specific measures towards building and sustaining capabilities. These efforts, as described above, are important steps towards implementing this recommendation. As agreed with your offices, unless you publicly announce the contents of this report earlier, we plan no further distribution until 30 days from the report date. At that time, we will send copies to the Secretary of Homeland Security, appropriate congressional committees and other interested parties. In addition, this report will be available at no charge on the GAO website at http://www.gao.gov. If you or your staff have any further questions about this report, please contact David C. Maurer at (202) 512-9627 or [email protected] or Stephen L. Caldwell at (202) 512-9610 or [email protected]. Contact points for our Offices of Congressional Relations and Public Affairs may be found on the last page. Key contributors are listed in appendix VII. This appendix provides information on the percentage of total PSGP grant funding directed at each funding group since fiscal year 2007, the first year in which Department of Homeland Security (DHS) categorized port areas into funding groups. Table 10 shows that the percentage of funding directed at Group I port areas and all other port areas has been relatively stable over time, whereas this percentage has changed more drastically for Group II and Group III port areas. As discussed in the report, DHS allocations to individual port areas were made largely in accordance with risk, and were based on DHS’s risk analysis and implementation decisions. DHS’s decision to direct the majority of PSGP funding to the highest risk port areas—as shown in table 10—was one such implementation decision. The second decision involved the use of funding “floors” to limit fluctuations in individual port area funding from year to year. This appendix provides information on the fiscal year 2011 PSGP risk model, which DHS uses to assess the relative risk posed to ports throughout the nation and to help determine PSGP eligibility and funding levels. As discussed in the report, DHS modified how port vulnerability— the relative exposure to an attack—was calculated in the PSGP risk model in fiscal year 2011. Rather than holding vulnerability constant, as was done in fiscal year 2010, DHS chose to modify the vulnerability index in fiscal year 2011 to recognize that different ports can have different vulnerability levels. The current vulnerability component—as shown in figure 6—considers how port vulnerability is affected by ferry and cruise ship ridership, foreign vessel calls, and hazardous material transits. However, as discussed in the report, further improvements are needed to ensure that the vulnerability score for a specific port is responsive to changes in security that may occur in that port—such as the implementation of new security measures—and that the vulnerability index is populated using the most precise data available. This appendix provides information on the financial status of PSGP funds awarded during fiscal years 2006 through 2010. As discussed in the report, DHS awarded nearly $1.7 billion in grant funds to port areas throughout the nation for fiscal years 2006 through 2010. As shown in table 11, grantees have drawn down about 24 percent—or about $395 million—of this funding, as of September 2011. An additional 52 percent of the awarded funding—about $873 million—is available to grantees. About one-quarter of awarded grant funding—or about $408 million—is unavailable, meaning that port areas have not identified specific projects to fund with these monies or compliance with postaward requirements is pending. This appendix contains information on the review and approval process for PSGP cost-share waivers, which grantees can request from DHS if they are unable to meet the cost-share requirement. As discussed in the report and shown in figure 7 below, the waiver approval process requires 22 steps—which include approval by leadership within FEMA’s Grants Program Directorate (GPD), approval by FEMA’s Administrator, and finally, approval by the Secretary of Homeland Security. In November 2009, FEMA told fiduciary agents that a decision on a waiver request could be expected within 30 days. However, under the review process outlined in figure 7, DHS took—on average—126 days to approve a cost- share waiver once all of the required information had been received. Evaluating the waiver review process could help ensure that the process is completed in a timely manner. This appendix provides descriptive information on the suite of internal performance measures that FEMA developed to track how well it administers and manages the PSGP. As discussed in the report, data collection for these measures—which were finalized in July 2011—will begin in the fiscal year 2012 grant cycle and the 2012 baseline data will be used to develop targets for each measure beginning in the fiscal year 2013 grant cycle. However, as discussed in the report, it is too early to know how effective these measures will be in helping FEMA to assess its performance and improve its grant management. In addition to the contacts above, Dawn Hoff, Assistant Director, and Dan Klabunde, Analyst-in-Charge, managed this assignment. Chuck Bausell, David Lutter, Sophia Payind, and Katy Trenholme made significant contributions to this report. Charlotte Gamble, Adam Hoffman, and Grant Sutton provided assistance with interviews. David Alexander assisted with design, methodology, and data analysis. Tracey King provided legal assistance. Jessica Orr provided assistance with report development and Robert Robinson provided graphic support. | From fiscal years 2006 through 2010, the Department of Homeland Security (DHS) has awarded nearly $1.7 billion dollars to port areas through its Port Security Grant Program (PSGP) to protect critical maritime infrastructure and the public from terrorist attacks. The Federal Emergency Management Agency (FEMA)--a DHS component agency--is the agency responsible for distributing grant funds. GAO was asked to evaluate the extent to which DHS has (1) allocated PSGP funds in accordance with risk; (2) encountered challenges in administering the grant program and what actions, if any, DHS has taken to overcome these challenges; and (3) evaluated the effectiveness of the PSGP. To address these objectives, GAO reviewed the PSGP risk model, funding allocation methodology, grant distribution data, and program documents, such as PSGP guidance. Additionally, GAO interviewed DHS and port officials about grant processes, funding distribution, and program challenges, among other things. In 2010 and 2011, PSGP allocations were based largely on port risk and determined through a combination of a risk analysis model and DHS implementation decisions. DHS uses a risk analysis model to allocate PSGP funding to port areas that includes all three elements of risk--threat, vulnerability, and consequence--and DHS made modifications to enhance the model's vulnerability element for fiscal year 2011. For example, DHS modified the vulnerability equation to recognize that different ports can have different vulnerability levels. However, the vulnerability equation is not responsive to changes in port security--such as the implementation of PSGP-funded security projects. Additionally, the vulnerability equation does not utilize the most precise data available in all cases. DHS addressed prior GAO recommendations for strengthening the vulnerability element of grant risk models, but the PSGP model's vulnerability measure could be further strengthened by incorporating the results of past security investments and by refining other data inputs. FEMA has faced several challenges in distributing PSGP grant funds, and FEMA has implemented specific steps to overcome these challenges. Only about one-quarter of awarded grant funding has been drawn down by grantees, and an additional one-quarter remains unavailable (see table below). Funding is unavailable--meaning that grantees cannot begin using the funds to work on projects--for two main reasons: federal requirements have not been met (such as environmental reviews), or the port area has not yet identified projects to fund with the grant monies. Several challenges contributed to funds being unavailable. For example, DHS was slow to review cost-share waiver requests--requests from grantees to forego the cost-share requirement. Without a more expedited waiver review process, grant applicants that cannot afford the cost-share may not apply for important security projects. Other challenges included managing multiple open grant rounds, complying with program requirements, and using an antiquated grants management system. FEMA has taken steps to address these challenges. For example FEMA and DHS have, among other things, increased staffing levels, introduced project submission time frames, implemented new procedures for environmental reviews, and implemented phase one of a new grants management system. However, it is too soon to determine how successful these efforts will be in improving the distribution of grant funds. FEMA is developing performance measures to assess its administration of the PSGP but it has not implemented measures to assess PSGP grant effectiveness. Although FEMA has taken initial steps to develop measures to assess the effectiveness of its grant programs, it does not have a plan and related milestones for implementing measures specifically for the PSGP. Without such a plan, it may be difficult for FEMA to effectively manage the process of implementing measures to assess whether the PSGP is achieving its stated purpose of strengthening critical maritime infrastructure against risks associated with potential terrorist attacks. GAO recommends that DHS strengthen its methodology for measuring vulnerability in ports by accounting for how past security investments reduce vulnerability and by using the most precise data available. GAO also recommends that DHS evaluate the cost-share waiver review process and take steps to expedite the process where appropriate and develop a plan with milestones for implementing performance measures for the PSGP. DHS concurred with GAO's recommendations. |
High-performing public organizations have found that maintaining a quality workforce requires them to systematically assess current and future workforce needs and formulate a long-term strategy to attract, retain, develop, and motivate employees. While simple in theory, strategic planning can be difficult to carry out. Managers must, for example, acquire accurate information on the workforce, set goals for employee performance, and develop ways to measure that performance. According to our previous work, strategic workforce planning should involve certain key principles. Among these principles is the need to involve top management, employees, and other stakeholders in developing, communicating, and implementing a strategic workforce plan. Other principles include determining the critical skills that will be needed, developing strategies to address any gaps in these skills, building the capability needed to address educational and other requirements important to support workforce planning strategies, and monitoring and evaluating progress toward workforce goals. However, federal agencies have for years lacked a strategic approach to workforce management. Consequently, since 2001, we have identified human capital management as a high-risk area needing urgent attention and transformation. OPM provides information and guidance on a wide range of strategies that departments and agencies can use to help strategically plan for and maintain a workforce sufficient to accomplish their missions. This includes standard retention and recruitment payments, such as recruitment incentives and student loan repayments. OPM can also authorize departments to use additional strategies to address workforce shortage situations should standard strategies prove insufficient. For example, OPM can approve higher salaries for individual positions in an occupation if the agency has difficulty staffing a position requiring an extremely high level of expertise that is critical to the agency’s successful accomplishment of an important mission. In addition to maintaining a workforce sufficient for routine functions, departments and agencies are directed by the President to ensure they can carry out essential functions during a “catastrophic event.” Such a catastrophic event is any natural or man-made incident, including terrorism, that results in extraordinary levels of mass casualties, damage, or disruption severely affecting the population, infrastructure, environment, economy, national morale, and/or government functions. To do so, agencies must develop continuity of operation plans for emergencies that disrupt normal operations. Continuity planning includes identifying and establishing procedures to ensure vital resources are safeguarded, available, and accessible to support continuity operations. Vital resources are personnel, equipment, systems, infrastructures, supplies, and other assets required to perform an agency’s essential functions. DHS’s Federal Emergency Management Agency (FEMA) provides direction to the federal executive branch for developing continuity plans and programs, including pandemic plans. For one type of catastrophic event, a pandemic that severely reduces the workforce, DHS has developed guidance that identifies specific elements agencies should consider as they plan to maintain essential services and functions. FEMA concluded that planning for a pandemic requires a state of preparedness that goes beyond normal continuity of operations planning. On March 1, 2006, FEMA first issued guidance to assist departments and agencies in identifying special considerations for protecting the health and safety of employees and maintaining essential functions and services during a pandemic. The Implementation Plan for the National Strategy for Pandemic Influenza recommends that organizations plan for a 40 percent absenteeism rate at the height of a pandemic. In addition, it called for department and agency pandemic plans to be completed by March 31, 2006. Departments and agencies must also plan for other events that could place extraordinary demands on their workforce, such as a catastrophic outbreak of a foreign animal disease. In December 2003, the President issued a Homeland Security Presidential Directive (HSPD-8) to establish national policy to strengthen the preparedness of the United States to prevent and respond to terrorist attacks, major disasters, and other emergencies. As part of its efforts to meet HSPD-8, a White House Homeland Security Council working group developed National Planning Scenarios for 15 major events, including a biological attack with a foreign animal disease, foot-and-mouth disease. According to the scenario, terrorists introduce the disease in several locations and states simultaneously. The transportation of livestock spreads the contagious virus to surrounding states and, within 10 days of the attack, more than half of the states may be affected. Ultimately, almost half the nation’s beef, dairy, and swine would be affected. These scenarios serve as the basis for assessing the nation’s preparedness for such an event by defining tasks that may be required and the capabilities needed governmentwide to perform these tasks. Although not a prescription for the resources needed to achieve these capabilities, they are intended to help identify such resource needs and guide planning efforts. No single jurisdiction or agency will be expected to perform every task, so the response to a catastrophic event will require coordination among all levels of government. State and local agencies are typically the first to respond, but federal agencies become involved if state resources are overwhelmed. In certain catastrophic events, it becomes the responsibility of DHS to coordinate the federal response. Four of the five key agencies that employ veterinarians—APHIS, FSIS, ARS, and Army—regularly assess the sufficiency of their veterinarian workforces for routine program activities, and all four identified existing or potential shortages. FDA does not perform such assessments. At the department level, USDA and HHS have not assessed their veterinarian workforces across their component agencies, whereas DOD has delegated this task to the Army. Finally, there is no governmentwide assessment of the veterinarian workforce. Specifically, OPM has not conducted a governmentwide effort to address current and future veterinarian shortages identified by component agencies, and efforts by the Congress to address the national shortage have thus far had minimal impact. APHIS, FSIS, ARS, and Army conduct regular workforce assessments. While APHIS reported it does not currently have a shortage, it identified a potential future shortage. FSIS, ARS, and Army have identified both existing and potential future shortages. FDA does not conduct such assessments, but officials there told us the veterinarian workforce is adequate to meet its responsibilities. Our work has shown that agencies should be held accountable for the ongoing monitoring and refinement of human capital approaches to recruit and hire a capable and committed federal workforce. APHIS reported that none of its six units that employ veterinarians has identified a current shortage, but officials told us they are concerned about the future size and skills of the veterinarian workforce. First, the agency reported that 30 percent of its veterinarians will be eligible to retire by the end of fiscal year 2011, potentially creating a serious shortage. This is consistent with our previous work where we reported that one-third of federal career employees on board at the end of fiscal year 2007 are eligible to retire between spring 2008 and 2012. In addition, APHIS is concerned that it will be unable to maintain an adequate workforce of veterinary pathologists. This is consistent with a report by the United States Animal Health Association, which found a shortage of over 40 percent nationwide. An APHIS laboratory director told us that veterinary pathologists are integral to work conducted in APHIS diagnostic laboratories, including work on diseases that threaten animal and human health. For example, APHIS veterinary pathologists work on bovine spongiform encephalopathy, a fatal degenerative disease—commonly known as mad cow disease—that has been linked to at least 165 human deaths worldwide. APHIS also identified a need to maintain a veterinarian workforce with sufficient expertise to help protect livestock and the nation’s food supply from foreign animal diseases. We reported in 2005 that many U.S. veterinarians lack the training needed to identify such diseases, whether naturally or intentionally introduced. Finally, after the terrorist attacks of 2001, USDA’s responsibilities were broadened to enhance the ability of the United States to manage domestic incidents. As such, in addition to being the lead for coordinating any response efforts to incidents involving an animal disease, APHIS will now also play a supporting role in incidents not directly related to animal diseases. For example, APHIS veterinarians may be called upon to assist in ensuring the safety and security of the commercial food supply or for caring for livestock stranded in hurricanes and floods. These increased responsibilities raise concerns about the ability of veterinarians to respond to multiple, simultaneous events, according to agency officials. APHIS has supported training opportunities to help overcome some of these projected skill gaps. The agency has also set a goal of recruiting at all veterinary colleges and working with universities to help them include relevant training in their course offerings. In addition, APHIS uses bonuses to attract and maintain its veterinarian workforce. During the first 9 months of fiscal year 2008, it provided one retention and one relocation bonus to veterinarians, totaling $41,654. Over the past decade, FSIS has not had a sufficient number of veterinarians and remains unable to overcome this shortage, according to FSIS officials. The agency’s goal was to have 1,134 veterinarians on staff in fiscal year 2008, but it fell short of that by 166 veterinarians, or 15 percent. Moreover, since fiscal year 2003, the FSIS veterinarian workforce has decreased by nearly 10 percent—from 1,073 to 968. The majority of these veterinarians work in slaughter plants. Federal law prohibits slaughtering livestock or poultry at a plant that prepares the livestock or poultry for human consumption for use in interstate commerce unless the animals have been examined by USDA inspectors and requires the humane slaughtering and handling of livestock at such plants. In implementing federal law, each slaughter plant is covered by one or more FSIS veterinarians to, among other things, ensure the safety and quality of meat and poultry products and the humane treatment of livestock during slaughter. Agency data from the past 5 years reveal that vacancy rates for veterinarian positions in slaughter plants vary by location and year, from no vacancy to as many as 35 percent of the positions vacant. FSIS headquarters officials and veterinarians working in slaughter plants differed on the impact of this shortage. Headquarters officials told us that, despite the shortage, the agency has been able to meet its food safety and other responsibilities by redistributing the workforce. For example, in some cases, FSIS has assigned one veterinarian to several slaughter plants or assigned only one to plants that previously had two. In contrast, several veterinarians working in slaughter plants told us that, because of inadequate staffing, they are not always able to meet their responsibilities and perform high-quality work. For example, veterinarians told us they cannot always verify crucial sanitation and security checks of the plant or promptly log data on animal diseases and welfare. In early 2008, veterinarians also told us they did not always have time to ensure the humane treatment of livestock. Inhumane treatment triggered an investigation that led to the largest beef recall in U.S. history. More specifically, in February 2008, the Humane Society of the United States released videos to the public that documented abuse of cattle awaiting slaughter at a plant in Chino, California. These alleged abuses, which took place in the fall of 2007, included electrically shocking nonambulatory “downer” cattle, spraying them with high-pressure water hoses, and ramming them with a forklift in an apparent attempt to force them to rise for slaughter. These acts are not only cruel, they pose a risk to the safety of the food supply, because downer animals are known to be at greater risk for bovine spongiform encephalopathy. FSIS regulations require that downer cattle be separated to await disposition by an inspector, even if they become nonambulatory after an inspector has approved the animal for slaughter during the preslaughter inspection. On February 1, 2008, the plant voluntarily ceased operations pending investigation by FSIS into the alleged abuses. On February 17, 2008, the plant announced that it was voluntarily recalling approximately 143 million pounds of raw and frozen beef products because of its failure to notify FSIS of the downer cows and the remote possibility that the beef being recalled could cause adverse health effects if consumed. The release of the videos by the Humane Society led congressional committees and USDA to question how such events could have occurred at a plant in which FSIS inspectors were assigned. At the request of the Secretary of Agriculture, USDA’s Office of Inspector General (OIG) is leading a criminal investigation that is ongoing at the time of this report. In addition, OIG conducted an audit of FSIS’s controls over preslaughter activities and reported in November 2008 that controls to demonstrate the sufficiency and competency of FSIS’ personnel resources could be strengthened to minimize the chance that such events could recur, among other things. Veterinarians and other FSIS officials we interviewed told us that, at the time of the incident, only one veterinarian was assigned to the plant that was the source of the recall, whereas two had been assigned in past years. Two veterinarians were needed, according to these officials, because the plant processed “cull” dairy cows, which are no longer used for milk production. These cows are generally older and in poorer condition than other livestock and thus require more frequent veterinary inspection. In the wake of this incident, FSIS required veterinarians to spend more time verifying the humane treatment of animals. However, veterinarians told us that this exacerbated the difficulty of completing their other work. In 2004, we made recommendations aimed at ensuring that FSIS can make well- informed estimates about the inspection resources—including veterinarians—needed to enforce the Humane Methods of Slaughter Act of 1978. Specifically, we recommended that FSIS periodically assess whether the level of resources dedicated to humane handling and slaughter activities is sufficient, but the agency has yet to demonstrate that they have done so. FSIS officials told us that there are several reasons for the agency’s ongoing shortage of veterinarians. For example, most veterinarians do not want to work in the unpleasant environment of a slaughterhouse. Furthermore, veterinarians are trained to heal animals, but FSIS veterinarians are hired to oversee the slaughter of animals. The job can also be physically and emotionally grueling, and many of the plants are in remote and sometimes undesirable locations. In addition, as a result of staff shortages, there is little opportunity to take time off for training that could lead to promotion. Finally, FSIS veterinarians told us that their salaries do not sufficiently compensate for the working conditions and are low relative to those of other veterinarians. According to OPM’s Central Personnel Data File, the mean annual salary for FSIS veterinarians in 2007 was $77,678; in contrast, the mean salary for private-practice veterinarians was $115,447 in 2007, according to the most recent data from the American Veterinary Medical Association. In commenting on a draft of this report, FSIS officials added that there is a lack of public health and food-safety emphasis in veterinary schools. FSIS has taken several steps to address the shortage. For example, it awarded 35 recruitment bonuses totaling more than $583,000 in the first 9 months of fiscal year 2008. FSIS also has internship programs that have, according to agency officials, increased awareness and generated interest in veterinarian work at the agency. For example, over the past 5 years, FSIS has established agreements with 16 veterinary schools to provide volunteer training opportunities to veterinary students with an interest in food safety and public health. In fiscal year 2008, there were 26 participants in the program, compared with only 1 when the program began in 2003. Two participants have thus far returned to FSIS for full-time employment after graduation. FSIS also has a paid veterinary student program that is designed to provide experience directly related to the student’s educational program and career goals. Since 2002, when FSIS began tracking this program, 77 students have participated, and 6 have become full-time employees. In addition, FSIS has sought special hiring authorities from OPM. For example, in July 2008, the agency was delegated authority to hire a limited number of retirees at full salary instead of at the reduced salary required for those with annuity income. Officials told us they hope this will encourage retired veterinarians to join FSIS, but, as of the date of this report, no retirees have been hired through this program. FSIS intends to track the effectiveness of this special hiring authority. Moreover, FSIS has proposed implementing a demonstration project that would allow the agency to test a pay system that offers more competitive salaries to veterinarians, among others. OPM requires that agencies undertaking such a project provide OPM with an analysis of the impact of the project results in relation to its objectives. OPM officials told us the project may be implemented in July 2009. Finally, OPM has in the past granted FSIS the ability to make immediate job offers to veterinarians without following prescribed competitive procedures, which can slow the hiring process. This “direct-hire authority” expired in 2007 and was not renewed at that time because, according to FSIS officials, USDA did not provide the expiration notification to FSIS. We were recently informed that USDA received approval from OPM on November 25, 2008, for direct hire for FSIS veterinarians lasting through December 31, 2009. However, FSIS officials raised concerns about the length of time of the authority, among other things, stating that it takes 5 to 6 months to renew this authority. ARS employed 57 veterinarians in fiscal year 2008, 12 percent short of its goal of 65. It has reported similar shortages throughout the last 5 years. Although veterinarians represent a small share of the ARS workforce (about 1 percent of more than 4,300 scientists and research technicians), the agency considers them critical to its mission. According to ARS officials, a sufficient veterinarian workforce is important to the quality and breadth of research ARS is able to conduct. For example, ARS would not have been able to conduct its research on the detection of avian influenza and development of vaccines against it, or on the transmission of bovine tuberculosis, without its veterinarians’ skills and experience. ARS officials told us it is difficult to attract and retain veterinarians because the agency requires its research veterinarians and senior program leaders who are veterinarians to have a Ph.D. in animal sciences or a related field, as well as a veterinary degree, and there is a limited pool of candidates for these positions. A recent report by the National Academy of Sciences identified a declining interest in veterinary research among veterinary students as a cause of a shortage of Ph.D. veterinarians. In addition, ARS officials told us the agency cannot compete with many of the salaries offered in the private sector. In 2007, the mean salary for ARS veterinarians was $102,081, according to OPM’s Central Personnel Data File. This is about $28,000 less than the mean salary reported by the American Veterinary Medical Association for veterinarians with a Ph.D. working at universities and colleges and about $96,000 less than those working in industry with similar qualifications, such as at pharmaceutical companies. To address its shortage of Ph.D. veterinarians, ARS provided six recruitment or retention bonuses to its veterinarians totaling $48,313 in the first 9 months of fiscal year 2008. The agency also created a tuition program in 2003, but participation has been limited. Only four individuals have been hired through the tuition program, and only two remained with the agency, according to officials. Under this program, ARS hires veterinarians without a Ph.D. and pays tuition and other educational costs while they earn this degree. Officials told us that the lack of success is most likely due to low salaries at ARS. In addition, the agency is reluctant to use this program because it diverts funding from the hiring of employees already qualified and ready to work. The Army reported that it filled its 446 authorized active-duty veterinarian positions, but that its veterinary reserve corps is not at full strength. Specifically, the Army only filled 173 of its 197 reserve positions in fiscal year 2008, a 12 percent shortage. According to the Army’s analysis, the reserve corps has been at less than full strength since fiscal year 2005. These veterinarians commit to part-time training and to being deployed to full-time active duty when needed. The shortage means there is not a sufficient pool of veterinarians that can be called into active duty as the need arises. This is a concern, according to the official responsible for assessing Army veterinarian workforce needs, because the Army’s need for veterinarian services is increasing due to growing concerns over bioterrorism, intentional contamination of the food supply, emerging zoonotic diseases, and due to operational requirements, such as agricultural reconstruction in Afghanistan and Iraq, among other things. This official told us that recruitment into the reserves has been a problem because of the length, frequency, and uncertainty of deployments, which, in some cases has also resulted in veterinarians losing their jobs or suffering financial hardships. However, he told us that recent changes to the reserve corps program—such as decreasing the length of deployment from 1 year to 180 days, and making additional incentives available to veterinarians in the reserves—have helped strengthen the capacity of the veterinary reserve corps. Officials also told us they are concerned about a growing need for certain special veterinary skills. For example, there is an increasing demand for Army veterinary pathologists, who are essential for interpreting test results from animals used in drug and vaccine research. The official responsible for assessing Army veterinarian workforce needs told us the Army has yet to formally assess this need. Other Army veterinarians conduct medical intelligence work for DOD’s Defense Intelligence Agency, where officials told us they are concerned about the difficulty of recruiting veterinarians with appropriate skills to meet a growing need to, among other things, collect and analyze data on animal diseases that could be used in a terrorist attack. Veterinarians are important to such work because, according to these officials, the majority of diseases considered to be potential bioterrorism agents are animal diseases that could also affect humans. They told us that while the agency is working to expand its workforce capabilities to address bioterrorism, there is a concern that the growing demand for veterinarian capabilities may outpace the growth of the Army’s workforce. The primary reason for the Army’s success in maintaining its active-duty veterinarian workforce is a scholarship program, according to the official responsible for assessing Army veterinarian workforce needs. This program targets veterinary students and pays their tuition and fees to veterinary school in exchange for a commitment to (1) serve as a veterinarian in the Army for 3 years and (2) serve an additional 5 years either in active duty or in the Army reserve program. In fiscal year 2008, the Army reported it had 106 qualified applicants for 47 scholarships. According to the official, the program is successful because it targets students before they accumulate school-related debt. Veterinary students graduate with more than $106,000 in debt, on average, according to the American Veterinary Medical Association. In addition, the funding for this program is directed specifically by congressional committees, separate from funds the Army uses to hire veterinarians. FDA officials reported that the agency has not assessed the sufficiency of its veterinarian workforce, but they told us that the workforce is sufficient to meet its responsibilities. However, a 2007 report by an FDA Advisory Committee found that FDA cannot fulfill its mission because of an insufficient scientific workforce. More specifically, the report states that FDA’s scientific workforce has remained static while its workload has increased, and that FDA’s Center for Veterinary Medicine (CVM) is in a state of crisis. This center employs nearly two-thirds of FDA’s 152 veterinarians and is responsible for ensuring the safety of veterinary drugs and regulating animal feed, among other things. An author of the report told us that veterinarians enter FDA employment lacking necessary skills and experience to examine the wide variety of veterinary products that require FDA approval and that FDA needs to better train its veterinarians to review the many diverse products under its jurisdiction. FDA officials told us the agency is currently undertaking significant reforms to address fundamental concerns in the report. For example, FDA reported it hired more than 1,000 scientists in order to build a more robust workforce, and it created the position of Chief Scientist to improve coordination of science planning and execution across the agency. However, FDA did not tell us how these reforms address the identified veterinarian skill gaps. Although FDA officials said the veterinarian workforce is sufficient, CVM officials recently told us that as a result of new obligations, the center hired 26 veterinarians in 2008 to fill vacancies. This represents a 17 percent increase in FDA’s overall veterinarian workforce in 2008, and it plans to hire more. The additional staff will enhance FDA’s ability to review generic animal drug submissions, among other things, according to these officials. In addition, in commenting on a draft of this report, OPM informed us that it is currently reviewing a request for direct-hire authority from FDA to fill veterinary positions. According to OPM, this request is based on a severe shortage of candidates and it is projected that this authority may be granted through December 31, 2010. CVM also plans to develop an internship program for entry-level veterinarians and other scientists in order to develop a qualified talent pool from which to draw permanent employees. Further, these officials said that, as a result of recent participation in interagency efforts to protect the nation’s food supply, CVM has begun to analyze the gap between its current resources and its needs. Even though their component agencies identified concerns about their veterinarian workforces, officials from both USDA and HHS told us that they have not undertaken a departmentwide assessment of these workforces to gain a broader perspective on trends and shared issues. In contrast, DOD has a process for such an assessment. Our prior work has found that top-level management needs to be involved in order for strategic workforce planning to be effective. Although USDA regularly collects veterinarian workforce data from its component agencies that employ veterinarians, it does not use this information to assess the sufficiency of the veterinarian workforce departmentwide. Department officials told us that workforce assessment is the responsibility of the agencies. Because USDA delegates this responsibility, it appears to be unaware of the scope of the workforce problems facing its agencies. For example, in its fiscal year 2007 human capital management report, USDA reported that its agencies had met or surpassed certain veterinarian workforce goals but made no mention of the shortages that FSIS and ARS identified in their workforce reports. USDA officials agreed that the report did not capture this critical information and that future reports should address the shortages. One result of this lack of department-level involvement is that USDA agencies compete against one another for veterinarians instead of following a departmentwide strategy to balance the needs of the agencies. According to FSIS officials, APHIS is attracting veterinarians away from FSIS because the work at APHIS is more appealing, there are more opportunities for advancement, and the salaries are higher. Indeed, our analysis shows that veterinarians are more concentrated in lower grade levels at FSIS than at APHIS (see fig. 1). Moreover, according to OPM’s Central Personnel Data File, the mean annual salary for veterinarians at FSIS in 2007 was about $78,000, the lowest among the three key USDA agencies (see fig. 2). According to an APHIS human resources official, the agency hired 75 veterinarians from FSIS between fiscal years 2003 and 2007, 17 percent of total new APHIS veterinarians hired. HHS neither assesses veterinarian workforce needs departmentwide nor has it instructed any of its component agencies that employ veterinarians—FDA, CDC, and the National Institutes of Health (NIH)—to assess their own workforces. HHS is thus not fully aware of the status of the veterinarian workforce at these component agencies and cannot strategically plan for future veterinarian needs. If it were able to provide such planning, it might be able to help FDA address workforce concerns raised in the 2007 FDA Science and Mission at Risk report. However, senior HHS strategic workforce planning officials we spoke with were unaware of the report. HHS officials told us that departmental leadership in workforce planning is important. In fact, they said the department is in the preliminary stages of developing a strategic departmentwide approach to workforce planning for certain professions. This effort will initially focus on workforce assessments for specific occupations, such as nurses and medical doctors. HHS officials told us they will not initially include veterinarians in this effort, because veterinarians are not deemed mission critical for the department, even though they are critical to the missions of FDA, CDC, and NIH. However, HHS officials said that this effort does not preclude agencies from assessing their own veterinarian workforce needs and sharing that information with the department. HHS officials also told us that because the department is expected to provide veterinary medical care and support during public health and medical disasters that warrant a coordinated federal response, it is critical that appropriate veterinary resources are identified and maintained. Furthermore, these officials told us that efforts are under way at the component agency level to address the national veterinary shortage. Specifically, CDC, in collaboration with Emory University, has developed a residency program designed to provide comprehensive training in laboratory animal medicine to better prepare veterinarians for working in laboratory research facilities at CDC and across the nation. In addition, in 2006 and 2008 CDC sponsored a “Veterinary Student Day” to promote public health careers for veterinarians. Unlike USDA and HHS, DOD has a process for assessing veterinarian workforce needs departmentwide. It has given this responsibility to the Army, which employs 89 percent of DOD veterinarians, with the remaining veterinarians working as public health officials for the Air Force. The Army assesses not only the number and type of veterinarians it will need but also what will be needed for the other services. For example, Army veterinarians are routinely assigned to care for working dogs and other animals at Army, Navy, Air Force, and Marine bases. Army veterinarians also conduct medical intelligence activities at the Defense Intelligence Agency. As the executive agency charged with assessing veterinarian workforce requirements for DOD, the Army takes all of these needs into consideration, then forwards the assessment results to DOD, which integrates them with overall workforce planning. No effort is being made to assess the sufficiency of the veterinarian workforce governmentwide. This is problematic because the majority (67 percent) of the 24 component agencies and other federal entities that employ veterinarians told us they have concerns about their veterinarian capabilities. OPM has not conducted a governmentwide effort to address current and future veterinarian shortages identified by component agencies, as it has done for other professions, and efforts by the Congress to address the national shortage have thus far had minimal impact. Sixteen of the 24 component agencies and other entities employing veterinarians reported concerns about their veterinarian workforce (see table 1). For example, several agencies reported that they lack veterinarian expertise required to fully meet agency responsibilities, such as addressing wildlife disease outbreaks. These current challenges are likely to worsen because a large number of federal veterinarians are eligible to retire in the near future. These retirements would exacerbate the veterinarian shortage and possibly increase interagency competition. Our analysis found that 697 veterinarians at FSIS, APHIS, ARS, Army, and FDA—27 percent of the combined veterinarian workforce of these agencies—are eligible to retire over the next 3 years. As the shortage grows, agencies across the federal government may experience a situation similar to the competition between FSIS and APHIS, and agencies with higher salaries for veterinarians are likely to gain an advantage. As figure 3 illustrates, mean veterinarian base salaries vary widely across agencies, from just under $70,000 at Interior’s National Park Service to just about $122,000 at DHS’s Office of Health Affairs. Salaries for individual veterinarians range from $35,000 for those in the residency program at the National Zoo to $205,000 for the highest paid veterinarian at NIH. Some agencies, such as those within HHS and the Department of Veterans Affairs, can augment base salaries for veterinarians using special statutory authorities. Agencies can use these authorities to hire veterinarians when standard hiring practices, including the use of recruitment incentives, are impracticable, less effective, or have been exhausted. In addition, DOD can provide all of its veterinarians with a $100 per month stipend, as well as up to an additional $5,000 per year of special pay if they have met the education and training standards of an American Veterinary Medical Association-recognized specialty college. There is no similar authority for USDA veterinarians. OPM’s mission is to ensure the federal government has an effective civilian workforce, but it has not conducted a governmentwide effort to address current and potential veterinarian shortages, as it has done for other professions. For certain professions, OPM has initiated governmentwide direct-hire authority, which allows expediting hiring during a time of critical need or a severe shortage of candidates. For example, in 2003, OPM authorized departments to immediately hire doctors, nurses, and other types of medical professionals without following prescribed competitive procedures. OPM officials told us their agency issued this authority based in part on department and agency concerns. OPM can also hold interagency forums to discuss workforce concerns but has not done so for veterinarians. According to OPM officials, interagency forums are open to all senior human capital representatives from all departments, including USDA and HHS. The forums provide an opportunity to discuss concerns, exchange ideas, and explore solutions to governmentwide staffing issues. OPM officials told us that no department has requested a discussion about veterinarian workforce concerns. Further, officials told us that the agency will facilitate a governmentwide solution, such as an interagency forum, if the departments demonstrate that a shortage exists. Our prior work has identified the need for OPM to use its leadership position to provide assistance to departments and agencies efforts to recruit and retain a capable and committed workforce. OPM officials told us the agency has taken some steps that could improve veterinarian recruitment and retention. During the course of our review, OPM created a Personnel Action Team to determine whether a governmentwide direct-hire authority should be granted for all veterinarians. OPM did not provide further details other than to state that a decision is expected in early 2009. In addition, OPM recently changed the federal classification of veterinarians. OPM raised the entry grade level for newly hired veterinarians from GS-9 to GS-11 and expanded the description of the federal veterinarian occupation to include areas of specialization, such as toxicology and pathology. OPM officials believe this will help attract more veterinarians into federal service. Agency officials also told us that they meet periodically with departments to ensure occupation classifications meet department needs. This was the first change of the veterinarian classification in over 20 years and was initiated at USDA’s request. The Congress has taken steps that address the broader, national veterinarian shortage, but its efforts thus far have had minimal impact. The National Veterinary Medical Services Act enacted in 2003, directs the Secretary of Agriculture to carry out a program to help veterinarians repay their school loans when they agree to work in areas of need. Although USDA is responsible for implementing the act, it has been delayed in doing so. USDA’s Undersecretary for Research, Education, and Economics testified before the Congress that this was because the Cooperative State Research, Education, and Extension Service (CSREES)—the USDA agency in charge of implementation—does not have experience with complex loan repayment programs. The Congress provided initial funding for the act in fiscal year 2006. In August 2008, CSREES began holding public hearings to solicit stakeholder input. Officials from USDA and veterinary associations told us that the $1.8 million allocated thus far for the program is insufficient and would have minimal impact on the shortage. With veterinary student debt averaging $106,000 upon graduation, $1.8 million would cover about 17 students with loans. Moreover, the program targets veterinarians who already have their degree and may not have the skill set the federal government is seeking. To be effective, officials from professional veterinary associations told us, the program would have to provide guarantees and target students early in veterinary school. The Congress also enacted the Higher Education Opportunity Act in August 2008, which has provisions intended to increase the number of veterinarians in the workforce through a competitive grant program that can increase capacity at veterinary colleges. According to the American Veterinary Medical Association, however, these grants will be capped at $500,000 per school, which will not be enough to increase capacity to meet veterinarian demands. Four of the five key agencies we reviewed—APHIS, FSIS, ARS, and FDA— have plans intended to detail how essential functions and services, including those that veterinarians perform, would continue during a pandemic that has the potential to severely reduce the workforce. However, each lacks elements that FEMA considers important for effective planning. The Army is still in the process of getting its plan approved and, therefore, we have not evaluated it. In addition, DHS’s efforts to identify the veterinarian workforce needed to address a catastrophic nationwide outbreak of foot-and-mouth disease are based on an unrealistic assumption and limited information. FEMA’s pandemic guidance assists agencies in identifying special considerations for maintaining essential functions and services during a pandemic outbreak that may cause absenteeism to reach 40 percent. For example, the guidance directs agencies to identify in their pandemic plans how operations will be sustained until normal business activity can be reconstituted, which may be longer than the 30 days usually planned for other types of emergencies. Agency plans are also to identify the essential functions that must be continued on-site and those that can be conducted from a remote location. They also should take into consideration the need for logistical support, services, and infrastructure that help an agency achieve and maintain essential functions and services. To account for the expected high rate of absenteeism at the peak of a pandemic, FEMA guidance also directs agencies to identify at least three people who can carry out each responsibility and identify how the agency will continue to operate if leadership and essential staff are unavailable. Finally, agencies are directed to test their pandemic plans, including the impacts of reduced staffing on facilities and essential functions and services. APHIS has developed pandemic plans for its headquarters, regional offices, and three laboratories that employ veterinarians, but these plans are missing elements in FEMA’s guidance and are not well-organized. For example, they do not explain how animal care, disease investigation, and other essential functions and services would continue if leadership and essential staff are unavailable. Moreover, pieces of these pandemic plans are spread throughout a large number of documents and are not well linked. For example, APHIS officials provided us with an undated pandemic plan that they told us was an appendix to the headquarters continuity of operations plan. But this continuity of operations plan made no reference to such an appendix, and officials were never able to provide us with a document that made reference to such an appendix. USDA recently hired a new emergency preparedness director to revise APHIS’s pandemic plans, among other things. The director told us that APHIS recognizes the importance of easily locating the plans and quickly implementing them in the event of a pandemic, and he acknowledged that the current documents are not an effective plan. APHIS is now combining its plans into one comprehensive document that will cover APHIS headquarters, regional offices, and laboratories. In addition, the director told us the new plan, to be completed by early 2009, will better adhere to FEMA guidance. FSIS has developed a pandemic plan that addresses many of the elements in FEMA’s guidance, but it lacks some crucial details. Importantly, the plan takes into account the work that veterinarians do at private slaughter plants. However, it does not address the logistics of how FSIS will work with industry to ensure veterinarians and other employees are available in the event of a pandemic so that food production can continue. FSIS officials told us that they have discussed this logistic with industry and expect, based on these discussions, that some plants would not be able to operate during a pandemic, as a result of FSIS or plant personnel absenteeism. The agency would maintain close communication with industry during a pandemic in order to determine how best to allocate available veterinarians and other FSIS inspection personnel so that slaughter plants could continue to operate. Veterinarians would be allocated to plants based on considerations such as the location of the outbreak and the type of slaughter plant affected. For instance, poultry plants may receive priority consideration because birds can only be slaughtered at a very specific weight. That is, the equipment for processing birds is designed for birds of a very specific size, and industry would not be able to process them if they were permitted to grow too large. However, such logisitcs are absent from FSIS’s plan, effectively postponing any decisions until the middle of a crisis. Similarly, the plan does not mention how FSIS would work with APHIS, even though the agencies have formally agreed to jointly plan for critical activities related to surveillance of animal diseases. In addition, the plan does not consider the impact of local quarantines on access to plants. ARS has developed pandemic plans for all of its 12 laboratories where veterinarians work. We reviewed plans for the two laboratories that employ the most veterinarians: the Southeast Poultry Research Laboratory and the National Animal Disease Center (NADC). These plans are important because they spell out the site-specific details needed to ensure that essential functions at each laboratory can continue. However, the plans lack crucial details, such as how the laboratories will continue operations if absenteeism reaches 40 percent. Specifically, neither of the plans take into account how the laboratories would continue to conduct essential functions and services if leadership and essential staff are unavailable. Agency officials told us they would temporarily suspend projects to account for increased absenteeism, but there is no mention of this in the plans; nor is there mention of how the agency will select projects for suspension or what would trigger suspension. Ensuring a sufficient veterinarian workforce at these laboratories during a pandemic is important because veterinarians carry out critical research and must be available to ensure the proper care of research animals. In addition, NADC is part of a USDA research complex that is transitioning to joint ARS and APHIS support services, including veterinary care for research animals. However, ARS and APHIS have yet to jointly plan for continuity of operations for any type of emergency. FDA has also developed a pandemic plan, but it is high-level plan that does not address several of FEMA’s elements, leaving it unclear if consideration has been given to how veterinarians would carry out any essential functions and services during a pandemic. For example, it does not identify which essential functions—whether they be the responsibility of the veterinarian or others—must be performed on-site and which can be performed remotely. Nor does it explain how veterinarians, or others, will continue operations if absenteeism reaches 40 percent by, for example, delegating authority to three individuals capable of carrying out each of the agency’s essential functions. The plan omits other important details, such as contact information for individuals who could assume authority should essential staff and leadership become unavailable. FDA officials told us they will take these gaps into consideration when they update their plan in 2009. The Army is still in the process of getting its pandemic plan approved and, therefore, we have not evaluated it. According to Army officials, the agency has developed a pandemic plan that has been validated by the U.S. Army Northern Command, but it has not yet been formally referred for approval to the Army’s senior leadership, and it does not contain details of how essential functions would continue. According to DOD officials, subordinate divisions within the Army intend to develop detailed plans, but the division responsible for veterinary services (Veterinary Command) has yet to do so. However, DOD officials told us that the Army has been instrumental in helping the United States plan for an outbreak of highly pathogenic avian influenza in birds. Controlling the outbreak in birds reduces the opportunity for the virus to mutate into a strain that could cause a pandemic in humans. FEMA guidance also directs agencies to test how well their pandemic plans might maintain essential functions and services given reduced staffing levels. FSIS and FDA are the only agencies we reviewed that have done so. In March 2007, FSIS conducted a “tabletop” pandemic exercise where key personnel discuss simulated scenarios in an informal setting in order to test their plans, policies, and procedures. In a summary report, FSIS officials noted that, among other things, additional exercises were needed to improve coordination with industry. FSIS subsequently conducted a similar tabletop exercise with industry in November 2008, but the summary report on lessons learned has yet to be published. FDA conducted an operational exercise in October 2008—a drill to test how well it could continue operations under a staffing shortage. As part of this exercise, FDA tested its ability to reassign tasks, but it is not clear if tasks performed by veterinarians were among those reassigned. FDA officials told us that they plan to issue a report with lessons learned from the exercise in early 2009 and will incorporate that information into FDA’s pandemic plan. ARS and APHIS have not tested their plans to see how well their agencies might maintain essential functions and services in the event of reduced staffing levels, but officials told us they intend to do so. DHS has two efforts under way that involve identifying the veterinarian workforce needed to quickly perform rapid diagnoses and other essential activities during a large-scale outbreak of foot-and-mouth disease, but both efforts have shortcomings. The first is a long-term national effort that DHS is coordinating to assess the nation’s preparedness for multiple, intentional introductions of foot-and-mouth disease. This effort includes identifying the veterinarian workforce and other capabilities that would be needed to best respond to such an outbreak. For example, it has identified the need for 750 veterinarians nationwide to conduct animal health epidemiological investigations and surveillance. It has also identified the need for teams of six livestock and six companion animal veterinarians in each affected state and local jurisdiction to implement disease containment measures, provide animal welfare, and euthanize and dispose of animals. However, this effort is based on a national planning scenario that USDA and DHS officials’ say includes an infeasible assumption. The scenario, developed by a White House Homeland Security Council working group in 2006, involves the mass slaughter of all potentially exposed animals. This “stamping out” method is the same one the United States has used in the past for eradicating smaller outbreaks of foreign animal diseases, but under this scenario, it would result in the slaughter of almost half the nation’s beef, dairy, and swine. DHS and USDA officials, as well as state officials who have conducted large-scale foot-and-mouth disease exercises, consider this stamping out method infeasible because, among other things, it would lead to serious logistical and environmental concerns, would not be tolerated by the public, and could wipe out a viable livestock industry. As a result, DHS and USDA officials told us, any workforce estimates produced from this effort are not relevant. However, these officials told us it has helped them better understand the enormity of the workforce response and the coordination that would be required for such a catastrophic event. DHS and USDA officials told us that to arrive at more relevant workforce estimates, the United States would have to consider alternatives to stamping out for outbreaks as large as the one depicted in the national planning scenario. For example, some countries protect against and control foot-and-mouth disease using vaccines. There are numerous reasons the United States has not used this approach, including limitations to vaccine technology. However USDA, DHS, and state officials recognize that newer, more promising vaccines may play an important role in controlling a catastrophic outbreak. DHS officials also told us that they are looking into revising the Homeland Security Council’s planning scenario to make it a more useful planning tool. For its second effort to identify the veterinarian workforce needed during a foot-and-mouth disease outbreak, DHS has contracted with the Department of Energy’s Lawrence Livermore National Laboratory to create a decision support system that models various foot-and-mouth disease outbreak scenarios. This effort includes estimating the number and type of workforce needed for responding to outbreaks, both with and without vaccination. However, according to the project leader, modeling efforts could be improved if certain information were available. For example, in order to model workforce needs for a response that includes the use of vaccines without subsequent stamping out, known as “vaccinate to live,” it is important to know what segments of the livestock industry might use such a strategy, and under what circumstances, and how animals and animal products would be identified and their movement tracked. Because the concept of vaccinate to live is new in the United States, USDA has yet to detail in contingency response plans how it would employ this concept, according to agency officials. In the absence of such plans, the project leader, a veterinarian who took part in the response to the 2001 United Kingdom foot-and-mouth disease outbreak, told us that she is left to base her modeling assumptions on personal knowledge and experience, as well as conversations with agency subject matter experts. Moreover, data limitations make it difficult for any computer modeling effort to accurately predict the spread of the disease. Specifically, modelers must estimate the number and location of animals, as well as their interaction with other segments of industry, because the United States does not have a mandatory, national system that identifies the location and tracks the movement of livestock. Instead, modelers currently use outdated county-level data from USDA’s National Agricultural Statistical Survey census, reducing the accuracy of predictions about the spread of foot-and-mouth disease. Also, without knowing the exact location of livestock, it is difficult to understand the interaction between livestock and wildlife. Limited data and information on the number and movement of wildlife and the susceptibility of wildlife populations to the virus further complicates matters, according to agency officials. This is an important gap, since foot-and-mouth disease has been known to spread from livestock to wildlife in past outbreaks. In fact, the last time the United States had an outbreak was in California in the 1920s, when the virus spread from pigs to cattle and black-tailed deer. It took 2 years and the slaughter of 22,000 deer to eradicate the disease from a local deer population in one national park. In areas where livestock graze extensively, there is potential for interaction with susceptible species, such as deer and feral pigs. According to the project leader, as well as USDA and DHS officials, control and eradication strategies would be greatly complicated if wildlife became infected and could require more veterinarians and different expertise. Given the important role wildlife can play in disease outbreak, officials agree it is important to better understand the interaction between livestock and wildlife. In fact, new technologies, such as global positioning systems, have been developed that can, for example, help determine the number and movement of animals, making it possible to gather this type of data, according to a USDA Wildlife Services official. A DHS official told us that, as a first step, it would be important for those agencies with responsibility for overseeing the health of humans, wildlife, and livestock to discuss how wildlife data can be gathered to most accurately model the spread of disease in wildlife. During four recent zoonotic disease outbreaks, the veterinarian workforce challenge cited most often by federal and state officials was having too few veterinarians to control the outbreak while also adequately carrying out other routine activities. Specifically, officials from 3 of 4 federal agencies—APHIS, CDC, and Interior’s U.S. Geological Survey (USGS)— and 9 of 13 state agencies cited this challenge. See table 2 for the 17 agencies that were identified as playing an important role, those that cited insufficient veterinarian capacity as a challenge, and other details about these outbreaks. Two primary reasons emerged for this insufficient capacity. First, according to federal and state officials, veterinarian capacity was insufficient because most of the agencies involved in the four outbreaks had difficulty recruiting and retaining veterinarians in general. For example, officials at many of the public health agencies and diagnostic laboratories we spoke with said that it has been challenging to hire or retain veterinarians with the specialized qualifications they need—public health and pathology skills, respectively. According to 2008 survey results from the American Association of Veterinary Laboratory Diagnosticians, it takes most diagnostic laboratories more than 6 months to fill vacancies for veterinary pathologists. In addition, numerous state agency officials told us that the salaries they offer are not competitive with those of the federal or private sectors. Moreover, officials told us that it has been particularly challenging recruiting veterinarians to work in remote areas or in areas with a high cost of living. Second, in 2002 and 2003 many veterinarians went to California to address a particularly demanding outbreak of exotic Newcastle disease, limiting the number of veterinarians available to respond to other outbreaks. The exotic Newcastle disease outbreak quickly exhausted California’s supply of veterinarians, both at state agencies and APHIS, because so many backyard birds—which are kept as a hobby or for personal consumption— were affected. Responders had to spend valuable time going door-to-door trying to locate potentially infected birds in densely populated urban areas. APHIS called in over 1,000 federal, state, and private-sector veterinarians from outside California to help with the response. But, even with a task force of over 6,000, it took almost a year to control the outbreak. Moreover, because so many veterinarians converged on California, the number available to work on the other three outbreaks— located in Michigan, Wisconsin, and Colorado—was insufficient, according to federal and state agency officials. In part because of the strain on veterinarian resources during the four outbreaks, officials from 16 federal and state agencies expressed concern that they will not have sufficient veterinarian capacity for multiple outbreaks in the future. FDA assisted in one of the four outbreaks and was the only agency not to express concerns about veterinarian capacity. Some federal officials said that the United States has never been tested with two major outbreaks occurring at once, such as simultaneous outbreaks of foot-and-mouth disease and highly pathogenic avian influenza—two highly infectious foreign animal diseases. They said that should this happen, the effects on animal and public health could be devastating. Federal and state agency officials reported several consequences of this insufficient veterinarian capacity. Examples are as follows: Michigan state agency officials told us they had trouble testing enough cattle during the bovine tuberculosis outbreak. Over a 6-1/2 year period, veterinarians struggled to test more than a million cows—an average of more than 3,500 a week—but the state has yet to eradicate the disease. Some Michigan officials told us that APHIS and the Michigan Department of Agriculture did not have enough veterinarians to both respond to bovine tuberculosis and address other animal diseases, such as E. coli. In fact, during all four outbreaks, veterinarians at some point had to delay important work on other diseases, in part because there were not enough veterinarians. During the 2003 West Nile virus outbreak in Colorado, a lack of sufficient veterinarians to track and control the disease, among other things, may have allowed the virus to infect more people and animals than it otherwise would have. The volume of work required to control and eventually eradicate exotic Newcastle disease in California physically and emotionally exhausted veterinarians to the extent that, once the outbreak was over, they needed significant time off to recover, further delaying work on routine activities. The demanding nature of the exotic Newcastle disease and bovine tuberculosis outbreaks may have caused some veterinarians to seek employment elsewhere. Despite reports of insufficient veterinarian capacity during these four outbreaks, the agencies have not taken full advantage of two important opportunities to learn from past experience. First, 10 of the 17 agencies have not assessed how well their own veterinarian workforces responded to individual outbreaks. Our prior work has shown that agencies can improve response by conducting postoutbreak assessments. One outcome of such an assessment might be a better understanding of how to most efficiently use veterinarians. For example, APHIS—one of the agencies that has performed postoutbreak assessments—found that it had difficulty locating veterinarians with the specialized expertise needed for addressing the exotic Newcastle disease outbreak. As a result, APHIS is developing a national list identifying veterinarians and their credentials to call upon in the future. In addition, federal and state agencies working on bovine tuberculosis in Michigan meet periodically to assess what strategies are working and what they need to change in order to better control the disease. APHIS also conducts periodic reviews of its efforts and the state’s efforts to address bovine tuberculosis. Moreover, none of the 17 agencies have come together to share their experiences across the outbreaks in order to identify workforce challenges that they may have had in common, including veterinarian workforce challenges. Consequently, the agencies are missing the opportunity to identify and address challenges they are likely to face in the future. The majority of the federal and state agency officials we spoke with agreed that it would be useful for agencies not only to conduct assessments of their own workforce response but also to periodically meet to identify common workforce challenges across multiple outbreaks and discuss strategies for overcoming these challenges. However, some agencies told us that their veterinarian workforce is already facing heavy workload demands that make it difficult for them to meet their existing responsibilities, and thus they have not had time to conduct postoutbreak assessments. Wet Nile virusas recently introdced in wild ird nd po potentilly erious thret to people nd hor. The virus prequickly cross the United Ste etween 1999 nd 200. Expert elieve it i now eablihed as asonl epidemic in North Americ, flring p in the summer nd contining into the fll. The virus mot often pred when mosquitoe ite infected ird (such as housrrow or roin), quire the virus, nd then pass it on to other nim or to h. However, Wet Nile virusl to mny pecie of wild ird, such as crow, which re then only minimlly involved in the pred of the infection. Mny people infected with the virus do not ecome ill. Some experience mild ymptom, inclding fever, heche, ody che, naus, vomiting, wollen lymph node, or kin rash. At 1 in 150 develop evere illness nd hve ymptom tht inclde high fever, heche, neck tiffness, por, diorienttion, com, tremor, convion, muscle wekness, viion loss, nness, nd ply. Veterinarians are a small but vital part of the federal workforce, playing important roles in protecting people from zoonotic and foodborne diseases, ensuring the health and humane treatment of food animals, and helping to keep America’s food system safe. The nation is facing a growing shortage of veterinarians, and component agencies and other federal entities have already identified insufficiencies in their veterinarian workforces. At FSIS, for example, the veterinarian workforce is finding it difficult to adequately carry out its responsibilities for ensuring food safety and the humane treatment of animals. In 2004, we recommended that FSIS periodically assess whether it has enough inspection resources, including veterinarians, dedicated to humane handling and slaughter activities, but the agency has yet to demonstrate that they have done so. Nor has the federal government conducted the broader assessments and planning activities necessary to address veterinarian workforce problems at FSIS and beyond. Unless USDA and HHS conduct departmentwide assessments of their veterinarian workforces, they will not fully understand the size and nature of the challenges they face in recruiting and retaining veterinarians with the appropriate skills. This will leave their component agencies without a high-level solution to problems they have so far been unable to solve on their own. Moreover, without a governmentwide effort to identify shortcomings in veterinarian capabilities, the federal government may be missing opportunities to find common solutions for attracting veterinarians into federal service. In addition, unless component agencies complete and test their pandemic plans in keeping with FEMA guidance, they will not be fully prepared to carry out essential veterinarian functions in the face of high rates of absenteeism. Until USDA details how responders would control a foot- and-mouth disease outbreak using vaccines, the nation will not have a complete understanding of the veterinarian workforce needed to control such an outbreak. Similarly, until more information is gathered on the spread of foot-and-mouth disease in wildlife, agencies will not be able to more accurately model the number and type of veterinarians that would be needed if the disease were to spread beyond livestock. Failure to understand the workforce needed during a catastrophic event—whether a pandemic or an attack on the food supply—could unnecessarily increase the scope and severity of the crisis. Finally, unless component agencies involved in responding to outbreaks of zoonotic disease regularly review their own performance and collectively assess opportunities for improvement, they cannot be assured they are using veterinarians as efficiently as possible. They are, therefore, more likely to face an insufficient veterinarian workforce capacity during future outbreaks, which may cause an unnecessary increase in the severity of the outbreaks and worsen the threat to public health. We are making nine recommendations to improve the ability of the federal veterinarian workforce to carry out routine activities, prepare for a catastrophic event, and respond to zoonotic disease outbreaks. To help ensure the federal veterinarian workforce is sufficient to meet the critical responsibilities it carries out on a routine basis, we recommend that 1. the Secretary of Agriculture direct FSIS to periodically assess whether its level of inspection resources dedicated to food safety and humane slaughter activities is sufficient, and 2. the Secretary of Agriculture conduct a departmentwide assessment of USDA’s veterinarian workforce—based, for example, on workforce assessments by its component agencies—to identify current and future workforce needs (including training and employee development) and departmentwide solutions to problems shared by its agencies. When the Secretary completes the assessment, the results should be forwarded to the Director of the Office of Personnel Management. 3. We also recommend that the Secretary of Health and Human Services direct the department’s component agencies that employ veterinarians to conduct regular workforce assessments and that the Secretary then conduct a departmentwide assessment of HHS’s veterinarian workforce to identify current and future workforce needs (including training and employee development) and solutions to problems shared by its agencies. When the Secretary completes the assessment, the results should be forwarded to the Director of the Office of Personnel Management. 4. Finally, we recommend that the Director of the Office of Personnel Management determine, based on USDA’s and HHS’s departmentwide veterinarian workforce evaluations, whether a governmentwide effort is needed to address shortcomings in the sufficiency of the current and future veterinarian workforce. To help the veterinarian workforce continue essential functions during a pandemic, we recommend that 5. the Secretaries of Agriculture, Defense, and Health and Human Services ensure that their component agencies that employ veterinarians complete pandemic plans that contain the necessary elements put forth in DHS’s continuity of operations pandemic guidance, including periodically testing, training, and exercising plans. To improve estimates of the veterinarian workforce needed to respond to a large-scale foot-and-mouth disease outbreak, we recommend that 6. the Secretary of Agriculture detail in a contingency response plan how a response using vaccines would be implemented, and 7. the Secretary of Homeland Security coordinate an interagency effort to identify the data necessary to model the spread of disease in wildlife and how best to gather these data. To improve the ability of the federal veterinarian workforce to respond to zoonotic outbreaks in the future while also effectively carrying out routine activities, we recommend that the Secretaries of those departments most likely to be involved in response efforts—such as USDA, HHS, and Interior—ensure that their agencies: 8. conduct postoutbreak assessments of workforce management; and 9. in coordination with relevant federal, state, and local agencies, periodically review the postoutbreak assessments to identify common workforce challenges and strategies for addressing them. We provided a draft of this report to USDA, DOD, HHS, OPM, DHS, and Interior for their review and comment. USDA, DOD, OPM, DHS, and Interior generally agreed with the recommendations. HHS generally concurred with the report but not with one finding we reported regarding FDA’s veterinarian workforce. Also, all departments provided technical comments, which we incorporated as appropriate. USDA agreed that it should periodically assess whether its level of inspection resources dedicated to food safety and humane slaughter activities is sufficient and believes that FSIS is already doing this assessment as a part of its budget formulation process. However, we made this recommendation in 2004, and are repeating it now, because FSIS has yet to demonstrate that they have done this assessment. USDA also reported that because APHIS and FSIS employ the majority of veterinarians within the department, these component agencies will work together, with departmental consultation, as needed, to develop solutions to shared problems. We continue to believe that a departmentwide assessment is necessary. In addition, the department commented that it will track veterinarian workforce trends and devise strategies to train, recruit, and retain veterinarians in order to mitigate attrition and maintain progress toward the department’s mission to protect the public health. Furthermore, USDA reported that APHIS and FSIS are already taking steps to revise their pandemic plans to overcome many of the gaps we identified to help ensure the USDA veterinarian workforce can carry out essential functions during a pandemic. USDA’s written comments and our evaluation appear in appendix III. DOD stated that efforts are under way to finalize the Army’s pandemic influenza plan and that the implementation date will be determined based on current mission priorities. DOD’s written comments and our evaluation appear in appendix IV. HHS reported that veterinarians are essential to protecting the health of the American people. In addition, the department commented that veterinarians are a valuable resource at CDC and conducting workforce assessments, as recommended in our report, will ensure that HHS maintains a sufficient capacity for outbreak response. HHS further reported that all operating staff division heads are required to have workforce plans in place for their organizations by September 2009. Once the plans are completed, the HHS Office of Human Resources will look across the plans to identify opportunities for collaboration with regard to strategic recruitment, development, and retention. The department also plans to strengthen its oversight of the operating divisions to ensure that they are implementing their workforce plans, focusing on those occupations critical to the success of their missions. While veterinarians are not currently identified as a department-level Mission Critical Occupation, largely because they represent less than 1 percent of the HHS workforce, the department plans to review its Mission Critical Occupations in the coming year using criteria that are more risk-based. However, HHS did not agree with a statement in our report that references a 2007 FDA Advisory Committee report claiming that CVM is in a state of crisis. The department stated that, given the broad nature of the 2007 Advisory Committee report, it is not applicable to veterinarians. However, we reported information pertaining directly to veterinarians—information we obtained from an interview with an author of the Advisory Committee report. Furthermore, HHS stated that CVM has made great strides in the past few years assessing its workforce needs and that the 2007 report is outdated. Our report identifies many of the efforts CVM has recently undertaken, such as hiring additional veterinarians and beginning an effort to analyze the gap between current resources and needs. It also notes that, according to FDA officials, the agency is undertaking significant reforms to address fundamental concerns in the 2007 report. However, as our report also states, FDA did not tell us how these efforts address the identified veterinarian skill gap specifically. HHS’s written comments and our evaluation appear in appendix V. OPM informed us that it has established a team to research and analyze data to determine the feasibility of issuing a governmentwide direct-hire authority for veterinarians under its statutory and regulatory authority. OPM did not provide further details except to say that a decision is expected early in 2009. Until this study is completed, OPM relies on individual agencies to make such requests when they have encountered a severe shortage of candidates or a critical hiring need for veterinarians. In addition, OPM informed us that on November 25, 2008, it approved USDA’s request for direct-hire authority. OPM also commented that, in 2003, the agency approved direct-hire authority for temporary and term positions, including veterinarians, to help protect the health or safety of the U.S. food supply during a pandemic or other declared emergency situation. OPM’s written comments and our evaluation appear in appendix VI. DHS recommended that the federal government enhance efforts to identify the veterinarian workforce needed during catastrophic events. They stated that this could be achieved through an OPM pursuit of a multidepartment assessment of veterinary manpower requirements. They further recommended that agencies develop plans that identify how veterinarians will continue essential functions during additional catastrophic events, taking into consideration the potential for absenteeism that exceeds the level of 40 percent estimated for a pandemic. In addition, DHS stated that, once a governmentwide veterinarian workforce need is determined, effective recruitment and retention programs should be developed that are consistent across all agencies. However, DHS disagreed with our finding that the estimate produced from one of its efforts to identify the workforce needed during a catastrophic outbreak of foot-and-mouth disease is not relevant. We continue to believe, as does DHS, that this effort is based on an infeasible assumption. Therefore, we do not agree that this estimate is relevant to any response that could reasonably be implemented during such an outbreak. DHS’s written comments and our evaluation appear in appendix VII. Interior commended GAO for conducting a well-researched examination of the federal veterinarian workforce. The department emphasized the importance of including wildlife disease expertise in a strategy for protecting human and animal health. The department also identified the importance of detecting and preventing non-native invasive infectious diseases from entering U.S. borders via imported wildlife as important to protecting human and animal health. Interior’s written comments and our evaluation appear in appendix VIII. As agreed with your offices, unless you publicly announce the contents of this report earlier, we plan no further distribution until 22 days from the report date. At that time, we will send copies to the Secretaries of Agriculture, Commerce, Defense, Energy, Health and Human Services, Homeland Security, Interior, Justice, Smithsonian Institution, and Veterans Affairs; the Director of the Office of Personnel Management; the Administrators of the Environmental Protection Agency, National Aeronautics and Space Administration, and U.S. Agency for International Development; appropriate congressional committees; and other interested parties. The report also will be available at no charge on the GAO Web site at http://www.gao.gov. If you or your staff have any questions about this report, please contact me at (202) 512-3841 or [email protected]. Contact points for our Offices of Congressional Relations and Public Affairs may be found on the last page of this report. GAO staff who made contributions to this report are listed in appendix IX. 1,771 Animal and Plant Health Inspection Service 667 Protect American livestock and poultry health through diagnosis, control and eradication of animal diseases, and partnering with state officials to manage and eradicate disease outbreaks. Some are employed overseas. Secretary for Preparedness and Response personnel for events requiring emergency and disaster-related veterinary medical care services to impacted animal populations (including household pets and service animals) in or outside of shelter locations until local infrastructures are reestablished. Number of veterinarians by component agency or other entity37 Conduct research to improve the health of veterans and oversee the health and welfare of animals used in research. 16 Investigate, diagnose, develop control methods, and develop databases for wildlife diseases; provide training to wildlife biologists and resource managers in wildlife disease identification and control; conduct clinical veterinary research on wildlife diseases; and oversee the health and welfare of experimental and wild animals used in research, including research on wildlife diseases. Growth, Agriculture and Trade; for Global Health; and for Africa pathogenic avian influenza outbreaks and recovery; identify opportunities to share and leverage resources for avian influenza response efforts with international and domestic health agencies and universities. Number of veterinarians by component agency or other entity9 Conduct audits of seafood plants and products as part of the Seafood Inspection Program; provide guidelines and oversight of the Marine Mammal Health and Stranding Response Program, Aquatic Animal Health Program, disease surveillance, health monitoring, outbreak investigations, and contaminants/pathogen/toxin/health research. 5 Office of the Chief 5 Provide and coordinate animal care at agency research facilities; one veterinarian is an astronaut. 1 Oversees the laboratories’ Food and Agricultural Security program, which includes the work on modeling animal disease to determine workforce resources that will be needed for response to outbreaks. 1 Provide veterinary expertise in the investigation of an intentional disease outbreak. The Army veterinarian workforce consists of 446 active duty; 173 reserve corps; and 134 other. The number of veterinarians listed for the Department of Health and Human Services does not include those United States Public Health Service Commissioned Corps veterinarians working at the FSIS and the Environmental Protection Agency because they are counted as employees of those agencies. To determine the extent to which the federal government has assessed the sufficiency of its veterinarian workforce for routine activities, we interviewed officials and collected documents from the American Veterinary Medical Association, the National Association of Federal Veterinarians (NAFV), and the Association of American Veterinary Medical Colleges to identify general concerns about the federal veterinarian workforce. NAFV also provided a review it had conducted in 1996 that identified federal departments and agencies that employ veterinarians. We expanded this list of departments and component agencies based on referrals and experience from our past reports, resulting in a list of 24 component agencies and other federal entities. We then surveyed these 24 entities to obtain information on the federal veterinarian workforce— including the number of veterinarians employed, their grade level, salaries, roles and responsibilities, number of vacancies, and sufficiency of the workforce. We conducted this self-administered electronic survey in October 2007 and then requested an update of this survey information in July 2008. We achieved a 100 percent response rate both times. However, one entity was unable to provide some of the specific salary information we requested, and we noted this in our report. Because this was not a sample survey, but rather a survey of the universe of respondents, it has no sampling errors. However, the practical difficulties of conducting any survey may introduce errors, commonly referred to as nonsampling errors. For example, respondents may have difficulty interpreting a particular question, the sources of information available to respondents may introduce errors or variability, and analysts may introduce errors when entering data into a database or analyzing these data. We took steps in developing the questionnaire, collecting the data, and analyzing them to minimize such nonsampling error. For example, we pretested the survey to ensure that the questions were relevant, clearly stated, and easy to understand. To obtain salary information for Department of Agriculture (USDA) agencies over the past 5 years, we used data from the Office of Personnel Management’s (OPM) Central Personnel Data File. We did not independently verify these data for the years we reviewed; however, in a 1998 report, we found that governmentwide data from this file for the key variables in this study (agency, birth date, service computation date, occupation, and retirement plan) were 99 percent accurate or better. Therefore, we feel these data were sufficiently reliable for the purposes of this review. On the basis of information we received in our survey of these component agencies and other entities, we then analyzed the workforce assessment efforts of USDA, the Department of Defense (DOD), and the Department of Health and Human Services (HHS). We selected these departments because they employ the majority of federal veterinarians (96 percent) identified in our survey. Within these three departments, we further focused our review on five component agencies—the Animal and Plant Health Inspection Service (APHIS), FSIS, Army, and the Food and Drug Administration (FDA)—to determine the extent to which they assessed the sufficiency of their veterinarian workforce. We also selected the Agricultural Research Service (ARS) for further review because it is USDA’s chief scientific research agency and conducts research to solve agricultural problems of high national priority. We conducted our assessment by reviewing department and agency documents, such as workforce plans, human capital management reports, workforce models, and gap assessments. We then compared workforce assessment efforts of the three departments and five component agencies with GAO workforce planning guidance. We also conducted semistructured interviews with workforce planning and veterinarian program officials. In addition, we interviewed an author of the report FDA Science and Mission at Risk regarding the report’s findings and their relation to FDA veterinarian skill gaps. Further, we visited one poultry and two beef slaughter plants of varying sizes to observe conditions and interview veterinarians and other FSIS officials. We also interviewed FSIS officials working at the slaughter plant that was the subject of the nation’s largest beef recall. We selected these plants on the basis of proximity to the sites of the four recent zoonotic disease outbreaks we reviewed, and recommendations from FSIS officials. Moreover, other veterinarians contacted us to relay concerns about the sufficiency of the FSIS veterinarian workforce. We interviewed officials from the OPM to determine the agency’s role in workforce planning for federal veterinarians and to identify recruitment and retention authorities available to agencies and departments. Finally, we interviewed experts from the Council of State and Territorial Epidemiologists, the National Association of State Public Health Veterinarians, the American College of Veterinary Pathologists, the American Association of Wildlife Veterinarians, the American Association of Veterinary Laboratory Diagnosticians, and the National Academy of Sciences to identify workforce needs for veterinary specialties including public health, wildlife veterinarians, veterinary laboratory diagnostics, and veterinary pathology. To determine the extent to which the federal government has identified the veterinarian workforce needed during a catastrophic event, we analyzed workforce planning efforts for two potential large-scale national incidents that the White House Homeland Security Council deemed critical for planning purposes: a pandemic and a foot-and-mouth disease outbreak. For the first, we compared pandemic plans from APHIS, FSIS, ARS, Army, and FDA to guidance the Department of Homeland Security’s (DHS) Federal Emergency Management Agency provided to departments and agencies for identifying special considerations for maintaining essential functions and services under such conditions. These agencies were selected for the reasons described above. We interviewed agency officials to discuss identified gaps and determine the extent to which the plans were being updated and tested. Furthermore, we interviewed HHS officials to understand their review of state pandemic plans, which are under development to ensure continuity of the food supply system and the ability to respond to agriculture emergencies. For the second, we reviewed veterinarian workforce outcomes from DHS’s nationwide effort to assess the nation’s preparedness for multiple, intentional introductions of foot- and-mouth disease. In addition to interviewing the DHS official responsible for coordinating the animal health emergency capability, we also interviewed state officials who have conducted large-scale exercises simulating a response to foot-and-mouth disease, as well as USDA officials with responsibility for such an event, to determine the feasibility of the response depicted in the scenario. Because vaccine use was suggested as an alternative strategy to the slaughter of animals infected with foot-and- mouth disease, we also interviewed USDA’s Chief Veterinary Officer, and DHS and USDA officials at Plum Island Animal Disease Center to determine the status of foot-and-mouth disease vaccine development and the feasibility, as well as practicality, of their use. Finally, at the recommendation of DHS, we interviewed the Department of Energy official responsible for overseeing the development of a decision support system that models various foot-and-mouth disease outbreak scenarios in order to estimate the number and type of workforce needed for responding to outbreaks. The Department of Energy is performing this work under contract for DHS. We also interviewed USDA, DHS, and Department of the Interior (Interior) officials to determine the extent to which agencies are including the possible spread of foot-and-mouth disease in wildlife in their planning efforts. To determine the extent to which federal and state agencies encountered veterinarian workforce challenges during four recent zoonotic outbreaks, we conducted semistructured interviews with 17 federal and state agencies involved in these outbreaks. We relied on federal and state officials to identify those agencies that played an important role in outbreak response. Based on this information, we then interviewed officials from USDA, HHS, Interior, state public health departments, state agriculture and wildlife agencies, state diagnostic laboratories, and one county public health agency. We also interviewed other individuals involved in the outbreaks, including researchers from Northwestern University, the University of California at Davis, and Western University of Health Sciences. We selected the four outbreaks in our review—bovine tuberculosis in Michigan, exotic Newcastle disease in California, monkeypox in Wisconsin, and West Nile virus in Colorado—because these outbreaks were most frequently recommended by federal officials as examples of recent zoonotic diseases; are ongoing or have occurred since 2001; and have affected various types of animals, including livestock, wildlife, pets, and exotic animals. In addition, we chose these four outbreaks for review because of the unique nature of the outbreaks in these states. Specifically, we selected Michigan as the state for the bovine tuberculosis review because the ongoing outbreak is the longest outbreak of this disease in the United States in recent history. We chose California because it experienced the greatest number of animal infections for the exotic Newcastle disease outbreak. We selected Wisconsin because it experienced the most human monkeypox infections. We selected Colorado for West Nile virus because the number of human infections in Colorado in 2003 was the highest for a single state. In addition to the interviews, we also analyzed federal, state, and county documents, such as after action reports, in order to (1) understand the extent to which agencies formally assessed the management of their veterinarian workforces during these outbreaks and (2) identify any workforce-related challenges and steps agencies took to address these challenges. The following are GAO’s comments on the Department of Agriculture’s letter dated January 16, 2009. 1. USDA commented that FSIS already regularly assesses the level of inspection resources it needs, as we recommended in 2004. However, as our report states, FSIS has yet to demonstrate that they have done so. We regularly follow up to request evidence that agencies have implemented our recommendations, and FSIS has not provided such evidence. 2. USDA reported the majority of its veterinarian workforce is located within two agencies, APHIS and FSIS, and each has the staff and expertise to conduct veterinarian workforce analyses for their respective agencies. Therefore, these two agencies will work together, with departmental consultation, as needed, to develop solutions to problems shared by both agencies. We continue to believe that a departmental assessment, not a consultation, is necessary, particularly in light of the competition between the two agencies. As we reported, APHIS is attracting veterinarians away from FSIS because the work at APHIS is more appealing, there are more opportunities for advancement, and the salaries are higher. Furthermore, ARS continues to experience difficulties recruiting and retaining highly qualified veterinarians to carry out critical research of national importance, yet there is no mention of ARS in USDA’s comments. 3. USDA commented that it has contingency plans and a decision tree for use of foot-and-mouth disease vaccine from the North American Foot- and-Mouth Disease Vaccine Bank. We acknowledge that USDA has these plans. In fact, we reviewed a draft plan titled, Response to the Detection of Foot-and-Mouth Disease in the United States, dated October 2007, that USDA officials told us was their new response plan that considered alternative response strategies, including “vaccinate to live.” However, this plan does not detail how a policy of this nature would be implemented. USDA further commented that policy decisions as to who may administer the vaccine will be made based on the circumstances of the outbreak. While we recognize that each outbreak is unique, this should not preclude USDA from identifying a plausible scenario or scenarios and detailing how a vaccinate to live strategy would be carried out in order to enhance preparation, response, and recovery in a time of crises. 4. We modified our report to reflect that USDA would like to change their statement from FSIS has “never” had a sufficient number of veterinarians to “over the past decade.” USDA also asserts that our report says that FSIS has been able to reallocate veterinary resources sufficient to meet its statutory mandates for food safety and humane handling of livestock. However, our report only presents this as the view of FSIS headquarters officials. We raise this point to illustrate that FSIS headquarters officials and veterinarians working in slaughter plants differ on the impact of this shortage. 5. We modified our report to reflect more clearly the relationship between the events at a Chino, California, plant and the February 2008 beef recall. 6. USDA commented that that our report emphasizes the incident at a plant in Chino, California. We raise the point because some veterinarians told us they did not have time to ensure the humane treatment of livestock, and this example illustrates inhumane treatment occurred despite the presence of FSIS inspectors. USDA further commented that we attribute this incident to having only one veterinarian. We do not state this in our report. We use this and other statements about resources to illustrate the need for FSIS to periodically assess whether the level of resources dedicated to humane handling and slaughter activities is sufficient. They have yet to do so. In addition, USDA commented that the USDA Inspector General did not find systematic problems associated with oversight of humane handling at slaughter facilities that process cull cows. However, the Inspector General did conclude that there is inherent vulnerability at the other plants in the scope of its audit, and that inhumane handling could occur and not be detected by FSIS inspectors due to lack of continuous surveillance. 7. USDA commented that GAO has closed the 2004 recommendation that FSIS periodically assess whether the level of resources dedicated to humane handling and slaughter activities is sufficient. We recognize that FSIS has taken actions in response to a number of recommendations made in the 2004 report and have documented implementation of these recommendations. However, with regard to periodic assessment, we closed this recommendation because enough time had passed that we considered it unlikely to be implemented. As our report states, FSIS has yet to demonstrate that it has been implemented. Based on our current work, we continue to believe that periodic assessment is needed, and we make a recommendation to that effect. 8. We modified our report to include the recent approval of USDA’s direct-hire authority and noted that USDA has raised some concerns. 9. We modified our report to include the concern about veterinary schools and enhanced the chart to include the concern for salary. The following are GAO’s comments on the Department of Health and Human Services’ letter dated January 14, 2009. 1. HHS commented that a premise of our report is that the control of zoonotic diseases is solely dependent on the capacity of the veterinarian workforce. Our report does not state this. The scope of this report, as described in the introduction, was to review the sufficiency of the federal veterinarian workforce. 2. Our report does not identify the Centers for Disease Control and Prevention (CDC) as having too few veterinarians to control the 2003 West Nile virus outbreak while also adequately carrying out other routine activities. However, CDC officials we interviewed who were involved with the 2003 monkeypox outbreak in Wisconsin told us there were too few veterinarians during this outbreak. 3. We modified our report to reflect the new information about the difficulty the National Institutes of Health has recruiting veterinarians. 4. Our report states conclusions from the FDA Advisory Committee report: that FDA “cannot fulfill its mission” because its scientific workforce has remained static while its workload has increased, and that FDA’s Center for Veterinary Medicine (CVM) is “in a state of crisis.” We discussed with an author of the Advisory Committee report how that report’s findings specifically related to veterinarians. Consequently, our report also states that an author of the FDA Advisory Committee report told us that veterinarians enter FDA employment lacking necessary skills and experience to examine the wide variety of veterinary products that require FDA approval and that FDA needs to better train its veterinarians to review the many diverse products under its jurisdiction. HHS further stated that CVM has made great strides in the past few years in assessing its workforce needs and that the conclusions of the Advisory Committee report are out of date. Our report identifies several of the efforts CVM has recently undertaken, such as hiring additional veterinarians and beginning efforts to analyze the gap between current resources and needs. It also notes that, according to FDA officials, the agency is undertaking significant reforms to address fundamental concerns in the 2007 report. However, as our report states, FDA did not tell us how these efforts address the identified veterinarian skill gap specifically. 5. We modified our report to add a statement that the increase observed in CVM’s veterinarian workforce was primarily in response to new obligations. The following are GAO’s comments on the Office of Personnel Management’s letter dated January 15, 2009. 1. We modified our report to reflect OPM’s establishment of a team to determine the feasibility of issuing a governmentwide direct-hire authority for veterinarians. 2. We modified our report to include OPM’s recent approval of USDA’s direct-hire authority request. The following are GAO’s comments on the Department of Homeland Security’s letter dated January 14, 2009. 1. DHS stated that current policy requires slaughter of all potentially exposed animals and, therefore, the projected manpower requirement is relevant. We agree that this estimate is relevant to this method. As our report notes, the United States has used this “stamping out” method in the past for eradicating smaller outbreaks of foreign animal diseases. However, DHS and USDA officials told us, and DHS reiterates in its comments, that stamping out is infeasible for a large- scale outbreak of foot-and-mouth disease. Therefore, we do not agree that this estimate is relevant to a catastrophic outbreak, which was the scope of this section of our report. Indeed, as we note, DHS and USDA officials we interviewed during the course of our review told us that the estimate was not relevant. 2. We modified our report to clarify the Office of Health Affairs’ concerns about the sufficiency of its veterinarian workforce. In addition to the individual named above, Charles Adams, Assistant Director; Mary Denigan-Macauley; Jennifer Gregory; Terry Richardson; Benjamin Shouse; and Michelle K. Treistman made key contributions to this report. Other important contributors included Kevin Bray; Candace Carpenter; Nancy Crothers; William Doherty; Joyce Evans; Brian Friedman; Katheryn Hubbell; Judith Kordahl; Jena Sinkfield; and Gloria Sutton. | Veterinarians are essential for controlling zoonotic diseases--which spread between animals and humans--such as avian influenza. Most federal veterinarians work in the Departments of Agriculture (USDA), Defense (DOD), and Health and Human Services (HHS). However, there is a growing national shortage of veterinarians. GAO determined the extent to which (1) the federal government has assessed the sufficiency of its veterinarian workforce for routine activities, (2) the federal government has identified the veterinarian workforce needed during a catastrophic event, and (3) federal and state agencies encountered veterinarian workforce challenges during four recent zoonotic outbreaks. GAO surveyed 24 federal entities about their veterinarian workforce; analyzed agency workforce, pandemic, and other plans; and interviewed federal and state officials that responded to four recent zoonotic outbreaks. The federal government lacks a comprehensive understanding of the sufficiency of its veterinarian workforce. More specifically, four of five component agencies GAO reviewed have assessed the sufficiency of their veterinarian workforce to perform routine activities and have identified current or future concerns. This includes USDA's Animal and Plant Health Inspection Services (APHIS), Food Safety and Inspection Service (FSIS), and Agricultural Research Service (ARS); and DOD's Army. Current and future shortages, as well as noncompetitive salaries, were among the concerns identified by these agencies. HHS's Food and Drug Administration (FDA) does not perform such assessments and did not identify any concerns. In addition, at the department level, USDA and HHS have not assessed their veterinarian workforces across their component agencies, but DOD has a process for doing so. Moreover, there is no governmentwide effort to search for shared solutions, even though 16 of the 24 federal entities that employ veterinarians raised concerns about the sufficiency of this workforce. Further exacerbating these concerns is the number of veterinarians eligible to retire in the near future. GAO's analysis revealed that 27 percent of the veterinarians at APHIS, FSIS, ARS, Army, and FDA will be eligible to retire within 3 years. Efforts to identify the veterinarian workforce needed for a catastrophic event are insufficient. Specifically, agencies' plans lack important elements necessary for continuing essential veterinarian functions during a pandemic, such as identifying which functions must be performed on-site and how they will be carried out if absenteeism reaches 40 percent--the rate predicted at the height of the pandemic and used for planning purposes. In addition, one federal effort to prepare for the intentional introduction of a foreign animal disease is based on the unrealistic assumption that all affected animals will be slaughtered, as the United States has done for smaller outbreaks, making the resulting veterinarian workforce estimates irrelevant. A second effort lacks crucial data, including data on how the disease would spread in wildlife. If wildlife became infected, as they have in the past, response would be greatly complicated and could require more veterinarians and different expertise. Officials from federal and state agencies involved in four recent zoonotic disease outbreaks commonly cited insufficient veterinarian capacity as a workforce challenge. However, 10 of the 17 agencies that GAO interviewed have not assessed their own veterinarian workforce's response to individual outbreaks and are thus missing opportunities to improve future responses. Moreover, none of the entities GAO reviewed has looked across outbreaks to identify common workforce challenges and possible solutions. |
The Navy has three levels of naval aviation maintenance—organizational, intermediate, and depot—to support naval aviation. Organizational maintenance is performed by sailors on the flight line and generally items are repaired on the aircraft, whether at sea or at a naval station. The intermediate maintenance activity is generally performed by sailors at the Navy’s aviation intermediate maintenance departments, which focus on item repairs in close proximity to the flight line but off-aircraft. Depot maintenance activities, generally performed by civilian aviation depot artisans, provide a comprehensive combination of major repair, overhaul, and modifications to weapons systems and components, assemblies, and subassemblies in off-flight-line maintenance. The current aviation maintenance process generally flows as follows: when the organizational maintenance crews cannot fix a broken aircraft component or item, it is sent to the intermediate department; if the intermediate maintenance department cannot repair an item, it declares that the item is beyond its capability of maintenance. The broken item is then turned over to the supply system in exchange for a replacement part; and the broken item is shipped to the depot for further repairs or overhaul. The recommendation to establish fleet readiness centers affects the intermediate department and depot maintenance levels, but not the organizational level. It involves moving about 150 artisans from the depots to the intermediate departments to perform aviation repairs. In addition, six fleet readiness centers will be established to transform naval aviation maintenance at the intermediate departments and depots as seen in figure 1. According to this BRAC recommendation, relocating depot artisans to intermediate departments is expected to reduce the number of items that are declared to be beyond the capability of maintenance at the intermediate departments and therefore, will not require some items to be sent to the depot for repair. As a result, repeated and duplicated maintenance procedures are projected to be avoided and turnaround times projected to be reduced. More specifically, prior to implementing this recommendation, when an item is being repaired by military personnel at the intermediate department, they perform diagnostics, disassemble the item, and attempt to repair it. When they determine it cannot be repaired and declare that it is beyond their capability of maintenance, the item is reassembled, repackaged, and shipped to the depot for repair. Upon arrival at the depot, the artisans must perform similar diagnostics, and repeat the processes of disassembly and repair that have already been performed at the intermediate department. According to Navy officials, after fleet readiness centers are established, the depot artisans positioned at the intermediate departments are expected to be able to complete more repairs there, which will reduce or eliminate some packaging, shipping, and administrative costs as seen in figure 2. At the time DOD originally submitted its recommendations to the BRAC Commission, it estimated this recommendation would yield $341 million in annual recurring savings, or $4.7 billion net savings over 20 years. The preponderance of the annual recurring savings was expected to come from fewer items being sent to the depots for repair, thus reducing per item maintenance costs. DOD also expected to achieve significant onetime savings by reducing existing inventory levels of aircraft component parts. In July 2005, we reported that while there is potential for significant savings, there is some uncertainty over the full magnitude of savings. Our report noted that the Navy used assumptions that had undergone limited testing, and the full savings realization depends upon the transformation of the Navy’s supply system to achieve organizational efficiencies. Moreover, we pointed out that realizing the full extent of the savings would depend on actual implementation of the recommended actions. The BRAC Commission also believed DOD’s overall estimated savings were overstated because savings were derived from overhead efficiencies that had not been validated. The commission projected annual recurring savings of about $248 million a year or $3.7 billion net present value savings over a 20-year period—about $1 billion less than the DOD’s estimate. Also, the commission reduced the estimated savings because it eliminated the proposed realignment of workload from the Naval Support Activity in Crane, Indiana, to Whidbey Island, Washington, since the Navy planned to phase out the aircraft associated with the proposed workload transfer in 10 to 15 years regardless of BRAC. In addition, the commission found errors in DOD’s estimation of construction costs and the savings projections based on eliminated personnel. The President and the Congress accepted the BRAC Commission recommendations, which became effective on November 9, 2005. Once the recommendations became effective, the Office of the Secretary of Defense designated one of the military services or defense agencies as the business manager responsible for implementing each recommendation. The Navy is responsible for establishing the six fleet readiness centers. The Office of the Secretary of Defense also required the Navy to submit a detailed business plan to update estimated costs and savings and identify a schedule for implementing the recommendation. The Navy’s detailed business plan was approved to implement the recommendation to establish fleet readiness centers on August 1, 2006. However, the Office of the Secretary of Defense has requested that the Navy resubmit its plan to accurately reflect the savings realized based on the Navy’s current implementation of this BRAC recommendation. The Navy’s plan was still in-process as of March 15, 2007. In addition, the Navy must comply with Title 10, Section 2466 of the United States Code (U.S.C.), which provides that not more than 50 percent of the funds made available in a fiscal year to the Navy for depot maintenance and repair workload may be used to pay for work performed by private contractors. The statute also requires the Secretary of Defense to submit a report to Congress (known as the “50/50” report) by April 1 annually, on public-private depot maintenance funding distributions. The 50/50 report notes the percentage of depot maintenance funding between the public and private sectors during the preceding fiscal year, the projected distribution for the current fiscal year, and the ensuing fiscal year. In comparing the Navy’s business plan with the BRAC Commission estimates of costs and savings, the Navy’s business plans shows an increase in one-time costs, a decrease in one-time savings, and an increase in annual recurring savings as seen in table 1 below. While the Navy has started to implement the recommendation and achieve savings, we believe the latest savings estimates are still overstated and uncertain. The majority of the savings consist of onetime savings from projected decreases in the inventory of aircraft components and replacement parts, and annual recurring savings from reduced depot labor and overhead charges and reductions in military personnel. While savings from lower inventory levels may be possible, our analysis of a judgmental sample of items targeted for inventory reduction concluded that the majority of these savings would not occur during the 6-year implementation period of this BRAC recommendation. Further, we believe the Navy’s estimated annual recurring savings remain overstated because they included savings from eliminating military personnel that are not expected to result in a reduction to its overall service force structure and included onetime savings erroneously reported as recurring savings. The Navy’s business plan shows onetime costs increased by 96 percent (from $34 million to $65 million) as compared to the BRAC Commission’s estimates, which was primarily due to increased costs associated with relocating depot employees to the intermediate level, other miscellaneous program management actions, and inflation. For example, Navy officials stated that they need to add more equipment or specialized workbenches to support depot artisans relocated to the intermediate departments. The program management costs are primarily for information technology upgrades. For example, Navy officials stated the need for an interim logistics tracking and accounting mechanism, using its current Naval Aviation Logistics Command/Management Information System to track depot maintenance repairs at the intermediate departments. While onetime costs have nearly doubled, they have limited effect on the long- term recurring savings expected from establishing fleet readiness centers once those savings offset implementation costs. While the Navy has reduced the projected onetime savings from lower levels of inventory, our analysis of a sample of aviation inventory items targeted for reduction concludes that the majority of these savings would not occur during the 6-year implementation period, and the amount of such savings over time is uncertain. In preparing the business plan, the Navy reduced its onetime savings by 92 percent (from $648 million to $54 million) mostly by lowering the estimated savings from reducing inventory of aircraft components and replacement parts. According to Navy officials, the initial inventory savings estimate was overly optimistic. In addition, the lower estimate was based on the BRAC Commission’s determination that the Navy’s projected savings were overstated because the commission found errors in the Navy’s savings estimates. Additionally, our July 2005 report stated that the magnitude of the expected savings for the fleet readiness centers is in part dependent upon transformation of the Navy’s supply system, such as eliminating unneeded management structures and duplicate layers of inventory in the supply system. DOD’s original submission to the BRAC Commission assumed that the dollar value of the inventory of aircraft components and replacement parts could be reduced by 15 percent. According to Navy officials, the 15 percent savings factor was based on the professional judgment of the Industrial Joint Cross Service Group members. They expected savings because fewer items would need to be kept in the shore-based aviation consolidated inventory because items would be getting repaired more quickly and returned to the inventory faster. However, the Navy officials stated that they did not have time during the BRAC process to discuss the estimated inventory and supply savings with officials from the Navy Supply Command to validate the estimate. Navy officials stated that they estimated the onetime savings from inventory reductions ($648 million) by multiplying the 15 percent factor times the total dollar value of the inventory and supply of aircraft components and replacement parts in fiscal year 2003. In developing the business plan, the Navy reduced the inventory and supply savings factor from 15 percent to less than 4 percent based on discussions with Naval Supply Command officials and a better understanding of how other BRAC recommendations affected DOD’s and Navy’s supply system. Specifically, two other recommendations involved significant savings projections from reengineering DOD’s inventory and supply system and the reconfiguration of supply, storage, and distribution management. After considering how these other BRAC recommendations could affect the Navy’s projected inventory and supply savings estimates, Navy officials concluded there would be a greater potential overlap of savings with the fleet readiness center BRAC recommendation. However, the Navy could not provide us documentation to support the lower inventory savings estimate. While savings from lower inventory may be possible, our analysis of a judgmental sample of 99 items targeted for inventory reduction concludes that the majority of these savings will not occur during the 6-year implementation period of this BRAC recommendation as the Navy originally projected. Our analysis shows that for 83 percent of the items sampled, the Navy will take more than the implementation period to achieve lower inventory levels because the majority of replacement items on-hand is sufficient to provide many years worth of supply, and the rate of replacement for that inventory will not be a factor contributing to savings, as seen in table 2. Since the Navy has not yet identified all of the inventory items that could be affected by the fleet readiness centers recommendation, we could not estimate the effect of delayed inventory savings reductions on the Navy’s estimated onetime savings or the total amount of savings likely to be realized. The Navy increased the annual recurring savings estimate by 25 percent (from about $250 million to $311 million) primarily by increasing projected savings from military personnel eliminations and inflation. These increases were offset to some degree by decreases in projected savings from maintaining facilities. However, we believe the Navy’s revised annual recurring savings estimates are still overstated by approximately $53 million because they include $28 million in savings from eliminating military personnel, which may be assigned elsewhere rather than taken out of the force structure, and $25 million that should have been reported as onetime, and not recurring, savings. In addition, we estimate that projected annual recurring savings increased by approximately $42 million due to inflation. The BRAC Commission projected annual recurring savings of about $10 million from eliminating about 120 military positions, while the Navy business plan includes about $28 million in annual recurring savings from eliminating about 290 military positions as originally planned. Regardless of the number of military personnel affected by the recommendations, as we reported in July 2005, the projected net annual recurring savings associated with eliminating jobs currently held by military personnel could create a false sense of savings available for other purposes because they do not represent dollar savings that can be readily reallocated outside the military personnel accounts. Rather than reduce end strength, these positions are expected to be reassigned to other areas, which may enhance capabilities but also limit dollar savings available for other uses. The Navy incorrectly reported onetime savings as annual recurring savings in its business plan. Navy officials stated that $25 million onetime savings were incorrectly categorized as annual recurring savings in its business plan. These onetime savings included reductions in aviation depot level repair charges, decreased spare parts inventory, and reduced materials to repair aviation components. As a result of the fleet readiness center implementation to date, Navy has begun to reduce its current spare parts inventory, which translates into less physical space needed to store the inventory and fewer sailors needed to manage it. However, GAO believes that the Navy’s business plan should correctly report the $25 million as onetime savings and not annual recurring savings. Increases in the Navy’s annual recurring savings estimates were offset to some degree by decreases in projected savings expected from reduced facility costs. According to the Navy officials, the projected reductions in personnel should result in reducing floor space for numerous work shops, but they will not free up enough space to allow the Navy to vacate any buildings at this time. Since no buildings will be vacated, the Navy reduced the annual recurring savings expected from facilities maintenance by about $3 million. Navy officials indicated that as fleet readiness center implementation progresses, there may be opportunities to combine similar work shops at some sites, which may result in entire buildings being vacated, and produce savings in the funding for facilities maintenance. If this occurs, a Navy official noted the business plan would be updated to reflect these savings. In addition, Navy’s implementation efforts are beginning to show savings. The Navy reported savings of $19 million from October 2006 to April 2007 at the 6 fleet readiness centers. These savings are from repairing selected aviation items at the fleet readiness centers instead of sending them to the depots for repair. The Navy faces challenges in ensuring that projected savings are realized from implementing the fleet readiness center recommendation in addition to some workforce challenges in implementing the recommendation. Since the Navy has already included projected BRAC savings in its budget for fiscal years 2007 through 2011, the Navy will need to monitor the extent to which these savings are achieved. If savings are not realized, the Navy may need to get funds from another Navy program or request additional funds to offset unrealized savings or be unable to repair aviation components in a timely manner, which could impact readiness. Accordingly, the Navy has developed an interim method for tracking aviation maintenance repair costs and calculating the BRAC savings from establishing fleet readiness centers, which addresses our prior recommendation to DOD to update and track savings. In addition, the Navy acknowledges that other challenges remain, such as identifying and moving necessary depot artisans with the right skills to various intermediate maintenance departments and integrating a primarily civilian depot workforce with the military intermediate department workforce. Navy officials recognize that this mixing of workforces could create some cultural tension in the workforce, but this blending may facilitate the development of a better-trained and more-productive workforce. The Navy has recognized many of these challenges and outlined steps to be taken to address them. Our prior work has shown that strong and sustained executive leadership is needed if reform efforts are to succeed. Furthermore, our prior work has raised questions about the reasonableness and consistency of depot maintenance workload data submitted to the Congress. Therefore, the Navy will need to ensure that depot maintenance work performed at intermediate departments is accurately reported to satisfy congressional reporting requirements. The Navy has developed an interim method for tracking aviation maintenance repair costs and calculating the BRAC savings from establishing fleet readiness centers, but it will be important to ensure this effort continues over time to validate savings. Navy officials noted that if the expected savings are not realized, this decrease in savings could adversely affect the Navy’s ability to perform its mission within budgeted funds. Furthermore, inadequate implementation could affect readiness, and the Navy may need to request additional funds to offset unrealized savings. Our previous work has raised concerns with prior DOD efforts to reduce related operating budgets in advance of actual savings being realized. The Navy reduced its aviation maintenance budget for fiscal years 2007 through 2011 by the estimated BRAC savings it projects will result from establishing fleet readiness centers. Navy officials recognized its challenges in achieving these estimated savings as well as the importance of monitoring and tracking the actual and realized BRAC savings. The Navy has developed an interim method for calculating the BRAC savings realized at the newly established fleet readiness centers during the implementation time frame. This interim method utilizes information from two separate logistic systems, one at the depots and the other at the intermediate departments, to allow Navy officials to evaluate each fleet readiness center’s performance in meeting its BRAC savings targets. However, this short-term solution for tracking BRAC savings is not designed to go beyond 2011 or address long-standing business and financial system challenges. To achieve desired savings, the Navy has begun identifying which items currently repaired at the depots could be repaired at the former intermediate departments (now fleet readiness centers/sites). The Navy originally calculated about 38,000 items that were beyond the capability of maintenance of the intermediate departments, which could be repaired by potentially moving about 150 depot artisans to the intermediate departments. As of November 2006, the Navy has identified about 1,800 items that can be repaired at intermediate departments. Twenty-five depot artisans have already begun to repair 127 of these items at the intermediate departments. The number of items ultimately selected will dictate the number of personnel needed and savings to be realized. Our prior work on strategic workforce planning highlighted the need for organizations to identify the right number of staff with the right skills and competencies in the right locations to fulfill their missions and goals. Based on the items identified for repair, the Navy will determine the skill sets required for depot artisans to perform repairs at the intermediate departments. Consequently, the Navy will request depot artisan volunteers to relocate to the intermediate departments. If artisans do not volunteer to relocate to the intermediate departments or if artisans with the necessary skill sets have retired or stopped working through normal attrition, the Navy plans to hire or contract for the necessary skill sets. Navy officials stated that intermediate departments are located in heavily industrialized areas that may enable them to hire people with the necessary skill sets. As the Navy establishes the fleet readiness centers, the Navy will relocate some civilian depot artisans to work alongside military personnel at the intermediate maintenance departments, which has the potential to create cultural challenges within the workforce. Navy officials recognized that this mixing of civilian and military workforces with their differences in working environments could create some cultural tension, but this blending may facilitate the development of a better-trained and more- productive workforce. The Navy’s civilian depot artisans work under a collective bargaining agreement which specifies employee work hours, maximum allowable excess work hours, and the number and duration of an artisan’s guaranteed breaks. At the intermediate maintenance departments, the military personnel are required to work according to mission needs, which may exceed normal work hours and disallow breaks, if necessary. Navy officials stated that they do not foresee any labor problems when the Navy establishes fleet readiness centers. Our prior work recognizes that certain organizational and environmental differences cause stresses that may affect an agency’s ability to attain its strategic goals. Certain key human capital practices can be employed to overcome such differences, such as developing policies and procedures to allow for the flexible use of the workforce to ensure consistency, equity, transparency, and address employee concerns. While this mixing of diverse cultures could pose some challenges in implementation, it could also help in developing a better-trained and more- productive workforce if properly managed. As implementation of this BRAC recommendation begins, the Navy will temporarily assign civilian artisans to predominately military intermediate maintenance departments to perform repairs. As fleet readiness centers are established, the temporary assignments will become permanent. As the artisans and military personnel become accustomed to working side-by-side, the Navy may combine similar shops that have existed separately at depots and intermediate maintenance departments to assure efficient use of personnel, equipment, and facilities. This effort to determine if shops can be combined will begin over the next several years. According to Navy officials, when depot artisans begin to work with military personnel, the artisans will provide on-the-job training as a means to increase the military personnel ability to perform aviation repairs and improve aviation maintenance efficiency. However, Navy officials stated that some workforce members are concerned about the long-term effect of these changes. For example, it is unclear whether shops that are comprised of military and civilian workforce members will be managed by military or civilian leadership. In addition, these combined shops may have an effect on the career paths of aviation maintenance officers and civilian managers. Communicating the mission and goals of the fleet readiness centers is critical to implementing this BRAC recommendation. To address this challenge, the Navy has focused on developing a communication plan to mitigate the risk of inaccurate or inconsistent information and address workforce fears. The communication plan goal is to maximize stakeholder ownership and involvement with the implementation of the fleet readiness centers to minimize uncertainty and anxiety inherent with organizational change. In our prior report, we stated that strategic workforce planning is most effective when an agency’s goals, approach, and results are communicated early, clearly, and often. Navy officials said that early communication is critical to mitigate rumors and speculation about potential workforce changes at the intermediate departments and depot maintenance facilities. Accordingly, the Navy has developed a detailed communication plan to describe the challenges associated with implementing this BRAC recommendation. This plan details the approach that will be used to establish fleet readiness centers, the goals they are expected to achieve, and the results that are desired from introducing depot artisans into the intermediate workforce. The Navy expects to evaluate the success of the communication plan using several methods including monthly key stakeholder feedback reports; postbriefing and post–town hall audience surveys; circulation or number of memos and number of people who actually saw the message; and other surveys to determine changes in awareness (knowledge), attitudes (opinions) or respondent’s reports of past or anticipated/intended actions (behaviors). As part of the Navy’s communications strategy, the Commander, Aviation Depots, Naval Air Systems Command has traveled in excess of 200 days during the past year in order to communicate the fleet readiness center concept to the entire aviation maintenance workforce. He stated he will meet or exceed that travel schedule during the implementation phase to ensure that all workforce members have heard his message. During a portion of his travel time, he plans to conduct “town hall” meetings with the aviation maintenance workforce members at fleet readiness center locations and affiliated sites. Following these meetings, the commander will send teams to each newly established fleet readiness center to introduce the concepts and the expected changes in establishing the centers to the workforce. These teams will also provide information with regard to procedural changes that will be necessary to assure that costs and savings are properly tracked at each fleet readiness center and affiliated site. According to Navy officials, as the implementation proceeds, efforts will be undertaken to apply lessons learned as fleet readiness centers are established. Generally, commanding officers in the Navy change commands every 2 years, which can make sustained leadership in a reorganization effort challenging, and there is no guarantee that leadership will remain in place throughout the implementation of this BRAC recommendation. Our prior work on strategic workforce planning states that sustained leadership and succession planning is necessary to achieve workforce reorganizations and agency goals. Navy officials stated that they expect to achieve the largest change in naval aviation maintenance since 1959 in only 3 to 5 years and the Commander, Aviation Depots, Naval Air Systems Command, expects his assignment to continue until fleet readiness center implementation is complete. The Navy has 26 Naval Aviation Maintenance duty captains, which comprise a cadre of officers available for selecting successive commanding officers to oversee the implementation of the recommendation to establish and manage fleet readiness centers. In addition to top-level leadership, the Navy plans to utilize the Navy’s chief petty officers, the Marine Corps’ senior noncommissioned officers, and seasoned civilian maintainers as key enablers of the implementation process. Navy officials feel that these individuals can reinforce the communications of senior Navy leadership and clarify the intent of establishing fleet readiness centers to sailors, marines, and the civilian workforce. Navy officials noted another challenge may exist after fleet readiness centers are established that involves accurately recording and reporting depot maintenance performed at intermediate departments. Under 10 U.S.C. § 2466, the military departments and defense agencies can use no more than 50 percent of annual depot maintenance funding for work performed by private-sector contractors. In fiscal year 2006, the Navy reported that 52 percent of naval aviation depot work was performed by civilian depot artisans and 48 percent was performed by private contractors. As depot artisans begin to work in intermediate maintenance departments, adequate systems and management commitment for verifying the amount of public-sector depot maintenance is necessary to comply with 50/50 requirements. We previously reported that the Navy did not maintain documentation to support the amounts in its 50/50 report and no formal training on procedural requirements or Navy guidance to develop and report the 50/50 data was provided to the personnel responsible for compiling the data. Our report noted that persistent deficiencies limit the accuracy and usefulness of DOD’s funding allocation data reported to the Congress, and further, that it is difficult to project out- year data due to factors such as changing depot maintenance requirements and the ongoing consolidation of maintenance facilities. When the fleet readiness centers are implemented, depot artisans will be stationed at the intermediate departments and must document the depot maintenance performed, which is used for entry into the depot accounting system and the Naval Aviation Logistics Command/Management Information System. The Navy has drafted a handbook that provides procedures and quality assurance for the required details of documentation by the artisans. For example, all maintenance documentation goes through layers of quality assurance such as validation specifications within the Naval Aviation Logistics Command/Management Information System, production controls that approve each component before moving it back into the supply system, database administrator screening, and a final reality check by the fleet readiness center command subject matter experts. Although projected savings from establishing fleet readiness center remain significant, it appears likely that the majority of onetime savings from reduced inventory levels may not occur as expected during the BRAC implementation period, and projected long-term savings are likely overstated. To accurately account for and report BRAC savings, the Navy business plan to establish fleet readiness centers should include onetime savings that will be achieved during the implementation period and long- term savings that are directly attributed to implementing the recommendation. While the Navy has recognized the need to assess progress against goals and track savings, our prior work has shown that sustained leadership and follow-through will be important to ensure the recommendation is successfully implemented. To improve the reporting of savings projected from BRAC 2005 recommendations, we recommend that the Secretary of Defense direct the Secretary of the Navy to update the business plan for the fleet readiness centers (1) to reflect only savings that are directly related to implementing the recommendation, and (2) update projected onetime savings when data are available; and monitor implementation of the recommendation to determine the extent that savings already taken from the Navy budget are actually achieved. We are sending copies of this report to interested congressional committees; the Secretaries of Defense and the Navy; and the Director, Office of Management and Budget. We will also make copies available to others upon request. In addition, the report will be available at no charge on GAO’s Web site at http://www.gao.gov. In commenting on a draft of this report, DOD concurred with our recommendations. DOD noted that it considers military personnel reductions attributable to a BRAC recommendation as real savings. It noted that while the department may not reduce end strength, these reductions allow the department to reapply these military personnel to support new capabilities. We believe the department counting of savings from eliminating military personnel positions, without corresponding reductions in end strength, creates a false sense of savings available for other purposes because they do not represent dollar savings that can be readily reallocated outside the military personnel accounts. We do agree that assigning these positions to other areas may enhance capabilities. DOD’s written comments are reprinted in appendix III. DOD also provided technical comments, which we have incorporated into this report as appropriate. If you or your staff have any questions about this report, please contact me on (202) 512-4523 or [email protected]. Contact points for our Offices of Congressional Relations and Public Affairs may be found on the last page of this report. Additional contacts and staff acknowledgments are provided in appendix IV. We performed our work at the Office of the Secretary of Defense, the office the Commander, Naval Air Forces, Naval Air Systems Command, Patuxent River, Maryland; the Naval Aviation Depots in Coronado, California, and Jacksonville, Florida, as well as the Aviation Intermediate Maintenance Departments located at Oak Harbor, Washington; Coronado, California; and Mayport, Florida. To determine the extent to which estimated costs and savings have changed, we compared the Navy’s business plan approved in August 2006 to the recommendation approved by the Base Realignment and Closure (BRAC) Commission. We focused on the major factors that affected projected onetime costs, onetime savings, and annual recurring savings. We determined the reasonableness of these estimates by reviewing and analyzing source data and the methodology used to generate savings estimates and interviewing Navy officials who prepared these estimates. We discussed the reasons for variances in costs and savings estimates between the BRAC Commission and the approved business plan with Navy officials. To analyze projected onetime savings from reduced levels of aircraft component inventory, we took a judgmental sample of 99 items targeted for inventory reduction. We calculated the years of supply for each item using its required inventory level, inventory on-hand, excess on- hand inventory, condition, and recurring and nonrecurring demands. Our analysis was reviewed by Navy Supply System officials. We analyzed the business plan to identify the major elements that contributed to projected annual recurring savings. Our analysis indicated that the business plan included savings from an initiative to reduce aviation maintenance costs referred to as AirSpeed. We interviewed Navy officials to determine the relationship of AirSpeed to the BRAC recommendation. To assess the reliability of the data used to generate estimates of costs and savings and the validity of underlying assumptions used to generate cost and savings estimates, we reviewed Navy regulations and instructions for reporting aviation maintenance data and interviewed officials at Navy Air Systems Command, Navy Aviation depots, Navy Aviation Intermediate Maintenance Departments, and Naval Supply Systems Command knowledgeable about the data and the assumptions underlying estimated costs and savings. Based on this, we believe that the assumptions underlying estimated costs and savings are generally valid, and that the data used were sufficiently reliable for the purposes of this report. To determine the challenges to successfully implement the fleet readiness centers, we analyzed pertinent documents and reports and interviewed officials responsible for developing the original proposal and the business plan. We also interviewed Navy officials at the Aircraft Intermediate Maintenance Departments at Whidbey Island, Washington; North Island, California; and Mayport, Florida; and at Naval Aviation Depots at North Island, California, and Jacksonville, Florida. In addition, we also reviewed statutes related to continuing congressional oversight of annual depot maintenance funding, related reports, and court cases involving depot personnel. We conducted our work from February 2006 to March 2007 in accordance with generally accepted government auditing standards. 165. FLEET READINESS CENTERS (IND 19) a. Realign Naval Air Station Oceana, VA, by disestablishing the Aircraft Intermediate Maintenance Department Oceana, the Naval Air Depot Cherry Point Detachment, and the Naval Air Depot Jacksonville Detachment; establishing Fleet Readiness Center Mid Atlantic, Naval Air Station Oceana, VA; and transferring all intermediate maintenance workload and capacity to Fleet Readiness Center Mid Atlantic, Naval Air Station Oceana, VA. b. Realign Naval Air Station Patuxent River, MD, by disestablishing the Aircraft Intermediate Maintenance Department at Naval Air Warfare Center Aircraft Division; establishing Fleet Readiness Center Mid Atlantic Site Patuxent River, Naval Air Station Patuxent River, MD; and transferring all intermediate maintenance workload and capacity to Fleet Readiness Center Mid Atlantic Site Patuxent River, Naval Air Station Patuxent River, MD. c. Realign Naval Air Station Norfolk, VA, by disestablishing the Aircraft Intermediate Maintenance Department Norfolk VA, the Naval Air Depot Jacksonville Detachment, and Naval Air Warfare Center Aircraft Division Lakehurst Detachment; establishing Fleet Readiness Center Mid Atlantic Site Norfolk, Naval Air Station Norfolk, VA; and transferring all intermediate and depot maintenance workload and capacity to Fleet Readiness Center Mid Atlantic Site Norfolk, Naval Air Station Norfolk, VA. d. Realign Naval Air Station Joint Reserve Base New Orleans, LA, by disestablishing the Aircraft Intermediate Maintenance Department, establishing Fleet Readiness Center Mid Atlantic Site New Orleans, Naval Air Station Joint Reserve Base New Orleans, LA; and transfer all intermediate maintenance workload and capacity to Fleet Readiness Center Mid Atlantic Site New Orleans, Naval Air Station Joint Reserve Base New Orleans, LA. e. Realign Marine Corps Air Station Cherry Point, NC, as follows: disestablish Naval Air Depot Cherry Point; establish Fleet Readiness Center East, Marine Corps Air Station Cherry Point, NC; relocate depot maintenance workload and capacity for Aircraft Avionics/Electronics Components (approximately 39 K DLHs) , Aircraft Hydraulic Components (approximately 69 K DLHs), Aircraft Landing Gear Components (approximately 8 K DLHs), Aircraft Other Components (approximately 23 K DLHs), and Aircraft Structural Components (approximately 126 K DLHs) to Fleet Readiness Center Mid Atlantic, Naval Air Station Oceana, VA; relocate depot maintenance workload and capacity for Aircraft Avionics/Electronics Components (approximately 11 K DLHs), Aircraft Hydraulic Components (approximately 19 K DLHs), Aircraft Landing Gear Components (approximately 2 K DLHs), Aircraft Structural Components (approximately 35 K DLHs), and Aircraft Other Components (approximately 6 K DLHs) to Fleet Readiness Center Mid Atlantic Site Norfolk, Naval Air Station Norfolk, VA; relocate depot maintenance workload and capacity for Aircraft Avionics/Electronics Components (approximately 6 K DLHs), Aircraft Hydraulic Components (approximately 10 K DLHs), Aircraft Landing Gear Components (approximately 1 K DLHs), Aircraft Other Components (approximately 3 K DLHs), and Aircraft Structural Components (approximately 18 K DLHs) to FleetReadiness Center Mid Atlantic Site Patuxent River, Naval Air Station Patuxent River, MD; relocate depot maintenance workload and capacity for Aircraft Avionics/Electronics Components (approximately 2 K DLHs), Aircraft Hydraulic Components (approximately 3 K DLHs), Aircraft Landing Gear Components (approximately 0.4K DLHs), Aircraft Other Components (approximately 1 K DLHs), and Aircraft Structural Components (approximately 6 K DLHs) to FRC Mid Atlantic Site New Orleans, Naval Air Station JRB New Orleans, LA.; relocate depot maintenance workload and capacity for Aircraft Avionics/Electronics Components (approximately 9 K DLHs), Aircraft Hydraulic Components (approximately 16 K DLHs), Aircraft Landing Gear Components (approximately 2 K DLHs), Aircraft Other Components (approximately 6 K DLHs) and Aircraft Structural Components (approximately 30 K DLHs) to the Fleet Readiness Center East Site Beaufort, hereby established at Marine Corps Air Station Beaufort, SC; relocate depot maintenance workload and capacity for Aircraft Avionics/Electronics Components (approximately 11 K DLHs), Aircraft Hydraulic Components (approximately 20 K DLHs), Aircraft Landing Gear Components (approximately 2 K DLHs), Aircraft Other Components (approximately 6 K DLHs), Aircraft Structural Components (approximately 36 K DLHs), Aircraft Rotary (approximately 1 K DLHs), Aircraft VSTOL (approximately 2 K DLHs), Aircraft Cargo/Tanker (approximately 0.02K DLHs,), Aircraft Other (approximately 18 K DLHs), Aircraft Structural Components (approximately 0.001K DLHs), Calibration (approximately 0.15 K DLHs) and “Other” Commodity (approximately 0.3 K DLHs) to Fleet Readiness Center East Site New River, hereby established at Marine Corps Air Station New River, Camp Lejeune, NC; and transfer all remaining depot maintenance workload and capacity to Fleet Readiness Center East, Marine Corps Air Station Cherry Point, NC. f. Realign Marine Corps Air Station Beaufort, SC, by disestablishing Naval Air Depot Jacksonville Detachment Beaufort and transferring all depot maintenance workload and capacity to Fleet Readiness Center East Site Beaufort, Marine Corps Air Station Beaufort, SC. g. Realign Naval Air Station Jacksonville, FL, as follows: disestablish Naval Air Depot Jacksonville, Naval Air Depot Jacksonville Detachment Jacksonville, and Aircraft Intermediate Maintenance Department Jacksonville; establish Fleet Readiness Center Southeast, Naval Air Station, Jacksonville, FL; relocate depot maintenance workload and capacity for Aircraft Avionics/Electronics Components (approximately 8 K DLHs), Aircraft Hydraulic Components (approximately 6 K DLHs), Aircraft Landing Gear Components (approximately 3 K DLHs), Aircraft Other Components (approximately 27 K DLHs), and Aircraft Structural Components (approximately 9 K DLHs) to Fleet Readiness Center Southeast Site Mayport, hereby established at Naval Air Station, Mayport, FL; transfer all remaining intermediate and depot maintenance workload and capacity to Fleet Readiness Center Southeast, Naval Air Station Jacksonville, FL. h. Realign Naval Air Station Mayport, FL, by disestablishing Aircraft Intermediate Maintenance Department, Naval Air Depot Jacksonville Detachment Mayport, and Naval Air Warfare Center Aircraft Division Lakehurst Voyage Repair Team Detachment Mayport and transferring all intermediate maintenance workload and capacity to Fleet Readiness Center Southeast Site Mayport, Naval Air Station Mayport, FL. i. Realign Naval Air Station Lemoore, CA, by disestablishing Aircraft Intermediate Maintenance Department Lemoore and Naval Air Depot North Island Detachment; establishing Fleet Readiness Center West, Naval Air Station Lemoore, CA; and transferring all intermediate and depot maintenance workload and capacity to Fleet Readiness Center West, Naval Air Station Lemoore, CA. j. Realign Naval Air Station Fallon, NV, by disestablishing the Aircraft Intermediate Maintenance Department Fallon and the Naval Air Depot North Island Detachment Fallon; establishing Fleet Readiness Center West Site Fallon, Naval Air Station Fallon, NV; and transferring all intermediate and depot maintenance workload and capacity to Fleet Readiness Center West Site Fallon, Naval Air Station Fallon, NV. k. Realign Naval Air Warfare Center Weapons Division China Lake, CA, by disestablishing the Aircraft Intermediate Maintenance Department and relocating its maintenance workload and capacity for Aircraft (approximately 3 K DLHs), Aircraft Components (approximately 45 K DLHs), Fabrication & Manufacturing (approximately 6 K DLHs) and Support Equipment (approximately 16 K DLHs) to Fleet Readiness Center West, Naval Air Station Lemoore, CA. l. Realign Naval Air Station Joint Reserve Base Fort Worth, TX, by disestablishing the Aircraft Intermediate Maintenance Department, establishing Fleet Readiness Center West Site Fort Worth, Naval Air Station Fort Worth, TX, and transferring all intermediate maintenance workload and capacity to Fleet Readiness Center West Site Fort Worth, Naval Air Station Joint Reserve Base Fort Worth, TX. m. Realign Naval Air Station Whidbey Island, WA, by disestablishing the Aircraft Intermediate Maintenance Department, establishing Fleet Readiness Center Northwest, Naval Air Station Whidbey Island, WA, and transferring all intermediate maintenance workload and capacity to Fleet Readiness Center Northwest, Naval Air Station Whidbey Island, WA. n. (Deleted) o. Realign Naval Air Station North Island, Naval Base Coronado, CA, as follows: disestablish Naval Air Depot North Island, COMSEACONWINGPAC (AIMD), and NADEP North Island Detachment North Island; establish Fleet Readiness Center Southwest, Naval Air Station North Island, Naval Base Coronado, CA; relocate depot maintenance workload and capacity for aircraft Avionics/Electronics Components (approximately 6 K DLHs), Aircraft Hydraulic Components (approximately 2 K DLHs), Aircraft Landing Gear Components (approximately 3 K DLHs), aircraft Other Components (approximately 13 K DLHs), and Aircraft Structural Components (approximately 4 K DLHs) from Naval Air Depot North Island to Fleet Readiness Center Southwest Site Point Mugu, hereby established at Naval Air Station Point Mugu, Naval Base Ventura, CA; relocate depot maintenance workload and capacity for Aircraft avionics/Electronics Components (approximately 26 K DLHs), Aircraft Hydraulic Component (approximately 8 K DLHs), Aircraft Landing Gear Components (approximately 13 K DLHs), Aircraft Other Components (approximately 55 K DLHs), Aircraft Structural Components (approximately 16 K DLHs) from Naval Air Depot North Island to Fleet Readiness Center Southwest Site Miramar, hereby established at Marine Corps Air Station Miramar, CA; relocate depot maintenance workload and capacity for Aircraft Avionics/Electronics Components (approximately 8 K DLHs), Aircraft Hydraulic Components (approximately 2 K DLHs), Aircraft Landing Gear Components (approximately 4 K DLHs), Aircraft Other Components (approximately 17 K DLHs), and Aircraft Structural Components (approximately 5 K DLHs) from Naval Air Depot North Island to Fleet Readiness Center Southwest Site Pendleton, hereby established at Marine Corps Air Station Camp Pendleton, CA; relocate depot maintenance workload and capacity for Aircraft Avionics/Electronics Components (approximately 6 K DLHs), Aircraft Hydraulic Components (approximately 2 K DLHs), Aircraft Landing Gear Components (approximately 3 K DLHs), Aircraft Other Components (approximately 12 K DLHs), Aircraft Structural Components (approximately 3 K DLHs) from Naval Air Depot North Island to Fleet Readiness Southwest Site Yuma, hereby established at Marine Corps Air Station Yuma, AZ; relocate depot maintenance workload and capacity for Aircraft Avionics/Electronics Components (approximately 6 K DLHs), Aircraft Hydraulic Components (approximately 2 K DLHs), Aircraft Landing Gear Components (approximately 3 K DLHs), Aircraft Other Components (approximately 12 K DLHs), and Aircraft Structural Components (approximately 3 K DLHs) from Naval Air Depot North Island to Fleet Readiness Center West Site Fort Worth, Fort Worth TX; relocate depot maintenance workload and capacity for Aircraft Avionics/Electronics Components (approximately 25 K DLHs), Aircraft Hydraulic Components (approximately 8 K DLHs), Aircraft Landing Gear Components (approximately 13 K DLHs), Aircraft Other Components (approximately 53 K DLHs), and Aircraft Structural Components (approximately 15 K DLHs), from Naval Air Depot North Island to Fleet Readiness Center Northwest, Naval Air Station Whidbey Island, WA; and transfer all remaining intermediate and depot maintenance workload and capacity to Fleet Readiness Center Southwest, Naval Air Station North Island, Naval Base Coronado, CA. p. Realign Naval Air Station Point Mugu, Naval Base Ventura, CA, by disestablishing the Aircraft Intermediate Maintenance Department and transferring all intermediate maintenance workload and capacity to Fleet Readiness Center Southwest Site Point Mugu, Naval Base Ventura, CA. q. Realign Marine Corps Air Station Miramar, CA, by transferring depot maintenance workload and capacity for Aircraft Other (approximately 28 K DLHs) and Aircraft Fighter/Attack (approximately 39 K DLHs) and intermediate maintenance workload and capacity for Aircraft Components, Aircraft Engines, Fabrication & Manufacturing and Support Equipment from Marine Aviation Logistics Squadron (MALS)-11 and 16 to Fleet Readiness Center Southwest Site Miramar, Marine Corps Air Station Miramar, CA. r. Realign Marine Corps Air Station Camp Pendleton, CA, by transferring depot maintenance workload and capacity for Aircraft Other (approximately 22 K DLHs) and Aircraft Rotary (approximately 102 K DLHs) and intermediate maintenance workload and capacity for Aircraft Components, Aircraft Engines, Fabrication & Manufacturing and Support Equipment from MALS-39 to Fleet Readiness Center Southwest Site Camp Pendleton, Marine Corps Air Station Camp Pendleton, CA. s. Realign Marine Corps Air Station Yuma, AZ, by transferring depot maintenance workload and capacity for Aircraft Fighter/Attack, Aircraft Other and Aircraft Rotary and intermediate maintenance workload and capacity for Aircraft Components, Aircraft Engines, Communication/Electronics Equipment, Ordnance Weapons & Missiles, Software and Support Equipment from MALS-13 to Fleet Readiness Center Southwest Site Yuma, Marine Corps Air Station Yuma, AZ. In addition to the person named above, Michael Kennedy, Assistant Director; Avrum I. Ashery; Pat L Bohan; Grace A. Coleman; Julia C. Matta; Charles W. Perdue; Maria-Alaina I. Rambus; and John E. Trubey also made major contributions to this report. | The 2005 Base Realignment and Closure (BRAC) recommendation to establish fleet readiness centers was expected to yield more savings than any other of the 2005 BRAC recommendations. To achieve these savings the Navy plans to integrate civilian depot personnel to complete some repairs at intermediate maintenance departments to reduce aviation maintenance costs. This report, prepared under the Comptroller General authority to conduct evaluations on his own initiative, is one in a series of reports related to the 2005 BRAC recommendations. GAO's objectives were to (1) analyze the reasons for changes in costs and savings estimates since the recommendation was approved, and (2) identify challenges in implementing this BRAC recommendation. GAO analyzed Navy and BRAC Commission costs and savings estimates and interviewed officials at the Naval Air Systems Command and at three fleet readiness centers. The Navy has increased onetime costs, decreased onetime savings and increased annual recurring savings expected from the fleet readiness centers recommendation, but GAO believes the savings are likely overstated. In preparing a detailed business plan for implementing the recommendation, the Navy increased onetime costs by $31 million or 96 percent because of costs associated with relocating employees and inflation. The Navy also decreased expected onetime savings from reduced inventory levels by $594 million or 92 percent because Navy officials believed earlier estimates were too optimistic. GAO's analysis of inventory levels for a sample of aviation items indicates that the majority of the revised savings estimate will not occur during the 6-year BRAC implementation period and the amount of such savings are uncertain at this time. GAO believes the annual recurring savings are overstated by about $53 million or 15 percent because the Navy's estimate includes $28 million in savings from eliminating military personnel, which may be assigned elsewhere rather than taken out of the force structure, and $25 million in onetime savings that was erroneously reported as recurring savings. While projected savings would remain substantial, they are still subject to some uncertainties and further efforts will be required to assess actual savings as this recommendation is implemented. The Navy faces challenges in ensuring projected savings are realized and faces some workforce challenges in implementing the recommendation. Since the Navy has already included projected BRAC savings in its budget for fiscal years 2007 through 2011, it will be important for the Navy to monitor the extent to which these savings are actually achieved to prevent adverse affects on naval aviation readiness or the need for additional funding. The Navy also faces workforce challenges, such as identifying and moving about 150 depot artisans with the right skills to various intermediate maintenance departments and integrating a primarily civilian depot workforce with the military intermediate department workforce. This mixing of diverse cultures could pose some challenges in implementation but should help develop a better trained and more productive workforce. The Navy will need sustained leadership to successfully establish the fleet readiness centers. |
The National Flood Insurance Act of 1968 established NFIP as an alternative to providing direct disaster relief after floods. NFIP, which makes federally backed flood insurance available to homeowners and businesses, was intended to reduce the federal government’s escalating costs for repairing flood damage after disasters. Floods are the most common and destructive natural disaster in the United States. In fact, according to NFIP statistics, 90 percent of all national disasters in the United States have involved flooding. However, flooding is generally excluded from homeowners’ policies that typically cover damages from other losses, such as wind, fire, and theft. Because of the catastrophic nature of flooding and the inability to adequately predict flood risks, historically, private insurance companies have largely been unwilling to underwrite and bear the risk that results from providing primary flood insurance coverage. Under NFIP, the federal government assumes the liability for the insurance coverage and sets rates and coverage limitations, among other responsibilities, while the private insurance industry sells the policies and administers the claims for a fee determined by FEMA. As of January 2011, 21,361 communities across the United States and its territories participated in NFIP by adopting and agreeing to enforce state and community floodplain management regulations to reduce future flood damage. In exchange, NFIP makes federally backed flood insurance available to homeowners and other property owners in these communities. Homeowners with mortgages from federally regulated lenders on property in communities identified to be in high-risk special flood hazard areas (SFHA) are required to purchase flood insurance on their dwellings for at least the outstanding mortgage amount. Optional lower-cost coverage is also available under NFIP to protect homes in areas of low to moderate risk. To insure furniture and other personal property items against flood damage, homeowners may purchase separate NFIP personal property coverage. Although premium amounts vary according to the amount of coverage purchased and the location and characteristics of the insured property, the average yearly premium was around $620 as of October 2010. NFIP is designed to pay operating expenses and flood insurance claims with premiums collected on flood insurance policies rather than with tax dollars. However, FEMA has statutory authority to borrow funds from Treasury to keep NFIP solvent in years when losses are high. NFIP, by design, is not actuarially sound because Congress authorized subsidized insurance rates to be made available for policies covering certain structures to encourage communities to join the program. As a result, NFIP is not able to build reserves to cover losses that exceed the historic averages. NFIP is managed by FEMA’s Federal Insurance and Mitigation Administration (FIMA), with administrative support from FEMA’s Mission Support Bureau (see fig. 1). DHS provides management direction by issuing guidance and working to integrate its various management processes, systems, and staff within and across its management areas. Around 350 FEMA employees, assisted by contractor employees, manage and oversee NFIP and the National Flood Insurance Fund, into which premiums are deposited and from which claims and expenses are paid. Their management responsibilities include establishing and updating NFIP regulations, analyzing data to determine flood insurance rates, and offering training to insurance agents and adjusters. In addition, FIMA and its program contractors are responsible for monitoring and overseeing the performance of the WYO insurance companies to help ensure that NFIP is administered properly. FIMA receives administrative and management support as well as direction on program operations from FEMA’s Mission Support Bureau offices, including the Office of the Chief Administrative Officer (OCAO), Office of the Chief Component Human Capital Officer (OCCHCO), Office of the Chief Financial Officer (OCFO), Office of the Chief Information Officer (OCIO), and Office of the Chief Procurement Officer (OCPO). In addition, FEMA’s Office of Policy and Program Analysis (OPPA) serves a collaborative support role to provide leadership, analysis, coordination, and decision-making support on agency policies, plans, programs, and key initiatives. While Mission Support and OPPA provide important services to FIMA, their responsibilities do not include comprehensive oversight of FIMA or NFIP. We found a number of management practices that could be improved to help FEMA more effectively administer NFIP. First, FEMA has not provided FIMA with strategic direction and guidance for administering NFIP and therefore lacks the starting point necessary to develop performance measures for assessing the program’s effectiveness. Second, FEMA faces a number of human capital challenges, including developing a strategic human capital plan that addresses mitigating high turnover, hiring, and overseeing contractors that play a key role in NFIP. Moreover, it has yet to adequately address managing the day-to-day operations when deploying staff to respond to federal disasters. Third, collaboration among offices within FEMA that are responsible for administering NFIP has at times been ineffective, leading to challenges in effectively carrying out some key functions. In particular, FIMA, the office that administers NFIP, and FEMA Mission Support, which provides mission-critical functions such as information technology (IT), acquisition, and financial management, have had difficulties collaborating on these functions. Finally, FEMA does not have a comprehensive set of policies, procedures, and systems to guide its operations. Specifically, it lacks an updated records management policy, procedures to effectively manage unliquidated obligations, and a fully developed and implemented documentation of its business processes. FEMA has begun taking steps to improve its acquisition management and document some of its business processes, but as they were recently implemented or still in progress, the results of these efforts have yet to be realized. Unless it takes further steps to address these management challenges, FEMA will be limited in its ability to manage NFIP’s operations or ensure program effectiveness. FEMA published its most recent agencywide strategic plan in February 2011, but the plan did not clearly lay out how and where NFIP’s mission and activities fit within FEMA’s own goals and objectives. The Government Performance and Results Act of 1993 (GPRA) requires agencies to submit a strategic plan containing a number of components, including a comprehensive mission statement, long-term goals and objectives for major operations, and strategies for achieving these goals and objectives. Further, we have reported that an agency’s strategic planning effort is the most important element in results-oriented management and serves as the foundation for defining what the agency seeks to accomplish, identifying strategies to achieve desired results, and determining how well it succeeds in reaching its goals and objectives. Leading results-oriented organizations focus on the dynamic and inclusive process of strategic planning, rather than on a strategic planning document, to provide a foundation for day-to-day activities and foster communication between the organization and its stakeholders. Moreover, the committee report accompanying GPRA stated that clear and precise goals enable an organization to maintain a consistent sense of direction regardless of the leadership changes that can occur frequently across the federal government. NFIP is a major operation with $1.2 trillion in coverage and $17.8 billion in debt that has remained on GAO’s high-risk list since 2006. FEMA officials told us that FEMA chose not to prescribe goals and objectives for specific programs in its strategic plan as required by GPRA. They said that the agency chose a different strategic approach that would allow for more flexibility, something that was needed because FEMA must respond to emergencies as they occur. While FEMA may require flexibility in its operating environment, as a federal insurance program NFIP requires a more structured framework to help ensure that its operations are properly managed and allow for the development of effective performance measures. Unless FEMA provides FIMA with strategic direction and guidance for administering NFIP, the program risks not having a strategic focus that is aligned with agency goals and objectives or effective performance measures. FIMA officials told us they were in the process of developing a strategy for mitigation and insurance but did not provide a specific timeline for completing or implementing it and did not provide details of what it might include. FIMA officials said they began developing the strategy in June 2010 and had created a steering committee with about 15 members representing various areas within FIMA. The committee held a summit with a number of stakeholders in November 2010 to validate the proposed mission, goals, and objectives of the organization before entering the drafting process and expect to eventually publish the final strategy in the summer of 2011. Because these efforts have not yet been completed, whether the strategy will include adequate goals and objectives for administering and managing NFIP remains to be seen. Without goals and objectives and a firm timeline for completing them, NFIP will continue to lack a strategic direction. FIMA officials said they had relied on other documents for strategic guidance, including FEMA- and DHS-level guidance and the agency’s general mission—managing risks from all natural hazards to help free America from the burden of such disasters. However, without specific agency- or program-level goals, FIMA cannot ensure that any performance measures it develops for NFIP properly and adequately measure the program’s success. According to GPRA, agencies should establish performance indicators to be used in measuring and assessing the relevant outputs, service levels, and outcomes of each program activity. Moreover, GAO’s Standards for Internal Control in the Federal Government states that management should ensure that agencies establish and review performance measures and indicators. As we have reported, performance goals and measures that successfully address important and varied aspects of program performance are key to a results-oriented work environment. Measuring performance allows organizations to track the progress they are making toward their goals and gives managers critical information on which to base decisions for improving their programs. We have also reported that successful performance measures are, among other things, linked to core program activities. FIMA officials said that in recent years they had generally relied on five performance measures for NFIP that they reviewed quarterly: Percentage of the U.S. population (excluding territories) covered by local hazard mitigation plans that had been approved or were pending adoption. Percentage of the national population whose safety had been improved through the availability of flood risk data in Geospatial Information System (GIS) format. Number of communities taking or increasing actions to reduce their risk from natural disasters. Potential property losses, disasters, and other costs avoided. NFIP premium income per $100 dollars of combined operating expense and historical losses paid. However, FIMA recently revised its operating plan, which FIMA officials said aligns resources to major activities and provides transparency to FIMA’s performance. In this revision, FIMA replaced the five measures with 11 new performance measures aligned with DHS’s mission and relevant DHS goals. FIMA said that these measures are still under development but that it began testing these measures in fiscal year 2011 and plans to officially require and report them in fiscal year 2012. They are grouped into three levels—strategic, management, and activity—indicating how they are expected to be used and which units will be gathering and reporting information in support of these performance measures. The measures relate to a range of FIMA’s activities including mitigation effectiveness, mapping progress, and NFIP operating efficiency. However, FIMA has not had a set of strategic goals and objectives to guide its administration of NFIP. FIMA officials plan to include long-term goals and objectives in its upcoming strategic plan, but until this plan is complete and effectively implemented, FIMA will continue to be challenged by a lack of strategic focus and direction. Further, FIMA officials will be limited in their ability to understand and assess their effectiveness in administering NFIP and properly allocate its resources. Further, without a strategic plan specific to FIMA that incorporates specific goals and objectives for NFIP, determining whether FIMA’s performance measures are aligned with and appropriately support FEMA’s goals for NFIP is not possible. Without a robust set of goals and performance measures that are aligned and appropriately supported, FIMA is limited in its ability to monitor and hold management and staff accountable for program performance and take corrective actions as needed. The Post-Katrina Emergency Management Reform Act of 2006 (PKEMRA) required FEMA to develop a strategic human capital plan that included an assessment of the critical skills and competencies required for its workforce. While FEMA developed a 2008-2012 Strategic Human Capital Plan, we found that the plan did not meet PKEMRA’s requirements. PKEMRA required that the plan include an assessment of (1) the critical skills and competencies that would be needed in the workforce during the 10-year period after the law was enacted; (2) the skills and competencies of the FEMA workforce and projected trends in that workforce based on the expected losses due to retirement and other attrition; and (3) staffing levels for each category of employee and gaps that should be addressed to ensure that FEMA has continued access to the necessary critical skills and competencies. In addition, PKEMRA requires FEMA to develop a “Plan of Action” to address gaps in critical skills and competencies, including: specific goals and objectives for recruiting and retaining employees, such as recruitment and retention bonuses; specific strategies and program objectives to develop, train, deploy, compensate, motivate, and retain employees; specific strategies for recruiting staff with experience serving in multiple state agencies responsible for emergency management; and specific strategies to develop, train, and rapidly deploy a surge capacity force. FEMA’s plan—including a 2010 Human Capital Operational Plan—did not address all PKEMRA requirements. For example, it did not define the critical skills and competencies that FEMA would need in the coming years or provide specific strategies and program objectives to motivate, deploy, and retain employees, among other things. In an October 2009 report, NAPA also stated that FEMA’s plan did not meet certain PKEMRA requirements, which the report described as being focused on understanding and planning for the current and future workforce. NAPA also recommended that FEMA strengthen its human capital planning. One NAPA official noted that the 2008-2012 Strategic Human Capital Plan is essentially a “plan to develop a workforce plan.” We have noted in previous work that agencies should develop human capital strategies—including succession planning, training, and staff development—to eliminate gaps between current skills and competencies needed for mission success. FEMA’s human capital plan does not have strategies to address retention challenges or contractors, among other things. For example, FEMA experiences frequent turnover in key positions and divisions that can result in lost productivity, a decline in institutional knowledge, and a lack of continuity for remaining staff. Within the past several years, key leadership has also changed within several key FEMA offices that support FIMA in some NFIP activities. For example OCCHCO has hired its third chief in the last 2 years. Further, FEMA has experienced turnover in several of the offices that provide critical mission support services to NFIP. For example, OCPO, which had 88 permanent full-time (PFT) staff at the beginning of FY 2007, had lost 59 employees as of August 2010. FEMA staff told us the high turnover had resulted in the loss of institutional knowledge, specialized skills, and management continuity and efficiency. FEMA also faces challenges in hiring, which has been a major focus of its workforce operations. As of the third quarter of fiscal year 2010, approximately 876 of FEMA’s 4,916 funded positions were unfilled. Further, both FEMA program officials and OCCHCO, which screens candidates, said that OCCHCO often sent candidates without the requisite skills forward to the program offices that typically make the final hiring decisions. OCCHCO officials told us that in several instances program offices had not properly aligned announcements and position descriptions, so that candidates appearing to meet the requirements of the position description did not meet the actual requirements of the position. OCCHCO officials added they were working to improve the situation. FEMA also lacks accurate data on its current staffing levels, largely because of IT issues, exacerbating the difficulties of workforce planning. In a 2009 review of OCCHCO, NAPA found that frequent shifting of organizational resources over the previous 6 years, the lack of a single system to track and account for the workforce, complexities associated with tracking multiple workforce categories, and problems with FEMA’s human resource management system had hindered efforts to obtain complete and accurate human capital data for review. According to NAPA, these shortcomings had significant consequences in 2009, when FEMA established an informal hiring freeze because the number of staff hired exceeded authorized levels. In 2010, the Homeland Security Studies and Analysis Institute also found a discrepancy of around 700 filled positions between FEMA’s manpower database and National Finance Center data. The institute found that the two most common discrepancies in employee data were errors involving on the employees’ work unit and activities. OCCHCO officials said they had also experienced difficulties with human resource management systems. Most recently, in 2010 DHS deployed the Talent Link system to manage its human resource needs, but the system was found to be incompatible with government human resource systems and processes. As a result, a few months after Talent Link was deployed DHS phased it out and moved FEMA to the USA Staffing system. In addition, in spite of the importance of the work of contractors to NFIP’s activities, FEMA does not centrally track the number of contractors or the type of work they do. For example, FIMA staff estimated that one of its divisions had as many as 10 contractors per FIMA staff member, and other FEMA staff said that they were unable to estimate the number of contractors. According to a FEMA Workforce Baseline Assessment conducted by the Homeland Security Studies and Analysis Institute, examining the federal workforce alone cannot fully assess FEMA’s full human capital capability. The assessment went on to note that contract support must be considered in any discussion of FEMA staffing because contractors do not just supplement staff efforts but perform a substantial amount of FEMA’s work. Unless FEMA tracks its contractors, it is severely limited in its ability to assess the total workforce and their respective roles and to plan for future staffing needs. However, pursuant to the Consolidated Appropriations Act of 2010, the head of DHS, which includes FEMA, is now required to prepare an annual inventory of service contracts it awards or extends through the exercise of an option. The initial inventory was due not later than December 31, 2010, and annually thereafter. As part of the inventory, DHS must include the number and work location of contractor and subcontractor employees expressed as full-time equivalents for direct labor, compensated under the contract. FEMA told us it had begun developing an initial workforce assessment that it planned to complete in 2012, but the agency is uncertain whether it will include contractors in this study. According to FEMA staff, a new strategic human capital plan is also under review, and therefore, FEMA could not provide us with a copy. As a result, we were unable to determine whether it addressed PKEMRA’s requirements and the human capital challenges that NFIP faces. Without a human capital plan that, at a minimum, meets PKEMRA’s requirements, includes a comprehensive workforce assessment that identifies staffing and skills requirements, addresses turnover and staff vacancies, and analyzes the use of contractors, FEMA will continue to have difficulty hiring and retaining staff and managing its contractors. As we have previously reported, neither FEMA nor FIMA has a plan to help ensure that agency operations, including NFIP’s, are maintained when a federal disaster is declared and staff are required to respond to it. Without such a plan, FEMA faces the risk that some critical day-to-day functions may not be performed while staff are deployed, limiting the agency’s ability to provide the necessary support for disaster relief missions. In addition to their responsibilities for day-to-day operations, FEMA employees are also expected to be on call during disasters for potential assignment to disaster-related activities, including deployment to field operations. FEMA staff told us that neither FIMA nor FEMA had a program-specific or agencywide plan that covered all of its staff and functions, including NFIP. According to a FEMA official, while program offices have some ability to make decisions about how many mission- critical staff to deploy to the field during a disaster and how many to keep in their office positions, the current administrator has made it clear that when a disaster hits, the priority is to deploy staff to the field. As was the case with Hurricane Katrina, FEMA staff can be deployed for weeks or months and, during that time, are often performing duties in the field that take them away from their day-to-day responsibilities. According to a recent study by the Homeland Security Studies and Analysis Institute, FEMA staff found that operating normally during and immediately after a disaster was problematic due to staff deployment and an increased workload due to the disaster. For this reason, planning for business continuity management and deployment planning are particularly important for the agency. We previously reported that FEMA did not have guidelines on what constitutes a mission-critical position, had not conducted an assessment of the minimum level of support that would be necessary to keep the agency fully operational, and thus had limited guidelines for deciding who should be deployed. In addition, the report found that nearly 57 percent of FEMA’s permanent employees who are deployable do not have assigned deployment job titles or roles that would facilitate deployment during a disaster. Without a plan for deploying staff during a disaster, FEMA faces the risk that critical functions, such as managing NFIP operations, may not be performed while staff are deployed to the field during a natural disaster, increasing the likelihood that the agency will be unable to provide the necessary support for disaster relief missions. FIMA relies on Mission Support for a variety of mission-critical functions, including IT, acquisition, and financial management, but FIMA and Mission Support have faced challenges in collaborating with one another. In our prior work, we have identified eight practices that agencies can use to enhance and sustain their collaborative efforts: Define and articulate a common outcome. Establish mutually reinforcing or joint strategies. Identify and address needs by leveraging resources. Agree on roles and responsibilities. Establish compatible policies, procedures, and other means to operate across agency boundaries. Develop mechanisms to monitor, evaluate, and report on results. Reinforce agency accountability for collaborative efforts through agency plans and reports. Reinforce individual accountability for collaborative efforts through performance management systems. While these practices were originally developed for collaboration among federal agencies, they can apply to collaboration between FIMA and the offices that support it. OCIO’s stated function is to assist FEMA offices in IT development and to help ensure they follow the agency’s established processes for IT system implementation. However, FIMA and OCIO faced challenges in agreeing on roles and responsibilities and establishing mutually reinforcing or joint strategies. For example, FIMA officials said they had experienced difficulty in the past getting timely approvals from OCIO for IT programs and contracts for NFIP and had sought ways to streamline the process, including using contractors rather than OCIO staff. FIMA officials also said that OCIO’s certification and accreditation (C&A) process—which determines whether systems are certified to become operational—could be lengthy. They said they had to wait months for C&A approval for at least two mission-critical systems, one of which had been held up for about 9 months as of February 2010. One official said this problem had arisen because the C&A process lacked a formalized structure and communication between FIMA and OCIO was inadequate. OCIO officials acknowledged that some communication problems existed and said they were aware of FIMA’s concerns. OCIO’s primary concern, however, was that at times FIMA would perform IT functions independently from OCIO and believed that involving OCIO would help streamline IT development. For example, an OCIO official said that assessing and approving a $1 million investment would require 30 to 45 days. OCIO officials also said that 95 percent of FEMA’s known systems were certified but noted that other systems, including some of FIMA’s that affect NFIP, might have been developed independently of OCIO and thus lacked its approval. For example, in the past year OCIO discovered five FEMA human resources programs that were developed without its knowledge or involvement. OCIO now requires that all systems on FEMA’s network complete the C&A process and be approved by the CIO, because undocumented systems can create risks that are difficult to correct. In accordance with the Federal Information Security Management Act of 2002 (FISMA), OCIO is creating an inventory of IT systems for each of FEMA’s offices. OCIO officials said that once the portfolio lists had been verified, OCIO would address the backlog of pending C&As. FEMA also developed an Acquisition Review Board (ARB) to help ensure that IT systems within the agency are developed with the CIO’s involvement, because the acquisition system requires the CIO’s approval at key points in the IT development process. OCIO is also taking steps to improve collaboration with FEMA’s program offices, but it is too early to determine if the issues with FIMA have been fully addressed. For example, in January 2008 OCIO began assigning a customer advocate to each program office to help it better understand the IT needs of FEMA’s program offices and to act as liaisons. The customer advocates are responsible for understanding all of the systems that are needed to support their assigned program offices and for regularly updating the CIO. FIMA’s customer advocate said he met frequently with FIMA officials to resolve IT issues that arose and he was aware of only one major issue—the need to replace the legacy policy and claims processing system. While FIMA officials have mentioned a number of processes that could benefit from greater automation, including document management and budget formulation, it is unclear whether they have communicated these needs to their customer advocate. Until cooperation between FIMA and OCIO improves, FEMA will be unable to ensure that FIMA’s and NFIP’s IT needs are adequately met. FEMA has exceeded its goals for awarding contracts to small businesses, but FIMA and OCPO have differed on the question of how the policy for setting aside these contracts should be implemented. The federal government’s goal for participation by small business concerns is at least 23 percent of the total dollar value of all prime contract awards for each fiscal year. By comparison, FEMA’s fiscal year 2010 goal of 31.9 percent was higher because, according to OCPO officials, DHS noticed that FEMA was exceeding its previous targets and wanted to provide incentives for continuing to exceed them. In general, before setting aside a contract for competition among small businesses, an agency must conduct market research to determine whether there is a reasonable expectation of obtaining offers from at least two small businesses that could meet the contract’s requirements. OCPO officials make this determination within FEMA. If the program office objects to the decision, OCPO generally asks the office to support its position. If a disagreement persists, the Head of Contracting Activity has traditionally resolved the disagreement informally. No formal process exists for resolving these disagreements or appealing decisions. FIMA officials said that in several instances the use of small business contracts has caused inefficiencies for NFIP. According to these officials, flood insurance work is better suited to large businesses. For instance, in 2007 OCPO decided to split one of FIMA’s contracts—which covered many areas of NFIP, including marketing, training, and data management—into five smaller contracts that were more conducive to small business involvement. According to FIMA officials, OCPO did not involve FIMA sufficiently in this decision and did not sufficiently consider how it would affect FIMA, which would need additional staff to monitor the contractors and would lose experienced contractors. OCPO officials disagreed, noting, among other things, that the requirements for each contractor were outlined in the contract’s solicitation and only contractors that could meet the requirements were considered. No formal process exists for resolving the disagreement, and whether OCPO effectively communicated to FIMA how it could justify its position is unclear. Such disagreements indicate a need for those involved to improve their collaboration by establishing mutually reinforcing or joint strategies to achieve common outcomes. According to FIMA officials, these disagreements have created inefficiencies that have required extra work to resolve—for instance, lengthening the time required to complete certain processes. Recognizing that it needed to improve its relationship with program offices, OCPO management appointed an individual to reach out to and help them recognize the value of OCPO’s services. OCPO officials said that program offices now understand they must work with OCPO, and OCPO hopes to improve the relationship and help the program offices to better understand how beneficial the procurement office can be. OCPO officials said that the office now acts as an advocate for the program offices to DHS and helps improve communication by explaining to program offices the reasoning behind DHS’s various requirements. Without further improvements in this area, however, FEMA cannot fully ensure that NFIP’s acquisition needs are being met. FIMA and OCFO have not fully coordinated solutions to FIMA’s budget formulation process. FIMA officials said they could benefit from greater automation of the budget formulation process, which currently relies on FEMA’s Integrated Financial Management Information System (IFMIS). In particular, FIMA officials have said they need a system for building their budget, a process that involves estimating expected policy fee revenue and identifying and allocating funds from six appropriations. OCFO currently provides FIMA with spreadsheets for formulating the budget that contain templates for the spending plans detailing the resources required to execute programs, projects, and activities. OCFO officials acknowledged that the current process was more time consuming and prone to data entry errors than an automated system would be. FIMA officials noted that using these spreadsheets was particularly challenging because of fluctuations in NFIP premium revenues. To address some of these concerns, OCFO developed an automated budget formulation tool and is customizing it to meet the agency’s needs. OCFO expects that the new tool will act as an interface with its current systems and ease budget formulation by eliminating the use of spreadsheets and allowing FIMA and other program offices to develop spend plans directly in the system. The tool became operational within OCFO in March 2011, and OCFO plans to implement it FEMA-wide on a rolling basis throughout fiscal year 2011 to allow time to train staff. However, both OCIO and FIMA said they did not have adequate input into the development of the new system, and the extent to which OCFO ever defined and documented system needs and requirements is unclear. In particular, FIMA officials said that OCFO may not have fully understood FIMA’s needs regarding formulation and execution of NFIP’s budget and the challenges created by fluctuating premium revenues. Officials from KPMG, the auditor retained by DHS, also said they had noticed communication challenges within FEMA, particularly between FIMA and OCFO. For instance, KPMG found that FIMA had changed its method for estimating its deferred revenue, and as DHS reported in 2008, had not communicated this change to OCFO. While KPMG reports that this condition was corrected in fiscal year 2009, to prevent future problems the auditor recommended that FEMA develop better methods of communicating such changes. KPMG also found that FEMA had not completed its documentation of formal business policies and procedures for several of the roles, responsibilities, processes, and functions performed within FEMA. Without better collaboration and communication between FIMA and OCFO, FEMA will be unable to fully ensure that NFIP’s financial and budgetary needs are being met. FEMA is a paper-based agency and has no centralized electronic document management system that would allow its administrative, regional, and program offices—including FIMA—to easily access and store documents. According to the National Archives and Records Administration (NARA), a record enters the document life cycle at its creation and remains in the system through its use, maintenance, and disposition. Records enable and support an agency’s ability to fulfill its mission, and because records contain information, taking a systematic approach to managing them is essential. According to NARA, effective records management helps deliver services in a consistent and equitable manner; facilitates effective performance throughout an agency; protects the rights of the agency, its employees, and its customers; and provides continuity in the event of a disaster. According to NARA, from a strategic perspective, agencies lacking effective records management policies and procedures can hinder their ability to respond swiftly to opportunities, events, incoming requests, and investigations, and to effectively implement policy. From an operational perspective, such agencies may waste internal resources searching for or recreating records, while at the same time incurring storage costs for records that are not properly purged. From a regulatory standpoint, such agencies can face fines, sanctions, and convictions from noncompliance with federal statutes, rules, and regulations. Finally, from a legal perspective, such agencies can use excessive time, costs, and resources during discovery in order to retrieve needed materials from poorly organized records. According to a FEMA official, while there is broad consensus on the need for a centralized electronic document management system, currently no such system is in use. According to FEMA staff, FIMA has electronic systems in place for claims processing and correspondence recordkeeping, and FIMA’s Risk Insurance Division has a system in place that is used for document archiving for its division. FEMA’s Records Management Division told us it had instructed program offices needing a records management system immediately to continue the use of existing document management systems until DHS implements such a system. However, the agency has no policies or procedures in place for implementing such electronic systems. FEMA officials told us they had not implemented an agencywide system, even on an interim basis, because they were waiting for a decision from DHS on a centralized system. Further, FEMA lacks effective and systematic procedures to fully ensure that it appropriately retains and manages its records. While DHS has an overall records management directive, FEMA’s agency-specific guidance is outdated. For example, the guidance does not provide clear direction on electronic recordkeeping but does contain direction on file cabinet sizes and the use of candles in file rooms. FEMA Records Management officials were unable to tell us when an updated directive would be forthcoming. FEMA officials also said they had a plan for annually updating file plans that staff were supposed to follow but did not have processes in place to ensure that the plans actually were updated. As result of this lack of updated policy and guidance, FEMA’s recordkeeping practices, which apply to NFIP, may not conform with the requirements of federal records management laws and regulations and may not adhere to Standards for Internal Controls in the Federal Government, which state that management should ensure that relevant, reliable, and timely information is available for decision making and external reporting. For example, in our review, FEMA staff told us they were storing documents using a system of file rooms, personal file cabinets, and document-sharing software with limited staff access. According to FIMA staff, documents can be difficult to locate and at times have been lost or thrown away when staff separate from the agency. FEMA staff also told us they had faced decreased productivity due to lost packages, delays in budget execution and policy decisions, destroyed documents, and duplicated efforts. In addition, because FEMA staff are currently spread across several different locations in the Washington, D.C., area and 10 field offices across the country, progress in meeting NFIP goals can be slowed by staff’s inability to locate, transfer, and archive documents across all of these locations. FEMA has taken two actions that could help to ensure that its current paper-based records are effectively managed. First, in fiscal year 2010 DHS required all staff to take records management training on their individual responsibilities for maintaining agency records. FEMA officials told us this training was the first of its kind that the agency had offered. Second, FEMA has begun identifying staff to act as records liaison officers in each program office. Records liaison officers are responsible for helping ensure that records are kept in accordance with the agency’s file plan. Agency officials told us they relied heavily on records liaison officers to provide oversight in these areas. However, FEMA has not yet identified records liaison officers for each section of the agency and has not yet conducted a review or audit to fully ensure that records were being systematically retained and managed. Until FEMA addresses the agency’s immediate need for a centralized document management system and develops effective policies guiding the use of electronic systems, staff will continue to face challenges maintaining records, affecting FEMA’s ability to make effective decisions and report accurately on its finances and operations. Our review of FEMA’s financial management found that staff faced multiple challenges in their day-to-day operations due to limitations in the systems they must use to perform these operations. OCFO staff told us that one of the greatest challenges they faced in carrying out their financial management responsibilities was using unautomated and often disparate systems. For example, they said that some of their systems for invoicing, travel management, and debt collection did not interface with FEMA’s financial management system and, as a result, they had to manually enter data in FEMA’s system. In addition, OCFO staff said that because their current travel management system was difficult and time consuming to use, they employed a paper-based process for staff travel. While FEMA has plans to implement a new system, a FEMA official told us the new system would also be time consuming to use—for example, it would not allow staff to process multiple travel orders in a short period of time, as would be required during emergency deployment. Finally, OCFO staff said that both the current debt collection and Department of Justice grant systems for nondisaster grants required that grant obligations be entered manually. According to FEMA officials, DHS is currently in the process of developing a DHS-wide grants management system; however, they estimated the system would take roughly a few more years to fully develop and implement. The lack of automated systems for budget formulation and execution helped to make these tasks two of its biggest challenges. As we have seen, FIMA currently uses a system of spreadsheets to formulate fiscal year budgets and to track overall budget expenditure and specific line-item expenses. According to FIMA officials, spreadsheets can be corrupted and data are prone to errors because staff work on multiple versions. In addition, FIMA staff also told us they faced challenges with the paper- based tracking of requisition orders, which are sent between departments. In order to determine what was approved or not approved in the system on a daily basis, staff must manually track requisition packages through various offices. An agency official told us that the risks associated with this paper-based process were high and there had been instances in which packages were lost or signed for by unauthorized staff. These issues have been raised in past audits by the DHS’s Office of the Inspector General (OIG). While FIMA has begun to implement an automated tracking system, according to FEMA staff, the process was delayed due to IT challenges. We have previously reported on weaknesses in FEMA’s financial management processes. For example, we reported that internal control weaknesses had impaired FEMA’s ability to maintain transaction-level accountability; that FEMA’s broader oversight structures such as WYO company audits, the triennial operational reviews of WYOs, and FEMA’s claims reinspection program were limited in their effectiveness; and that FEMA’s initiative to improve specific internal control weaknesses and the overall NFIP environment has done little to address many of the NFIP financial data deficiencies highlighted by the 2005 Gulf Coast hurricanes. In addition, we reported that the design of FEMA’s financial reporting process increased the risk of inaccurate or incomplete data because it did not include transaction-level data and places an over reliance on manual data entry. Furthermore, our testing of transactions from the Bureau and Statistical Agent database found that many transactions either lacked or had incomplete insured names, addresses, or policy effective dates. As a result, we were unable to test the accuracy of reported insured premium amounts or whether policy premium information was complete. Recent external audits of DHS’s financial statements, performed by KPMG, have also identified material weaknesses in the area of unliquidated obligations. As of March 2011, FEMA had a total of $3.3 million in unliquidated obligations for NFIP-related funds that had been inactive for at least 5 years. According to a FEMA official, around $3.0 million of these funds could potentially be deobligated and used for new obligations consistent with the purposes for which the funds were appropriated. According to GAO’s Standards for Internal Control in the Federal Government, transactions should be promptly recorded to maintain their relevance and value to management in controlling operations and making decisions. This applies to the entire process or life cycle of a transaction o event from the initiation and authorization through its final classification in summary records.” Further, “control activities help to ensure that all transactions are completely and accurately recorded.” In addition, “internal control and all transactions and other significant events need to be clearly documented, and the documentation should be readily avai for examination.” All documentation and records should be properly managed and maintained. KPMG cited the unliquidated obligations issue as a material weakness i 2008 and as a significant deficiency in the 2009 and 2010 Consolidated DHS Audits. According to a FEMA official, in 2009 the agency issued an interim directive and procedures for addressing the unliquidated obligations issue. For example, it has started to verify the age of obligations older than 365 days and is working with points of contacts in program offices to certify that the unliquidated accounts are still open. However, OCFO told us that staff had sent memos to FIMA regarding this issue but that FIMA staff responded they were unaware of the amount of the unliquidated obligations and the potential amount that might be returned to FIMA. Unless FEMA implements processes to better monitor unliquidated obligations, including within FIMA, it could lead to inaccurate financial statements and affect DHS’s overall budget. FEMA has also identified a number of weaknesses in its oversight and management of acquisitions, and DHS and FEMA have taken a number of steps to improve these functions. However, because many of these steps have either been recently implemented or are still under developmen extent to which they will improve FEMA’s acquisition management remains to be seen. FEMA’s acquisition management has traditiona guided by DHS’s investment review process, which had four main objectives: Identify investments that perform poorly, are behind schedule or o budget, or lack capability, so officials can identify and implement corrective actions. Integrate capital planning and investmen allocation and investment management. Ensure that investment spending directly supp orts DHS’s mission and identify duplicative efforts for consolidation. Ensure that DHS conducts required management, oversight, control, reporting, and review for all major investments. FEMA performs three types of acquisition activities: (1) acquisition programs, which typically provide a tangible capital asset; (2) enterprise service contracts, which provide a service with a direct impact on FEMA’s ability to carry out its mission; and (3) nonenterprise service contracts, which provide a service but do not have a direct impact on FEMA’s ability to carry out its mission. Historically, some FEMA investments have been funded despite not receiving adequate review or oversight. Most notably, the NextGen system went forward without the necessary reviews and failed after 7 years and an investment of $40 million. Further, the $1 billion Risk Mapping Assessment and Planning (RiskMAP) program, which is an effort to modernize flood hazard mapping, was funded without receiving approval from the review board. OCPO officials said that this former DHS review board did not sufficiently meet the department’s acquisition oversight needs, leading DHS to issue an interim acquisition directive in November 2008 and a final directive in January 2010. The directive provides an overall policy and structure for acquisition management within DHS describing the Acquisition Life Cycle Framework, Acquisition Review Process, and ARB, and outlines management procedures and responsibilities related to various aspects of acquisition. Because the DHS acquisition directive allows its component agencies to set internal acquisition processes and procedures as long as they are consistent with the DHS directive, in August 2010 OCPO began drafting its own acquisition directive and a handbook explaining how to implement it. FEMA had circulated its directive, for comments, and OCPO officials expect it will be completed within 30 days after comments have been collected and incorporated. One important component of acquisition management is reviewing programs through an ARB. FEMA created its ARB in July 2009 and had held four meetings as of January 2011. FEMA’s ARB includes two co-chairs (the Deputy Administrator and the Component Acquisition Executive), representatives from FEMA’s various program offices, heads of Mission Support’s various offices, and others. While FEMA can choose to review any acquisition activity, it requires that certain items be presented to the ARB, including all acquisition programs with life cycle costs of more than $50 million and enterprise service contracts with annual expenditures greater than $20 million. As of January 2011, DHS recognized nine FEMA programs requiring FEMA ARB review. Seven of these—including the $1 billion RiskMAP program—had gone through the FEMA ARB as of January 2011, and FEMA plans to review the other two, as well as others, in fiscal year 2011. As it continues to review its portfolio of programs, it expects to add additional programs to this list. In particular, OCPO is examining FIMA’s acquisition activities and considering adding NFIP operations to its ARB list. FEMA has also faced challenges in the acquisition and oversight of its contractors, which are critical to NFIP. Both OCPO and FIMA officials said there had been communication challenges between contracting officers who were part of OCPO and Contracting Officer’s Technical Representatives (COTR) who report to the contracting officers but also work in the program offices. OCPO officials said that many COTRs were loyal to their program office and communicated with contracting officers only when a problem arose. FIMA officials said that contracting officers had at times been unresponsive to them, particularly when reporting contractor discrepancies. Moreover, both we and KPMG previously noted weaknesses in FEMA’s oversight of contractors. For example, we reported that a lack of monitoring records, an inconsistent application of procedures, and a lack of coordination diminished the effectiveness of FEMA’s monitoring of NFIP-related contracts. Further, KPMG officials said that FIMA did not provide sufficient oversight of its contractors, something that is of particular concern because FIMA has a relatively high proportion of contractor staff. Moreover, DHS’s OIG found that acquisition personnel could not locate a number of contract files that were part of its review including one for a $3 million flood risk assessment contract. The report said that missing contract files created uncertainties, including whether proper contracting procedures were followed, contractors were held accountable for goods and services, and tax dollars were appropriately spent. To correct some of its acquisition challenges, FEMA issued a directive in September 2009 to clarify the roles, responsibilities, and requirements of COTRs in contract administration. This directive includes, among other things, a COTR Tiered Certification Program consisting of credentialing and compliance, and FEMA plans to train all of its COTRs to their appropriate certification levels by March 2011. Providing further guidance, FEMA also issued a COTR handbook in February 2009. Among other things, the handbook includes training requirements, duties, monitoring and surveillance procedures, and documentation requirements. In May 2010, OCPO began a technical review of COTRs’ Contract Administration Files to better ensure that COTRs were adequately documenting their contracts. OCPO officials also said that, realizing the importance of outreach to FEMA’s program offices, they had developed and funded a “How to Work with Us” training course and held the agency’s first annual program management seminar. Moreover, officials from FIMA’s Risk Insurance Division said they had changed their process for monitoring contractors, including requiring the contractors to submit monthly monitoring reports. As we have seen, most of these actions are relatively new, and some have not been fully implemented. While these steps need to be taken, the extent to which they will ensure effective oversight of FEMA’s acquisition activities remains to be seen. Unless FEMA sets a firm timeline for implementing these actions, the agency will continue to have difficulty determining whether its acquisition processes are cost-effective, particularly those involving contractors. Several FEMA officials and staff told us that the emergency response culture within the agency could create resistance to implementing formal business processes, many of which involve NFIP. For example, several staff suggested that difficulties in following business processes were in part linked to FEMA’s emergency response culture—that is, its commitment to responding to disasters rather than strategically planning how its response could be improved by implementing more efficient office systems, policies, and processes. Further, agency officials told us that FEMA staff generally believed that formal or bureaucratic processes could impede their progress. Officials suggested that these cultural issues had led to both a general unwillingness to follow business processes at the staff level and limited commitment to planning and oversight at the management level. One FEMA official said that while FEMA’s culture was part of the challenge, the agency had expanded after September 11 and has doubled in size since the 2005 Gulf Coast Hurricanes without commensurate adjustments in processes and systems. FEMA staff also told us that because many of FEMA’s processes were manual, FEMA’s culture had become dependent on people, with staff relying on personal relationships to accomplish tasks. However, FEMA’s Mission Support Bureau told us it had begun a business process improvement effort in early 2009 that involved mapping the current processes, analyzing them, and determining what changes and improvements were needed. FEMA officials stated that the business process issues arose because FEMA expanded significantly after September 11, 2011, and the agency added new processes to existing ones without making necessary adjustments to ensure that the new processes were efficient. For example, the process for staff who were separating from the agency was mapped as having 117 steps and was streamlined to 88 steps. The bureau also determined that personnel actions for the regions were done differently than they were for FEMA headquarters. Mission Support officials said that as of July 2010 they had completed process maps and new internal control frameworks that affect NFIP. FEMA staff stated that Mission Support had completed several processes in areas such as COTR appointment and reappointment, printing, Freedom of Information Act requests for contract-related records, personnel actions, access control to headquarters facilities, hiring and separating for headquarters employees, workers compensation, annual property inventory, and the 40-1 requisition process. A FEMA official told us that staff had discovered numerous processes that either they did not realize they had, were different than those previously assessed, or were needed but did not exist. Mission Support staff said they had also found many work-around processes and processes that were poorly documented or duplicated at different places in the agency. FEMA officials told us they had tentative plans to roll out the initial changes to processes throughout relevant mission teams in 2011. In addition, FIMA officials told us they had plans to undertake a separate effort to map seven other business processes, including those for requisitions, hiring, congressional correspondence, and salaries and benefits. Until these mapping processes are complete and related internal control processes are developed, a risk exists that certain functions will be inconsistently or incompletely carried out and adversely affect FEMA’s management of NFIP. An important example of weaknesses in NFIP’s acquisition management activities is the cancelled development of the Next Generation Flood Insurance Management System (NextGen). Despite investing roughly 7 years and $40 million, FEMA cancelled this project in November 2009 because it failed to meet user expectations. As a result, NFIP must now continue to rely on a 30-year old flood insurance management system that does not fully support NFIP’s mission needs and is costly to maintain and operate. A number of acquisition management weaknesses contributed to the project’s failure and cancellation, and as FEMA begins anew to modernize the existing legacy system, it plans to apply lessons learned from its NextGen experience. As mentioned earlier in this report, FEMA has already implemented some changes to its acquisition management practices. However, whether these changes will better enable FEMA to avoid the problems that derailed the development and implementation of the NextGen system remains to be seen. NFIP currently uses a flood insurance policy and claims processing system that was developed 30 years ago. The system is designed to (1) collect data to determine flood insurance premium rates for specific properties, (2) collect data on claims made on properties that have had flood-related damage, (3) track the progress of policies and claims, and (4) prepare legislatively mandated reports for Congress. According to FEMA officials, this system is neither efficient nor effective and does not adequately support the program’s mission needs. For example: Staff must manually input data, potentially increasing the possibility of data errors that can take as long as 6 months to correct. The system provides limited access to data needed to manage the program, including policy and claims data provided by WYO insurers, which currently requires time-consuming and laborious steps to view and change a given file. The system employs 1980s mainframe technology and uses programming languages that were current in the 1960s but are not widely used today. As a result, the system is costly and difficult to maintain. The system can enforce restrictions on policies or claims only at the end of each processing cycle. As a result, the number of errors that occur during policy or claim processing is higher than it would be if such restrictions were enforced earlier. Correcting these errors can add as much as 2 to 3 months to the processing cycle. NFIP’s attempts to modernize the existing system date back to at least the mid-1990s, when NFIP tried to move the system’s applications and data onto a more modern hardware and software infrastructure. However, this effort was not successful and was cancelled in the late 1990s. According to NFIP officials, the effort failed in part because system users were not sufficiently involved in the design process and project management capabilities were inadequate. In 2002, NFIP awarded a contract for the development of the NextGen system, which was to be deployed and operational by April 2007. According to program plans, NextGen was to employ modern technology and reengineered business processes to, among other things, improve the accuracy and completeness of policy and claims data and provide 24-hour- a-day transaction processing and customer service. To meet these goals, five system applications were to be developed, all of which were to be supported by a new centralized database. 1. Transaction Record Reporting Process (TRRP), which was to collect data from the WYO insurers and flood insurance vendors on policies and claims, conduct front-end balancing of financial data, perform checks for errors in issued policies and processed claims, and develop financial and statistical reports. 2. Simple and Quick Access Net (SQANet), which was to permit standardized and customized reporting of NFIP data. 3. Flood Rating Engine Environment (FREE), which was to generate online flood insurance rates and quotes. 4. Flood Financial Management (F2M), which was to provide an interface for NFIP financial stakeholders (NFIP bureaus, WYO companies, and vendors) to enter, update, submit, and process monthly financial data. 5. ezClaims, which was to provide an interface for authenticated claimants to view, edit, and process disaster and claims data. To deliver the system, the contractor adopted a spiral development methodology, which involves the development of prototype applications that are tested and assessed by users and refined accordingly. Between 2004 and 2007, the five NextGen system applications and the supporting centralized database were prototyped, pilot tested, and modified. In May 2008, a production version of NextGen was placed into operational use. Shortly thereafter, however, users began reporting serious problems with the system’s performance, such as inaccurate calculations and erroneous data. For example, the system showed no claims received or processed for the entire state of Alaska, despite the fact that the legacy system showed numerous claims. Shortly thereafter, NFIP decided to revert to its legacy system, and as a result was forced to extend this system’s operations and maintenance contract. At the same time, NFIP decided to conduct user testing on NextGen in late 2008 and early 2009. During this testing, system users identified additional problems, causing FEMA leadership to establish an Executive Steering Committee to decide how best to proceed. The committee included FEMA’s Director for Acquisition Management, Chief Information Officer (CIO), Assistant Administrator for Mitigation, and other senior-level executives. To support the steering committee, two assessments were performed: one by the DHS Emergency Management Inspector General that focused on FIMA’s management and oversight of both the legacy system contractor and the NextGen contractor; and one by OCIO that focused on what could be salvaged from NextGen. In November 2009, based on interim results from the assessments, FEMA leadership decided to cancel NextGen. In June 2010, FEMA leadership transferred responsibility for modernizing NFIP’s legacy system to OCIO. According to the CIO, the next attempt to modernize NFIP’s legacy system will begin with a determination of the “degree of fit” between the NextGen applications and NFIP’s business requirements. To meet this goal, OCIO intends to first develop a clear understanding of NFIP’s business requirements. Next, it will test the NextGen software applications against these requirements to determine what gaps exist. During this time, OCIO also intends to establish a project office capable of managing the effort. As of March 2011, OCIO has hired a new project executive and project manager and is in the process of developing project management documentation, such as a mission needs statement and capability development plan. NFIP will now have to rely on its legacy system for an unspecified period of time. As a result, NFIP’s ability to manage its flood insurance operations will continue to be hampered by this system’s limitations. In addition, NFIP will have to continue to invest in the operations and maintenance of this system, which between June 2009 and June 2010 cost approximately $9.35 million to operate and maintain. According to the FEMA Acting Assistant Administrator for Mitigation, NFIP is currently in the process of negotiating a 2-year contract extension for operating and maintaining the legacy system. Weaknesses in several key system acquisition areas led to NextGen’s failure and cancellation. Specifically, business and functional requirements were not sufficiently defined; system users did not actively participate in determining the requirements for the development of system prototypes or in pilot testing activities; test planning and project risks were not adequately managed; and project management office staffing was limited. These weaknesses can, in turn, be attributed in large part to a general lack of executive-level oversight and attention to the project’s status. Well-defined requirements are a cornerstone of effective system acquisition. According to recognized guidance, documenting and implementing a disciplined process for developing and defining requirements can help reduce the risk of developing a system that does not perform as intended and does not meet user needs. Such a process includes, among other things, (1) establishing a complete and unambiguous set of high-level requirements that can form the basis for defining the more detailed requirements that guide system development, and (2) involving users throughout the development process. For NextGen, neither of these conditions were met. According to industry practices, high-level system requirements become the basis for the development of more detailed requirements that, in turn, can be used to develop specific software. Without complete and clear high-level requirements, sufficiently defining the more detailed requirements will be unlikely, in turn creating the risk that the resulting system will not meet users’ needs. While NFIP did conduct activities intended to elicit NextGen requirements, these requirements—which NFIP refers to as “business requirements”—were neither complete nor clear. Specifically, NFIP established five working groups to review and refine business processes and provided the NextGen system developer with NFIP operational manuals. These five groups, which were associated with five business areas—claims, marketing, financial management, underwriting, and information technology—were each expected to produce a set of recommended business requirements. However, FEMA officials described the groups’ efforts as largely based on oral communications, resulting in misunderstandings and poorly documented requirements. For example, one working group produced four different models of business processes, all of which were provided to the system developer as a basis for defining more detailed system requirements. According to the system developer, reconciling differences in these models contributed to the challenges in defining the requirements for NextGen. NFIP also provided the system developer with its operational manuals (e.g., flood insurance manuals, specific rating guidelines, and transaction reporting process manuals). However, none of these manuals were current and complete, according to NFIP officials. For example, officials told us the manuals were constantly changing and did not fully reflect actual flood insurance underwriting practices. According to these officials, only the NFIP subject matter experts had sufficient knowledge about the practices actually being employed. However, the subject matter experts were not sufficiently involved in defining business requirements. As a result of this inadequate information, the system developer had to interpret the business requirements, leading to the development of more detailed requirements that were later found to be incomplete and inaccurate. Specifically, an assessment done by FEMA’s CIO found that NextGen’s business and functional requirements were not sufficiently complete or decipherable and were otherwise not captured in accordance with industry standards. Further, users were not sufficiently involved in defining requirements. Best practices for defining and managing system requirements also include eliciting user needs and involving users throughout the development process. Continued user involvement is particularly essential to a project for which high-level operational or business requirements have not been well defined, as was the case with NextGen. Recognizing the limitations in the business requirements, and consistent with practices associated with the spiral development methodology employed on NextGen, the system developer conducted a series of application prototyping and pilot testing activities between 2004 and 2006. According to officials from both FIMA and its contractor, these activities were intended to, among other things, discover new system requirements and clarify existing requirements by having groups of users interact with the system developers on early versions of the applications. However, according to FIMA and the contractor, key subject matter experts did not participate in these prototyping and piloting efforts, particularly in the area of NFIP’s underwriting process. Instead, user participation was largely confined to the WYO insurance companies and flood insurance agents that participated in NFIP. To increase user participation, NFIP established the NextGen Executive Decision Group in January 2006. However, minutes of the group’s meetings during 2006 and 2007 indicate that limited involvement of key NFIP internal users continued to hinder efforts to define NextGen system requirements. Moreover, the CIO assessment found that stakeholders were not adequately engaged in efforts to develop requirements. In particular, the assessment found that NFIP stakeholders’ needs and concerns had not been adequately solicited and their approval of and commitment to requirements were not obtained. Effective testing of a system like NextGen is essential to ensuring that the system functions as intended and meets mission needs and user expectations. As we have previously reported, an overarching test plan or strategy is critical for effective system testing. Among other things, this overall test management plan should define the type and timing of the developmental and operational test allow for detailed test planning and execution and ensure that the progress of the tests can be tracked and results reported and addressed; define the roles and responsibilities of the various groups that are responsible for the test events; and provide a high-level schedule for planned events and activities. Without such a plan, a risk exists that system testing will occur in an ad hoc and undisciplined fashion and that problems will not be discovered until late in the system’s development cycle, when they are more difficult and costly to correct. NFIP did not develop an overall NextGen test management plan or create a high-level schedule of the testing activities that would be performed. Instead, NFIP allowed its system development contractor to determine which tests to perform and how and when they would take place. According to the NextGen COTR, the types of testing events that were actually performed by the contractor were application prototyping and pilot tests between 2004 and 2006, followed by functional, regression, and system usability testing in 2006 and 2007. NextGen testing also included user testing conducted by NFIP in 2008 and 2009. Along with an overarching plan, specific, well-defined test plans are necessary if testing is to be effective. According to relevant guidance, test plans should specify each of the following key elements: Roles and responsibilities: Identifies individuals or groups that are to perform each aspect of the specific test event, such as test operators and witnesses, and the functions or activities they are to perform. Environment and infrastructure: Identifies the physical facilities, hardware, software, support tools, test data, personnel, and anything else necessary to support the test event. Tested items and approach: Identifies the object of testing (such as specific software or hardware attributes or interfaces) and describes the method used to ensure each feature of these objects is tested in sufficient detail. Traceability matrix: Consists of a list of the requirements that are being tested and maps each requirement to its corresponding test cases, and vice versa. Risk and mitigation strategies: Identifies issues that may adversely affect successful completion of testing, the potential impact of each issue, and contingency plans for mitigating or avoiding these issues. Testing schedule: Specifies milestones, duration of testing tasks, and the period of use for each testing resource (e.g., facilities, tools, and staff). Quality assurance procedures: Defines a process for ensuring the quality of testing, including steps for recording anomalies or defects that arise during testing and steps for making changes to approved procedures. Test plans were not developed or used for prototype and pilot testing performed by the contractor between 2004 and 2006. According to the NextGen COTR, formal system testing was not considered necessary during prototyping and pilot efforts under the spiral system development approach. While testing performed during such efforts is understandably less formal, the absence of any test plan is not consistent with relevant guidance. As we have previously reported, system pilots should be guided by a documented test plan that includes, for example, the type and source of data and the associated analysis necessary to determine the success of the pilot test. The contractor did develop test plans for the functional, regression, and usability testing of the NextGen applications that occurred in 2007 and 2008. Specifically, the contractor prepared, and the COTR approved, test plans for each test event for each application. However, none of these plans had all of the key elements of effective test planning. In particular, while most of the plans addressed roles and responsibilities, environment and infrastructure, test items and approach, and quality assurance, only two included a testing schedule, and none included a traceability matrix or the risks to be mitigated (see table 1). Roles and responsibilities: All of the test plans addressed roles and responsibilities for each application. Specifically, they identified either individuals or groups of individuals, such as the test lead or subject matter experts that were to perform specific functions, such as reviewing test results, providing detailed test findings, and allocating testing resources. Environment and infrastructure: All of the test plans addressed environment and infrastructure. Specifically, they described the types of environments, such as a lab or the pilot program environment, as well as the hardware, software, and support tools needed for testing. Further, test data and personnel were also identified in each plan. Tested Items and approach: Four out of the five test plans identified the objects to be tested and described the methods used to ensure that each feature of these objects was tested in sufficient detail. For example, the FREE test plan included the test scripts, test cases, and sample test result log that would be used to test the application and record the results. Traceability matrix: None of the test plans listed the specific requirements that were being tested or mapped those requirements to the corresponding test cases. Rather, the test plans cited a single overarching requirement. For example, the SQANet test plan cited the requirement that NextGen provide NFIP reporting capabilities. However, this requirement was not broken down into subordinate requirements or mapped to corresponding test cases. Risk and mitigation strategies: None of the test plans identified issues that might adversely affect successful completion of testing. Although the TRRP test plan identified assumptions and constraints— for example that the subject matter experts would be available to provide documentation and rationale for identified discrepancies—the plan did not identify any assumptions or constraints as risks or provide plans for mitigating or avoiding their impacts. Testing schedule: Two of the five test plans (TRRP and F2M) included a detailed testing schedule. For example, both test plans cited the test name, tasks, timeframes, and durations (estimated number of hours). The other test plans referred to the NextGen project management plan and the project schedule for a testing schedule. However, neither of these project-level documents contained detailed information about these test events. Quality assurance procedures: All of the test plans included quality assurance procedures. Specifically, the plans described a process, including steps, for identifying and documenting issues or defects that arise during testing and for making changes to approved procedures. For example, the SQANet test plan defined a process for identifying and documenting test anomalies that included explaining each defect/issue found, capturing screenshots depicting the defect/issue, describing the testing environment or special testing method used to identify the defect/issue, and reviewing and resolving the defect/issue. According to the NextGen COTR, risk mitigation strategies were not included in the test plans because they had already been addressed in a risk list that the contractor developed and maintained, and test schedules were not included because they were already in the NextGen project management plan. However, the contractor did not effectively implement the risk management activities, and as we have seen, the NextGen project management plan did not include a schedule that detailed specific test activities. The COTR also told us that traceability matrices were not included because DHS did not require them at the time the test plans were developed and executed. But according to industry best practices, traceability matrices are essential to helping ensure that the scope of test activities is adequate. In addition, no user acceptance test plans were developed for the user testing that NFIP conducted in 2008. Instead, the program’s branch chiefs selected eight NFIP subject matter experts to separately and individually test the system using system queries (test cases and procedures) of their own choosing based on their respective knowledge. In doing so, they were also told to compare their respective query results with results of similar queries of the legacy system. According to the NextGen COTR, user acceptance test plans were not developed because the tests performed by the subject matter experts were considered to be sufficiently specific and limited, focusing on finding the few “glitches” remaining after the initial deployment. As a result, user test plans were considered at the time to be unnecessary. Without well-defined test plans, however, the effectiveness of the testing performed could not be determined. Effective test management includes not only capturing, prioritizing, tracking, and resolving any problems identified during testing, but also disclosing to stakeholders when and how problems are resolved. According to relevant guidance and best practices, this element of test management should be governed by a defined process and should ensure that those who are responsible for correcting the problems understand the full scope of system problems and the status of their resolution. The problems identified during NFIP’s user acceptance testing of NextGen in 2008 were not governed by a defined and disciplined process for capturing, prioritizing, tracking, and resolving these problems. Specifically: The NextGen contractor was tasked with maintaining a list of problems identified. However, users participating in the testing told us they were not required to capture problems using a standard format and that the NFIP project office did not centrally merge and transmit the problems they identified to the contractor. Instead, these users said they separately and individually communicated the problems they each found either orally in meetings or via emails. However, NFIP officials also told us the NextGen contractor did not attend all of these meetings and the issues raised in these meetings were not always documented or provided to the contractor. As a result, NFIP and contractor officials agreed that the contractor’s list of problems requiring resolution was incomplete. The NextGen project office did not maintain its own centralized list of problems requiring resolution. As a result, the project office did not know the universe of problems requiring resolution and could not track the status of each problem’s resolution. Users participating in the system testing told us they were not told whether the problems they had identified were ever resolved or when and how resolution of those that were resolved took place. They said that this lack of communication regarding the resolution of system problems ultimately resulted in their rejection of the NextGen system. Because of these weaknesses in how NFIP managed the resolution of problems identified during user acceptance testing, the NextGen project office was unable to demonstrate to the FEMA Acting Assistant Administrator that NextGen met NFIP mission needs and user requirements. This inability, in combination with the other acquisition management weaknesses, contributed to NextGen’s cancellation. According to federal guidance, proactively managing project risks can increase the chances of delivering promised system capabilities and benefits on time and within budget. We have reported that effective risk management, among other things, includes defining and implementing a process that identifies, analyzes, and mitigates risks and periodically examines the status of the identified risks and mitigation steps. NFIP did not define and implement its own risk management process for its NextGen acquisition but instead delegated risk management to the NextGen system development contractor. NFIP officials said they did not conduct their own risk management activities because the NextGen project office was not staffed to do so. They said they expected the contractor to manage all project risks and believed they did not need to duplicate these efforts. The contractor did follow a process of identifying and analyzing risks and developing plans for implementing them that involved actions on the part of both NFIP and the contractor. However, not all of these plans were effectively implemented, in some instances because NFIP did not take the appropriate action, and in others because the contractor did not receive devoted resources to implement the action. In total, the contractor’s risk management efforts identified 72 risks over the life of the project, of which 47 (about 65 percent) remained open at the time the project ended. Of these 47 open risks, 36 (about 77 percent) related to the contractor’s inability to gain access to NFIP staff or obtain information from NFIP staff or the legacy contractor. Specifically, 11 risks, the first of which was identified in July 2003, were associated with the lack of participation by NFIP subject matter experts in the prototyping and piloting of system applications. While FEMA established an executive-level decision group in 2006 to address this category of risks, risk related to lack of participation by subject matter experts continued to be identified and remained open at the time the project was cancelled. Twenty-five risks were related to a lack of timely delivery of information from NFIP to the development contractor. For example, NFIP did not provide timely delivery of comments on deliverables and the legacy system that NextGen was to replace. According to the contractor’s risk management documentation, these delays affected the development and pilot testing of key applications and thus the entire NextGen schedule. However, this documentation also shows that little or no action was taken by NFIP to address the risks. The NextGen project also faced risks beyond those identified by the NextGen contractor. However, some of these risks were never captured and mitigated because they were outside the contractor’s control. For example, documentation shows that NFIP officials were aware that representatives from both the NFIP NextGen office and the legacy contractor resisted NFIP’s earlier attempt to move the NFIP system onto a new platform. However, the risk that this resistance posed to the new system was not included in the NextGen contractors’ risk list, and steps to mitigate this risk were not taken. Later in the development of NextGen, this ongoing resistance was cited as having impaired NFIP’s ability to develop the NextGen system. Specifically, the DHS Emergency Management IG reported that 14 NFIP staff in key positions relative to approving NextGen favored the legacy contractor and helped to promote a divisive atmosphere that limited NFIP’s ability to develop NextGen. As we have previously reported, having sufficient project office staff with the requisite capabilities is essential to effectively managing a system acquisition like NextGen. Establishing such an office requires, among other things, an assessment of the core competencies and associated knowledge, skills, and abilities needed to perform key project management functions. It also requires an understanding of the knowledge, skills, and abilities of those assigned to the project, so that any gaps can be identified and a plan for filling those gaps can be developed and executed. The NextGen project office was not adequately staffed, having only one full-time government employee, the COTR, assigned from 2006 to the project’s cancellation. No project management staff were assigned to perform such critical system acquisition management functions as developing and managing system requirements, managing system testing, and managing risk. Instead, NFIP relied almost exclusively on the NextGen contractor to perform these and other project management functions. According to a FEMA official, the NextGen project office requested additional staff in 2006, but the Acting Assistant Administrator for Mitigation denied the request because of resource constraints. Moreover, the request was for only one part-time person and was not based on a project management human capital assessment, which generally should include an analysis of needs and existing capabilities, the associated gap, and a plan for addressing identified gaps. As we have previously reported, successfully acquiring IT systems requires the oversight and informed decision making of a senior-level investment review board. Among other things, such a board is responsible for selecting among competing IT investments and overseeing those investments throughout their respective life cycles to help ensure that project cost, schedule, and performance commitments are met, benefit expectations are realized, risks are minimized, and project managers are held accountable for results. DHS has recognized the need for such a system investment oversight body. Specifically, DHS established a department-wide investment review board in 2003. In November 2008, DHS revised its acquisition review process to include updating this board, which became the ARB, as the department’s highest review body and charging it with reviewing and approving all investments with life cycle costs above $300 million. In addition, it established working groups and other boards, such as the Enterprise Architecture Board and the Program Review Board, to provide subject matter expertise to the ARB, and the Joint Requirements Council to validate the results of the strategic requirements planning process. Further, DHS required each of its component organizations, including FEMA, to establish and operate review boards to oversee their respective investments. However, neither FEMA nor DHS provided effective executive-level oversight of NextGen. Specifically, no FEMA review board or executive office, such as the CIO and Chief Financial Officer (CFO), ever held an oversight or milestone-decision review for NextGen. The DHS review board’s last oversight of NextGen occurred in 2007. At that time, the ARB conditionally approved NextGen and delegated future oversight of the project to FEMA. However, FEMA did not have a review board in place at the time of the ARB’s decision, having recently disbanded it because the demands of Hurricane Katrina made attendance at board meetings a low priority for members. The current FEMA CIO stated that OCIO and OCFO had not been more involved in NextGen because FIMA was not responsive to their requests for information about the project. NFIP’s operating environment differs from that of traditional insurers and limits FEMA’s ability to keep the program financially sound. In particular, NFIP assumes and retains all of the risks for the policies it sells, is required to accept virtually all applicants for insurance, and cannot deny coverage for potentially high-risk properties. Moreover, additional external factors continue to complicate the administration of NFIP and affect its financial stability. These include lapses in NFIP’s authorization, the role of state and local governments, fluctuations in premium income, and structural and organizational changes that have been made. Finally, as noted in past GAO reports, NFIP also faces external challenges that will continue to threaten the program’s long-term financial health if they are not addressed. These include statutory requirements that NFIP charge subsidized premium rates for many properties, a lack of authority to include long-term erosion in the flood maps used to determine rates, and limitations on FEMA’s ability to take action when some owners of repetitive loss properties refuse to mitigate or accept FEMA’s mitigation offers. Any discussion of the challenges that FEMA faces in administering NFIP must take into account important differences between the government’s flood insurance program and private insurers. For example, by design NFIP does not operate like a private insurer but must instead meet a public policy goal—to provide flood insurance in flood-prone areas to property owners who otherwise would not be able to obtain it. At the same time, it is expected to cover its claims losses and operating expenses with the premiums it collects, much like private insurers. In years when flooding has not been catastrophic, NFIP has generally managed to meet these competing goals. But in years of catastrophic flooding, such as 2005, it has not. During those years, it has exercised its authority to borrow from Treasury to pay claims and, as of April 2011, NFIP owed approximately $17.8 billion to Treasury, mostly for the 2005 hurricane season. NFIP will likely not be able to meet its interest payments in all years, causing the debt to grow in certain years as FEMA may need to borrow to meet the interest payments in some years and potential future flood losses in others. This arrangement results in much of the financial risk of flooding being transferred to the U.S. Treasury and ultimately the taxpayer. Further, NFIP is also required to accept virtually all applications for insurance and cannot deny coverage or increase premium rates based on the frequency of losses. Private insurers, on the other hand, may reject applicants or increase rates if they believe the risk of loss is too high. As a result, NFIP is less able to offset the effects of adverse selection—the phenomenon that those who are most likely to purchase insurance are also the most likely to experience losses. Adverse selection may also lead to a concentration of policyholders in the riskiest areas. This problem is further compounded by the fact that those at greatest risk are required to purchase insurance from NFIP if they have a mortgage from a federally regulated or insured lender. Finally, by law, FEMA is prevented from raising rates on each flood zone by more than 10 percent each year. While most states regulate premium prices for private insurance companies for other lines of insurance, they generally do not set limits on premium rate increases, instead focusing on whether the projected losses and expenses justify them. As previously reported, FEMA also faces a number of external factors that are not necessarily within its control but that also must be considered when discussing the administration of the program. First, FEMA relies on private insurers to sell and service policies and adjust claims under the Write-Your-Own (WYO) Program, but multiple lapses in program authorization in recent years have strained NFIP’s relationship with WYO insurers. In particular, NFIP’s legal authorization has lapsed multiple times since it expired in 2008, leaving FEMA and WYO insurers unable to renew policies that expired during these lapses. Recent reauthorizations of the program have been for periods of time as short as 5 days. FIMA officials said these lapses in reauthorization created a significant burden for WYO insurers. For example, the insurers were forced to reallocate resources to communicate with agents and customers about how program lapses would affect them. In part for this reason, the largest WYO insurer left the program, and NFIP is transitioning the 840,000 policies that the insurer had been selling and servicing to NFIP’s Direct Servicing Agent. Second, like some other federal programs, FEMA relies on state and local governments and communities to implement parts of the program, which can limit the effectiveness of some of FEMA’s efforts. For example, communities enforce building codes and other floodplain management regulations in an effort to reduce the flood risk that insured structures face, but some communities may not have sufficient resources to enforce existing regulations. FEMA also relies on communities to administer grant funds that are intended to mitigate high-risk properties. However certain types of mitigation, such as relocation or demolition, might be met with resistance by communities that rely on those properties for tax revenues, such as coastal communities with significant development in areas prone to flooding. Finally, communities and individuals have sometimes mounted challenges to and resisted flood map revisions that place homes in higher-risk flood zones and would thus raise premium rates. Third, the financial resources that NFIP uses to fund much of its operations have fluctuated in recent years. NFIP divides the premiums paid by policyholders into “mandatory” and “discretionary” dollars. Most premium dollars are considered mandatory and are used to pay flood claims and other budget items such as WYO fees and advertising. The remaining premium dollars are allocated to discretionary uses and are used to fund NFIP operations. FIMA staff have noted that lower-than- expected policy fee income in recent years has forced them to cut back on certain functions, including contract and WYO oversight, field office management, and community outreach. For example, FEMA officials said that in 2009 FEMA based NFIP’s budget on expectations that the program would collect $156 million in policy fees, $107 million of which the President’s budget required to be spent on mapping. By the end of the fiscal year, NFIP had collected only $144 million in policy fees, leaving NFIP with only $37 million, instead of the expected $49 million, to pay salaries and other operating expenses. NFIP received approval from Congress to redirect $4.9 million in mandatory funds from the advertising budget into the discretionary budget to pay for these expenses, and it compensated for the remaining $7.1 million shortfall with spending cuts, largely from staff attrition and a hiring freeze. Finally, both FEMA and FIMA have faced many significant changes to their organizational structures and responsibilities since 2001, creating challenges in implementing consistent and effective business processes. FEMA underwent several organizational changes in 2001 and 2002, but the most significant change occurred in 2003, when FEMA transitioned from an independent agency to a component of the newly created DHS. At that time, FEMA became part of DHS’s Emergency Preparedness and Response Directorate, and some of its functions were moved to other organizations within DHS. In addition, functions that had formerly been part of other agencies were incorporated into the new Emergency Preparedness and Response organization. From 2003 through 2005, over $1.3 billion in new or significantly expanded programs came into FEMA, while programs with funding of nearly $1.5 billion were transferred out. Although these changes nearly balance in dollar terms and the number of employees remained the same, they created considerable disruption to FEMA’s operations and uncertainty about the availability of resources. After the 2005 hurricanes and the widespread perception that FEMA had failed to effectively meet its mission, the agency faced changes that created further uncertainty and affected employee morale. In 2007, PKEMRA expanded FEMA’s mission by integrating preparedness with protection, recovery, response, and mitigation to address all hazards. FEMA was reorganized again in 2009 at the direction of a new FEMA Administrator. At the same time, FIMA has also faced considerable organizational changes—both through the overall FEMA reorganizations and additional reorganizations that occurred with successive FIMA administrators, most significantly in 2006. Policies and processes are often specific to the organizational and oversight structures that are in place when they are created, and when those structures change, the policies and processes may no longer be relevant or complete. As we have pointed out in previous reports, FEMA is required by law to charge many policyholders less than full-risk rates, otherwise known as subsidized rates. These rates are intended to encourage property owners to purchase flood insurance, and today nearly one out of four NFIP policies are based on a subsidized rate. These rates allow policyholders with structures that were built before floodplain management regulations were established in their communities to pay premiums that represent about 40 percent to 45 percent of the actual risk premium. Moreover, FEMA estimates that properties covered by policies with subsidized rates experience as much as five times more flood damage than compliant new structures that are charged full-risk rates. One difficulty in analyzing the effect of subsidized premium rates is that, while they affect the overall financial stability of NFIP and can potentially increase borrowing from the Treasury, the subsidy is not recognized in FEMA’s budget. As we have reported in the past, the cost of federal insurance programs is often not accurately reflected in agencies’ budgets. As a result, Congress may not have adequate information about the potential claims on the federal budget when it establishes or reviews federal insurance programs. This lack of information may be especially problematic in the case of NFIP because of the continued growth in the subsidy. As we have pointed out, the number of policies receiving subsidized rates has grown steadily in recent years, and without changes to the program, will likely continue to grow, increasing the potential for future NFIP operating deficits. In addition, NFIP may “grandfather” properties when new flood maps place them in higher-risk zones. Unlike private insurers that charge risk- based rates, FEMA made a policy decision to allow certain properties remapped into riskier flood zones to keep their previous lower rates. While FEMA is not statutorily required to grandfather these policies, FEMA officials told us that they made the decision because of resistance to rate increases and based on considerations of equity, ease of administration, and goals of promoting floodplain management. However, homeowners who are remapped into high-risk areas and do not currently have flood insurance may be required to purchase it at the full-risk rate. Further, FEMA recently introduced a new rating option called the Preferred Risk Policy (PRP) Eligibility Extension that is, in effect, a temporary grandfathering of premium rates. While PRPs traditionally would have to be converted to more expensive standard-rated policies when they were renewed, FEMA extended PRP eligibility to 2 years after a new flood map’s effective date or January 1, 2011, whichever is later. FEMA made the decision to offer these lower rates in response to significant community resistance to remapping and the resulting increased rates as well as concern expressed by Congress. As we have reported, to the extent that NFIP charges less than full-risk rates on many properties, it adds to the risk that the program will need to borrow from Treasury to pay claims. While FEMA is in the process of updating the flood maps used to set premium rates for NFIP, it is not authorized to account for long-term erosion in developing these maps. The purpose of these maps is to accurately estimate the likelihood of flooding in specific areas given certain characteristics including elevation and topography. Despite these modernization efforts, some maps can quickly become inaccurate because of changes from long-term erosion, particularly in coastal areas. However, FEMA is not authorized to map for these changes—that is, it is not allowed to take into account situations in which long-term erosion might increase the risk of flooding in certain areas. Not accurately reflecting the actual risk of flooding increases the likelihood that even full-risk premiums will not cover future losses and adds to concerns about NFIP’s financial stability. In reforming NFIP in 2004, Congress noted that repetitive loss properties—generally, those that FEMA defines as having had two or more flood insurance claims payments of $1,000 or more over 10 years— constituted a significant drain on NFIP resources. While Congress has made efforts to address this issue through mitigation activities, repetitive loss properties continue to be a drain on NFIP. Many of these properties are part of the subsidized property inventory, and thus receive subsidized rates, further contributing to NFIP’s financial instability. This situation exposes the federal government and ultimately taxpayers to greater risks and is not consistent with several of the public policy goals (e.g., limiting exposure to the federal government and the taxpayer) that we have previously identified for disaster programs. As previously reported, FEMA will offer premium discounts for efforts to mitigate high-risk structures including raising the elevation of, relocating, or demolishing a property, but these efforts are for the most part voluntary. FEMA does have some authority to raise premium rates for property owners who refuse mitigation offers made by local authorities, such as an offer to elevate the property, in connection with the severe repetitive loss pilot program. Specifically, if a property owner refuses a mitigation offer, FEMA can increase premiums to up to 150 percent of their current amount and by a similar amount later on if the property owner is paid a claim of greater than $1,500. However, FEMA is prohibited from charging more than the current full rate and as a result cannot increase premiums on property owners are paying the full rate but who refuse a mitigation offer. In addition, FEMA is not allowed to discontinue coverage for those who refuse mitigation offers. As a result, FEMA has some limitations on its ability to compel owners of properties with repetitive losses to undertake flood mitigation efforts. Further, while Congress has made efforts to reduce the number of repetitive loss properties, their number has grown, making them an ongoing challenge to NFIP’s financial stability. Specifically, these properties account for about 1 percent of all policies but are estimated to account for up to 30 percent of all NFIP losses. Unless FEMA is able to effectively encourage owners of severe repetitive loss properties to undertake mitigation efforts, the potential losses associated with such properties continues to threaten the financial stability of the NFIP. Recognizing that NFIP faces a variety of structural challenges that need to be reformed, FIMA began a three-phase effort to develop recommendations to reform the program by addressing some of the program’s external challenges. The process began with a listening session in November 2009 to capture concerns and recommendations from about 200 stakeholder participants and to better understand the need for NFIP reform. The second phase included adopting a policy analysis framework, analyzing existing stakeholder input, developing and agreeing on guiding principles to direct the NFIP reform effort, and creating evaluation criteria to be used in scoring each of the proposed policy alternatives. The final phase, which began in June 2010 and includes evaluating the policy alternatives, will result in a reform proposal package that FIMA will submit to FEMA leadership. To inform this phase, FIMA conducted two additional stakeholder meetings in December 2010. This process may provide some helpful ideas to address some of the major challenges facing FEMA in its administration of NFIP. But as we have noted in earlier reports, comprehensive legislative reform will be needed to stabilize its financial condition. While FEMA has begun to take steps to address its issues, it faces significant management challenges in areas that affect NFIP, including strategic planning, human capital planning, collaboration among offices, records management, financial management, acquisition management, and business processes. Effectively addressing these challenges would require program improvements at all levels within FIMA, FEMA, and DHS and would not only help improve the administration of NFIP but also help to more effectively deal with financial and operational challenges that NFIP faces—challenges over which FEMA often has limited direct control. While FEMA has not yet addressed many of these issues, in part because of the demands of its key mission of responding to emergencies, it is beginning to take certain steps to address its challenges. While some efforts are under way, FEMA has much work ahead of it in beginning to plan and execute the day-to-day activities necessary to effectively manage both the agency and NFIP and to ensure effective collaboration between program and support offices. As we have seen, for example: FEMA has not provided FIMA with strategic direction and guidance for administering NFIP, and FIMA has not developed a comprehensive strategy with goals and objectives for the program. GPRA states that strategic plans should include such guidance and strategies for major programs like NFIP. Without this direction, NFIP lacks a strategic focus, and the agency is limited in its ability to develop effective performance measures to measure NFIP’s progress. Without a robust set of performance measures and an established process for management to regularly review them, the agency cannot monitor and hold accountable management and staff involved in the program. FEMA lacks a strategic human capital plan (as required by PKEMRA) that addresses the critical competencies required for its workforce. Such a plan is critical for FEMA because of its heavy reliance on contractors. Without such a plan, FEMA is limited in its ability to assess its staffing and workforce needs, manage turnover, fill vacancies, and oversee its contractor workforce. FEMA lacks a plan to ensure that agency operations are maintained when federal disasters are declared and staff are deployed to respond. Without such a plan, FEMA faces the risk that some critical day-to-day functions may not be performed while staff are deployed, limiting the agency’s ability to provide the necessary support for disaster relief missions. FIMA relies on Mission Support for a variety of mission-critical functions, including IT, acquisition, and financial management, but FIMA and Mission Support have faced challenges in collaborating with one another. For example, FIMA and OCFO have had limited communication regarding FIMA’s budget formulation needs. Without better collaboration and communication between FIMA and Mission Support’s various offices, FEMA will be unable to fully ensure that NFIP’s IT, acquisition, and financial and budgetary needs are being met. Further, FEMA still lacks comprehensive systems, policies, and processes that would help ensure sound records, financial, and acquisition management as they relate to NFIP. In particular: FEMA has no centralized electronic document management system that would allow its various offices to easily access and store documents. As a result, the offices have faced problems with lost or destroyed documents, decreased productivity, and duplicated effort. While there is broad consensus for the need for a centralized electronic document management system, FEMA is currently awaiting an overall DHS decision on a system to be used for this process. However, until such a system is provided, FEMA will continue to face document management challenges that impede program effectiveness. In previous audits, KPMG found weaknesses within FEMA’s management of unliquidated obligations. The agency has issued an interim directive for addressing the issue, but FIMA staff said they did not know the amount of these obligations and the extent to which they have been inactive. Until FEMA reviews FIMA’s unliquidated obligations, FIMA may be foregoing funds that could otherwise be returned and used for other program needs. Recognizing a number of weaknesses in its oversight and management of acquisitions, FEMA has taken steps to improve these functions, including drafting an acquisition directive and a handbook explaining how to implement it. However, most of these actions have either been recently implemented or are still under development. While they are the kinds of steps that need to be taken, the extent to which they will ensure effective oversight of FEMA’s acquisition activities remains to be seen. FEMA Mission Support staff told us that in early 2009 they began a business process improvement effort that involved mapping current processes, analyzing them, and determining how they could be improved. Until this mapping process is complete and related internal control processes are developed, a high risk exists that certain functions will be inconsistently or incompletely carried out. In addition, FEMA has spent about 7 years and $40 million in its latest attempt to modernize NFIP’s insurance policy and claims management system. FEMA ultimately canceled the effort in November 2009 because it failed to meet user expectations, forcing the agency to continue relying on an outdated system that is neither effective nor efficient. Any further attempts to modernize the program’s existing system must recognize the root causes of NextGen’s failure, which include: FEMA’s and DHS’s failure to provide sufficient oversight of the project and to allow these acquisition weaknesses to go unchecked for years. Without sufficient management oversight, FEMA will be limited in its ability to ensure that future modernization attempts are completed efficiently and effectively. Weaknesses in several key system acquisition areas that led to NextGen’s cancellation, including poorly defined and managed requirements, poorly planned and executed system testing, insufficiently mitigated program risks, and an inadequately staffed program office. Unless FEMA learns from these mistakes, future modernization attempts could face the same fate. In addition to management challenges, FEMA still faces challenges related to its financial operations and rate structure. The hurricanes of 2005 required a massive response from FEMA as it worked to help thousands of individuals recover from sometimes devastating damage to their property. The scope of the damages and total claims paid, which were unparalleled in NFIP’s history, highlighted challenges with the program’s financial structure. These challenges, along with the debt incurred by NFIP as a result of the 2005 hurricanes, remain today. As we have indicated in previous reports, FEMA can take some actions to improve NFIP’s financial stability, such as ensuring that NFIP’s full-risk premium rates accurately reflect the risk of loss and ensuring that WYO insurers justify and document their claims for payment. However, fully addressing other challenges to the long-term financial stability of the program will require congressional action. For example, as we have pointed out, congressional action to allow NFIP to charge full-risk premium rates to all property owners would decrease the potential for future NFIP operating losses. Authorizing the inclusion of long-term erosion in future rate maps and providing FEMA with the authority to require owners of repetitive loss properties to mitigate or impose penalties for not doing so would also reduce the risks of future NFIP losses. We recognize that these potential changes involve tradeoffs. Increasing premium rates and requiring homeowners to mitigate flood-prone properties could, for example, reduce participation and create hardship for some property owners. Nevertheless, until these and related issues are resolved, the program will continue to present a significant financial risk to the government and taxpayers. To improve strategic planning, performance management, and program oversight within and related to NFIP, we recommend that the Secretary of DHS direct the FEMA Administrator to take the following four actions: Provide strategic direction and guidance to the process for developing a comprehensive strategy for FIMA operations; establish a firm timeframe for and complete the development of this strategy; and take steps to ensure that this strategy has appropriate performance goals and measures to track NFIP’s progress. Develop a comprehensive workforce plan according to PKEMRA that identifies agency staffing and skills requirements, addresses turnover and staff vacancies, and analyzes FEMA’s use of contractors. Direct the FEMA Administrator to develop guidance for continuing operations when staff are deployed to respond to federal disasters and direct FIMA Acting Assistant Administrator to develop such a plan. Direct the FIMA Acting Assistant Administrator and the FEMA Mission Support Associate Administrator to develop protocols to encourage and monitor collaboration between FIMA and relevant support offices, including those for information technology, acquisition management, and financial management. To improve FEMA’s policies, procedures, and systems for achieving NFIP’s program goals, we recommend that the Secretary of DHS direct the FEMA Administrator to take the following four actions: While waiting for DHS to implement an agencywide electronic document management system, consider the costs and benefits of implementing an interim system for FEMA and updating its document management policies and procedures. Ensure that FEMA regularly reviews unliquidated obligations within NFIP-related funds. Establish timelines for and complete the development and implementation of FEMA’s revised acquisition process, in line with the DHS Acquisition Directive 102-01, including a rollout process with staff training and a mechanism to better ensure that all acquisitions undergo the necessary reviews. Ensure that FEMA Mission Support’s business process improvement efforts are expeditiously completed. To improve the usefulness and reliability of NFIP’s flood insurance policy and claims processing system, we recommend that the Secretary of DHS take the following two actions: Direct the DHS Deputy Secretary, as the Chair of DHS’s ARB, to provide regular oversight of FEMA’s next attempt to modernize this system. Direct the FEMA Administrator to ensure that FEMA’s CIO applies lessons learned from the NextGen experience to the next modernization attempt. At a minimum, this effort should ensure that (1) all levels of system requirements are complete and clear and that key stakeholders are adequately involved in requirements development and management, (2) key test events are effectively planned and executed and problems identified during testing effectively managed, (3) project risks are proactively identified and mitigated, and (4) project office staffing needs are properly assessed and met. As Congress considers NFIP reforms and reauthorization, it should consider ways to better ensure the long-term financial stability of the program, such as 1) allowing NFIP to charge full-risk premium rates to all property owners and providing assistance to some categories of owners to pay those premiums; 2) authorizing NFIP to account for long-term flood erosion in its flood maps; and 3) clarifying and expanding FEMA’s ability to increase premiums or discontinue coverage for owners of repetitive loss properties who do not mitigate their properties or refuse FEMA’s mitigation offers. We provided the Secretary of Homeland Security with a draft of this report for review and comment. DHS provided written comments that we summarize below. DHS’s letter is reproduced in Appendix II. FEMA also provided us with technical comments, which we have incorporated as appropriate. DHS concurred with all of our 10 recommendations and identified actions taken or plans made to implement them. Specifically, DHS agreed with our recommendations to: Provide strategic direction and guidance to the process for developing a comprehensive strategy for FIMA operations; establish a firm timeframe for and complete the development of this strategy; and take steps to ensure that this strategy has appropriate performance goals and measures to track NFIP’s progress. DHS stated that FEMA had recently released its strategic plan for fiscal years 2011-2014 and had begun requiring its directorates and offices to submit annual operating plans with goals, measures to track the goals, and links to FEMA’s plan. However, until such a plan and accompanying performance measures are complete and fully implemented, whether such a plan will provide the necessary strategic framework for managing NFIP remains to be seen. Develop a comprehensive workforce plan according to PKEMRA. DHS noted that FEMA had obtained a contractor to conduct a workforce assessment and had completed Phase I of the process. However, when the entire workforce plan will be completed given the challenges FEMA faces in identifying the number and categories of FEMA staff positions and contractors as cited in the Phase I study is unclear. In addition, as we cited in the report, the Strategic Human Capital Plan that FEMA developed in response to PKEMRA did not fulfill the requirements of the mandate. These requirements include: specific goals and objectives for recruiting and retaining employees, such as recruitment and retention bonuses; specific strategies and program objectives to develop, train, deploy, compensate, motivate, and retain employees; specific strategies for recruiting staff with experience serving in multiple state agencies responsible for emergency management; and specific strategies to develop, train, and rapidly deploy a Surge Capacity Force. Develop a plan for continuing NFIP operations when staff are deployed to respond to federal disasters. DHS stated that it agreed to provide guidance to FEMA and its components for developing such a plan, however it does not identify time frames for providing such guidance. Develop protocols for collaboration between program and support offices. DHS noted that Mission Support had begun some such efforts, including holding listening sessions and responding to problems that surface. Consider the costs and benefits of implementing an interim electronic records management system while awaiting an overall DHS system and update its document management policies and procedures to ensure records are being adequately managed. DHS indicated that they have been providing interim policies and guidance to program offices; however, the policies and procedures they provided us during our review had not been updated. Have FEMA regularly review unliquidated obligations within NFIP- related funds. DHS stated that FEMA had published an interim directive in 2009 that applied to open FEMA obligations including those within FIMA. While this directive provides useful criteria, our recommendation is that FEMA follow this guidance and better ensure that regular reviews are completed. Establish timelines for and complete the development of FEMA’s revised acquisition process. DHS listed a number of ongoing efforts in this area including training, certification, and recruitment, among others. While we are encouraged by the steps taken, establishing timelines and completing these efforts are critical to establishing a well functioning contract and acquisition management program. Ensure that Mission Support’s business process reengineering plans are expeditiously completed. DHS stated that Mission Support had begun the process of incorporating lessons learned into its day-to- day operations. However, we recommend that the plans be fully and expeditiously implemented, given their importance to helping FEMA’s improve its overall procedures. Finally, DHS concurred with our last two recommendations for improving NFIP’s flood insurance policy and claims processing system. Specifically, DHS stated it was preparing to elevate NFIP’s status and ensure that the program was designated for regular oversight by DHS’s ARB. DHS restated its commitment to ensuring that FEMA applies lessons learned from the NextGen experience to its efforts to replace its current system. We are providing copies to the Chairman and Ranking Member, Senate Committee on Banking, Housing and Urban Affairs; the Chairman and Ranking Member, House Committee on Financial Services; and other interested committees. We are also sending a copy of this report to the Secretary of Homeland Security and other interested parties. In addition, the report will available at no charge on our Web site at http://www.gao.gov. If you or your staff have any questions regarding this report, please contact me at (202) 512-8678 or [email protected]. Contact points for our Offices of Congressional Relations and Public Affairs may be found on the last page of this report. GAO staff who made major contributions to this report are listed in appendix III. Significant management challenges affect the Federal Emergency Management Agency’s (FEMA) ability to administer the National Flood Insurance Program (NFIP). GAO undertook this current review to identify root causes of these deficiencies and to clarify how to address them. Our objectives were to (1) analyze the extent to which FEMA’s key management practices—including strategic planning, human capital planning, records management, financial management, acquisition management, and intra-agency collaboration—affect the agency’s ability to administer NFIP; (2) identify lessons to be learned from the Next Generation Flood Insurance Management System (NextGen) program’s cancellation, including to what extent key acquisition management processes were followed on NextGen; and (3) describe factors that are relevant to NFIP operations and analyze limitations on FEMA’s authority that could affect its financial stability. To determine the extent to which FEMA’s management practices affected its ability to meet its program goals as well as congressional goals for NFIP, we collected available data from FEMA and conducted over 80 interviews with representatives from FEMA’s Federal Insurance and Mitigation Administration (FIMA), Office of Policy and Programs Analysis (OPPA), and the Mission Support Bureau’s offices for administration, finance, human capital, information, and procurement. We also interviewed representatives of the Department of Homeland Security’s (DHS) Office of the Inspector General (OIG), the National Association of Public Administration (NAPA), and KPMG LLP. In addition, we analyzed FEMA planning documents, policies, directives, materials, and data related to key aspects of program management: strategic planning, human capital planning, records management, acquisition management, and financial management. Due to the nature of the audit work in these areas, we conducted a data reliability assessment in the areas of human capital and financial management. Both were found to be sufficiently reliable for the purposes of our report. Further, we reviewed relevant legislation, internal control standards, best practices, and external studies of FEMA’s management challenges. More specifically: Strategic planning: To assess FEMA’s strategic plans and performance measures, we obtained and analyzed materials and documents including FEMA’s 2008 strategic plan and FIMA performance measures. We assessed these documents against our past reports on the Government Performance and Results Act of 1993 (GPRA) and the Standards for Internal Controls in the Federal Government. To further understand the strategic planning process and assessment of performance measures, we met with key FIMA and OPPA officials to discuss FEMA’s and FIMA’s past and future strategic planning efforts. Human capital: To assess FEMA’s workforce planning efforts, we reviewed the 2008-2012 Strategic Human Capital Plan and compared it with the requirements in the Post-Katrina Emergency Management Reform Act of 2006. We also evaluated FEMA’s efforts based on guidelines on workforce planning from the National Aeronautics and Space Administration, our past reports on key principles for workforce planning, and written responses provided by FEMA’s human capital office to questions we submitted. In addition, we analyzed the Consolidated Appropriations Act of 2010 to assess its contractor tracking requirements for December 2010. To determine turnover in key positions, we interviewed key FEMA staff regarding turnover in their departments and obtained and analyzed attrition data from the human capital office. To assess challenges in hiring, we reviewed documentation and interviewed human capital and other FEMA staff. In order to understand the information technology (IT) issues that the human capital office faces, we interviewed key human capital staff and analyzed reports and documents by the DHS OIG and NAPA. We also reviewed standards for continuity of operations plans and past GAO reports on business continuity plans. Collaboration: To assess FEMA’s efforts to encourage coordination between FIMA and the Mission Support offices, we compared the practices of these two offices to key practices that we identified in previous work for enhancing and sustaining a collaborative relationship among federal agencies. Records management: To assess FEMA’s records management efforts, we reviewed the National Archives and Records Administration standards, the Federal Records Act, the Paperwork Reduction Act, and the Standards for Internal Controls in the Federal Government. We reviewed FEMA and FIMA records management procedural documents, training materials, FEMA’s previous records management policy, DHS’s records management policy, and DHS OIG reports. We met with the Office of the Chief Administrative Officer, staff from the Records Management Division, and other relevant FEMA staff to further understand records management efforts. Financial management: To assess FEMA’s financial management processes for NFIP, we reviewed policy documents, training materials, reference materials, spreadsheets used in budget formulation, data information on past audits, and data on unliquidated obligations and compared them to findings in past KPMG LLC audits, DHS OIG reports, and our past reports on FEMA’s financial management. We interviewed relevant staff from FIMA’s and FEMA’s financial offices to further understand financial management processes and efforts. Acquisition: In order to assess FEMA’s acquisition efforts, we obtained and analyzed FEMA’s guidance for acquisition management and contractor oversight and compared them to the Federal Acquisition Regulation and to findings in the DHS OIG reports and our previous reports related to FEMA’s acquisition efforts. We interviewed FEMA’s Chief Procurement Officer and other relevant FEMA staff to assess acquisition efforts. We also attended contractor oversight meetings to better understand day-to-day contractor oversight activities. In addition, we worked at a FEMA audit site in its Arlington, Virginia, offices from January to April 2010. During that time, we held meetings with FIMA staff, obtained relevant documents, and attended day-to-day operational and contractor oversight review sessions. In order to gather additional information about NFIP reform efforts, we attended the NFIP Listening Session in November 2009 and the NFIP Reform Public Meeting in December 2010, both of which were held in Washington, D.C. To determine the extent to which the NextGen program’s acquisition was effectively managed and overseen, we focused on the following acquisition management areas: (1) requirements development and management, (2) test management, (3) risk management, (4) human capital planning, and (5) program oversight. In doing so, we analyzed a range of program documentation, such as requirements documentation, test plans and reports, risk documentation, program management plan, and related documentation, and interviewed relevant program and contractor officials. To determine the extent to which the program had effectively implemented requirements development and management, we reviewed relevant program documentation, such as the concept of operations document, NFIP operational manuals, requirements and design documents on NextGen applications, joint working group recommendation reports, change request forms, and the program management plan, and evaluated them against relevant guidance. Moreover, we reviewed briefing slides and meeting minutes from the NextGen Executive Decision Group. In addition, we interviewed program and development contractor officials to discuss the requirements development and management process. To determine the extent to which the program effectively implemented test management activities we reviewed test plans for functional, regression, and usability testing and NextGen application summary test reports and compared them with best practices to determine whether test activities had been adequately documented and implemented. In addition, we interviewed program and contractor officials to discuss the test management process. To determine the extent to which NextGen risks were effectively managed, we reviewed the most current NextGen risk management plan, risk lists, and monthly program status report. We also interviewed program and development contractor officials to discuss the risk management process. To evaluate whether FEMA was adequately providing for the NextGen program office’s human capital needs, we compared the program’s efforts against relevant guidance. We also interviewed key officials to discuss workforce analysis and human capital planning efforts. To determine the level of oversight given over NextGen we reviewed DHS’s acquisition directive and guidebook and met with officials responsible for NextGen executive-level oversight to determine if oversight was effectively provided. To identify external factors that affected NFIP’s ability to carry out its mission, we reviewed previous GAO reports that analyzed various aspects of NFIP’s policies, practices, and organizational structure, identifying factors that affected NFIP’s operations but over which NFIP did not have control. For example, we reviewed our reports on the oversight of the Write-Your-Own program, the financial impact of subsidized premium rates, and the rate-setting process for flood insurance premiums. To determine whether and to what extent the factors identified in these reports were still affecting NFIP’s operations and to identify any additional factors, we interviewed FEMA representatives and reviewed relevant testimony of officials from FEMA and several interested associations before Congress. We conducted this performance audit from July 2009 to June 2011 in accordance with generally accepted government auditing standards. Those standards require that we plan and perform the audit to obtain sufficient, appropriate evidence to provide a reasonable basis for our findings and conclusions based on our audit objectives. We believe that the evidence obtained provides a reasonable basis for our findings and conclusions based on our audit objectives. Orice Williams Brown, (202) 512-8678 or [email protected]. In addition to the contact named above, Randy Hite (retired), Director; William Woods, Director; Patrick Ward, Assistant Director; Tonia Johnson, Assistant Director (in memoriam); Nima Patel Edwards; Christopher Forys; Elena Epps; and Emily Chalmers made significant contributions to this report. Other contributors included Tania Calhoun; William R. Chatlos; Jim Crimmer; Marc Molino; Freda Paintsil; Karl Seifert; and Christy Tyson. Flood Insurance: Public Policy Goals Provide a Framework for Reform. GAO-11-429T. Washington, D.C.: March 11, 2011. FEMA Flood Maps: Some Standards and Processes in Place to Promote Map Accuracy and Outreach, but Opportunities Exist to Address Implementation Challenges. GAO-11-17. Washington, D.C.: December 2, 2010. National Flood Insurance Program: Continued Actions Needed to Address Financial and Operational Issues. GAO-10-1063T. Washington, D.C.: September 22, 2010. Homeland Security: US-VISIT Pilot Evaluations Offer Limited Understanding of Air Exit Options. GAO-10-860. Washington, D.C.: August 10, 2010. Department of Homeland Security: Assessments of Selected Complex Acquisitions. GAO-10-588SP. Washington, D.C.: June 30, 2010. National Flood Insurance Program: Continued Actions Needed to Address Financial and Operational Issues. GAO-10-631T. Washington, D.C.: April 21, 2010. Financial Management: Improvements Needed in National Flood Insurance Program’s Financial Controls and Oversight. GAO-10-66. Washington, D.C.: December 22, 2009. Homeland Security: Despite Progress, DHS Continues to Be Challenged in Managing Its Multi-Billion Dollar Annual Investment in Large-Scale Information Technology Systems. GAO-09-1002T. Washington, D.C.: September 15, 2009. Flood Insurance: Opportunities Exist to Improve Oversight of the WYO Program. GAO-09-455. Washington, D.C.: August 21, 2009. Results-Oriented Management: Strengthening Key Practices at FEMA and Interior Could Promote Greater Use of Performance Information. GAO-09-676. Washington, D.C.: August 17, 2009. Information on Proposed Changes to the National Flood Insurance Program. GAO-09-420R. Washington, D.C.: February 27, 2009. High-Risk Series: An Update. GAO-09-271. Washington, D.C.: January 2009. Homeland Security: U.S. Visitor and Immigrant Status Indicator Technology Program Planning and Execution Improvements Needed. GAO-09-96. Washington, D.C.: December 12, 2008. Department of Homeland Security: A Strategic Approach Is Needed to Better Ensure the Acquisition Workforce Can Meet Mission Needs. GAO-09-30. Washington, D.C.: November 19, 2008. Department of Homeland Security: Billions Invested in Major Programs Lack Appropriate Oversight. GAO-09-29. Washington, D.C.: November 18, 2008. Flood Insurance: Options for Addressing the Financial Impact of Subsidized Premium Rates on the National Flood Insurance Program. GAO-09-20. Washington, D.C.: November 14, 2008. Tax Administration: IRS Needs to Strengthen Its Approach for Evaluating the SRFMI Data-Sharing Pilot Program. GAO-09-45. Washington, D.C.: November 7, 2008. Flood Insurance: FEMA’s Rate-Setting Process Warrants Attention. GAO-09-12. Washington, D.C.: October 31, 2008. Secure Border Initiative: DHS Needs to Address Significant Risks in Delivering Key Technology Investment. GAO-08-1086. Washington, D.C.: September 22, 2008. National Flood Insurance Program: Financial Challenges Underscore Need for Improved Oversight of Mitigation Programs and Key Contracts. GAO-08-437. Washington, D.C.: June 16, 2008. Natural Catastrophe Insurance: Analysis of a Proposed Combined Federal Flood and Wind Insurance Program. GAO-08-504. Washington, D.C.: April 25, 2008. National Flood Insurance Program: Greater Transparency and Oversight of Wind and Flood Damage Determinations Are Needed. GAO-08-28. Washington, D.C.: December 28, 2007. National Disasters: Public Policy Options for Changing the Federal Role in Natural Catastrophe Insurance. GAO-08-7. Washington, D.C.: November 26, 2007. Business Systems Modernization: Department of the Navy Needs to Establish Management Structure and Fully Define Policies and Procedures for Institutionally Managing Investments. GAO-08-53. Washington, D.C.: October 31, 2007. Federal Emergency Management Agency: Ongoing Challenges Facing the National Flood Insurance Program. GAO-08-118T. Washington, D.C.: October 2, 2007. National Flood Insurance Program: FEMA’s Management and Oversight of Payments for Insurance Company Services Should Be Improved. GAO-07-1078. Washington, D.C.: September 5, 2007. Information Technology: FBI Following a Number of Key Acquisition Practices on New Case Management System, but Improvements Still Needed. GAO-07-912. Washington, D.C.: July 30, 2007. National Flood Insurance Program: Preliminary Views on FEMA’s Ability to Ensure Accurate Payments on Hurricane-Damaged Properties. GAO-07-991T. Washington, D.C.: June 12, 2007. Coastal Barrier Resources System: Status of Development That Has Occurred and Financial Assistance Provided by Federal Agencies. GAO-07-356. Washington, D.C.: March 19, 2007. Budget Issues: FEMA Needs Adequate Data, Plans, and Systems to Effectively Manage Resources for Day-to-Day Operations. GAO-07-139. Washington, D.C.: January 19, 2007. National Flood Insurance Program: New Processes Aided Hurricane Katrina Claims Handling, but FEMA’s Oversight Should Be Improved. GAO-07-169. Washington, D.C.: December 15, 2006. Enterprise Architecture: Leadership Remains Key to Establishing and Leveraging Architectures for Organizational Transformation. GAO-06-831. Washington, D.C.: August 14, 2006. Information Technology: Customs Has Made Progress on Automated Commercial Environment System, but It Faces Long-Standing Management Challenges and New Risks. GAO-06-580. Washington, D.C.: May 31, 2006. Homeland Security: Progress Continues, but Challenges Remain on Department’s Management of Information Technology. GAO-06-598T. Washington, D.C.: March 29, 2006. GAO’s High-Risk Program. GAO-06-497T. Washington, D.C.: March 15, 2006. Federal Emergency Management Agency: Challenges for the National Flood Insurance Program. GAO-06-335T. Washington, D.C.: January 25, 2006. Results-Oriented Government: Practices That Can Help Enhance and Sustain Collaboration among Federal Agencies. GAO-06-15. Washington, D.C.: October 21, 2005. Federal Emergency Management Agency: Improvements Needed to Enhance Oversight and Management of the National Flood Insurance Program. GAO-06-119. Washington, D.C.: October 18, 2005. Framework for Assessing the Acquisition Function at Federal Agencies. GAO-05-218G. Washington, D.C.: September 2005. Information Technology Investment Management: A Framework for Assessing and Improving Process Maturity. GAO-04-394G. Washington, D.C.: March 2004. Human Capital: Key Principles for Effective Strategic Workforce Planning. GAO-04-39. Washington, D.C.: December 11, 2003. Information Technology: A Framework for Assessing and Improving Enterprise Architecture Management (Version 1.1). GAO-03-584G. Washington, D.C.: April 2003. Tax Administration: IRS Needs to Further Refine Its Tax Filing Season Performance Measures. GAO-03-143. Washington, D.C.: November 22, 2002. Internal Control Management and Evaluation Tool. GAO-01-1008G. Washington, D.C.: August 2001. Determining Performance and Accountability Challenges and High Risks. GAO-01-159SP. Washington, D.C.: November 2000. Standards for Internal Control in the Federal Government. GAO/AIMD-00-21.3.1. Washington, D.C.: November 1999. Budget Issues: Budgeting for Federal Insurance Programs. GAO/T-AIMD-98-147. Washington, D.C.: April 23, 1998. Budget Issues: Budgeting for Federal Insurance Programs. GAO/AIMD-97-16. Washington, D.C.: September 30, 1997. Agencies’ Strategic Plans under GPRA: Key Questions to Facilitate Congressional Review. GAO/GGD-10.1.16. Washington, D.C.: May 1997. | The National Flood Insurance Program (NFIP) has been on GAO's high-risk list since March 2006 because of concerns about its long-term financial solvency and related operational issues. Significant management challenges also affect the Federal Emergency Management Agency's (FEMA) ability to administer NFIP. This report examines (1) the extent to which FEMA's management practices affect the administration of NFIP; (2) lessons learned from the cancellation of FEMA's attempt to modernize NFIP's insurance management system; and (3) limitations on FEMA's authority that could affect NFIP's financial stability. To do this work, GAO reviewed internal control standards and best practices, analyzed agency documentation, reviewed previous work, and interviewed relevant agency officials. FEMA faces significant management challenges in areas that affect NFIP, including strategic and human capital planning; collaboration among offices; and records, financial, and acquisition management. For example, because FEMA has not developed goals, objectives, or performance measures for NFIP, it needs a strategic focus for ensuring program effectiveness. FEMA also faces human capital challenges, including high turnover and weaknesses in overseeing its many contractors. Further, FEMA needs a plan that would ensure consistent day-to-day operations when it deploys staff to federal disasters. FEMA has also faced challenges in collaboration between program and support offices. Finally, FEMA lacks a comprehensive set of processes and systems to guide its operations, in particular a records management policy and an electronic document management system. FEMA has begun to address some of these challenges, including acquisition management, but the results of its efforts remain to be seen. Unless it takes further steps to address these management challenges, FEMA will be limited in its ability to manage NFIP's operations or better ensure program effectiveness. FEMA also faces challenges modernizing NFIP's insurance policy and claims management system. After 7 years and $40 million, FEMA ultimately canceled its latest effort (NextGen) in November 2009 because the system did not meet user expectations. As a result, the agency continues to rely on an ineffective and inefficient 30-year old system. A number of acquisition management weaknesses led to NextGen's failure and cancellation, and as FEMA begins a new effort to modernize the existing legacy system, it plans to apply lessons learned from its NextGen experience. While FEMA has begun implementing some changes to its acquisition management practices, it remains to be seen if they will help FEMA avoid some of the problems that led to NextGen's failure. Developing appropriate acquisitions processes and applying lessons learned from the NextGen failure are essential if FEMA is to develop an effective policies and claims processing system for NFIP. Finally, NFIP's operating environment limits FEMA's ability to keep the program financially sound. NFIP assumes all risks for its policies, must accept virtually all applicants for insurance, and cannot deny coverage for high-risk properties. Moreover, additional external factors--including lapses in NFIP's authorization, the role of state and local governments, fluctuations in premium income, and structural and organizational changes--complicate FEMA's administration of NFIP. As GAO has previously reported, NFIP also faces external challenges that threaten the program's long-term health. These include statutorily required subsidized premium rates, a lack of authority to include long-term erosion in flood maps, and limitations on FEMA's authority to encourage owners of repetitive loss properties to mitigate. Until these issues are addressed, NFIP's long-term financial solvency will remain in doubt. GAO makes 10 recommendations to improve the effectiveness of FEMA's planning and oversight efforts for NFIP; improve FEMA's policies and procedures for achieving NFIP's goals; and increase the usefulness and reliability of NFIP's flood insurance policy and claims processing system. GAO also presents three matters for congressional consideration to improve NFIP's financial stability. DHS concurred with all of GAO's recommendations. |
Although it first entered into force in 1975, the Convention evolved from years of discussions among several countries about conservation and sustainable trade. For example, in 1963, the General Assembly of the International Union for the Conservation of Nature and Natural Resources passed a resolution calling for “an international convention on regulations of export, transit and import of rare or threatened wildlife species or their skins and trophies.” A first draft of the Convention was produced in 1964, and after subsequent discussions and drafts, the Convention was signed in March 1973 in Washington, D.C. According to the Convention’s preamble, the member countries recognized that the conservation of wild fauna and flora was of global importance and that international cooperation was essential for the protection of certain species against overexploitation through international trade. Each year, wildlife (animals and plants) of all types are sold in the wildlife trade. Some of this trade is regulated by the Convention; some is regulated by domestic laws; and some is not regulated at all. In general, uses of wildlife consist of trade in wildlife parts and products and trade in live wildlife. Global trade in wildlife parts and products includes the following, among other things: exotic fur and leather such as fox and leopard fur coats, elephant and ostrich skin boots, snake and shark skin shoes, kangaroo skin soccer balls, and alligator and eel skin purses; ornamental objects and curios such as sea turtle shell cases, snail shells, elephant ivory jewelry, seahorses, and matted butterflies; food such as monkey and ape bushmeat, turtle, bear paws, frog legs, lobsters, shrimp, conch, fish, clams, and oysters; and traditional medicine ingredients such as tiger bones, rhinoceros horn, ginseng root, bear gall bladders, deer antlers, seahorses, and plant-based powders and ointments. Trade in live wildlife includes the following, among other things: furnishing the exotic pet and plant trade with species such as tropical fish, seahorses, parrots, iguanas, orchids, snakes, and geckos; providing species for biomedical research and teaching, such as monkeys, snakes, fish, and frogs; stocking public or private game farms and hunting ranches with deer, antelope, and wild sheep; providing zoos and safari parks with species such as elephants, rhinoceros, dolphins, large cats, monkeys, pandas, birds, and reptiles; and providing food such as reptiles, amphibians, and fish. As one of the wealthiest countries in the world, the United States is the largest importer and exporter of wildlife products and dominates an estimated $5 billion annual world wildlife trade industry, according to the Fish and Wildlife Service. The United States’ share of worldwide trade, according to Service officials, is between $1 billion and $2 billion a year. Figure 1 shows the intended uses of wildlife for which U.S. applicants sought import or export permits from the Service in 2003. The Convention provides a framework for cooperation and collaboration among member countries to conserve species affected by international trade. The membership is made up of all countries that have joined the Convention; as of July 2004, 166 countries were party to the Convention. Each member country, by its signature, ratification, or accession, agrees to abide by and enforce the terms of the Convention. For example, the member countries agree to monitor and regulate imports and exports of certain species, as specified by the Convention, and to submit annual reports on trade in species protected under the Convention and biennial reports on implementation of the Convention. The member countries also agree to enforce the terms of the Convention, typically through legislation that incorporates Convention provisions, establishes requisite authorities, and imposes penalties for noncompliance. Enforcement provisions generally involve inspecting import and export permits, as well as the shipments, to ensure their compliance with Convention requirements. The Convention’s Secretariat, located in Geneva, Switzerland, provides support to the member countries to implement the Convention. The Secretariat organizes and facilitates each conference of the member countries, helps members implement the requirements of the Convention, undertakes scientific and technical studies regarding issues that may affect the implementation of the Convention, and manages the fund that is financed through member contributions. The fund supports the day-to-day operation of the Convention, such as purchasing office supplies, paying personnel, and facilitating Convention-related conferences. Currently, the Secretariat has a full-time staff of 28. The membership agreed to a system to provide a stable source of funding through voluntary contributions by member countries in 1979 and implemented that system in 1983. Prior to that time, Convention funding was provided through the United Nations Environment Programme. Members’ annual contributions to the fund are determined through a scale of assessment related to a country’s gross domestic product. The Convention does not provide a mechanism for enforcing the payment of annual contributions. Although the Secretariat reported in 2003 that the overall amount of contributions in arrears was not great, it also indicated that several countries have not made contributions for years. The membership convenes every 2 or 3 years at a conference of the member countries, referred to as the “Conference of the Parties.” The conference is the primary forum at which the membership debates and votes on proposals submitted by one or more members. Approval of substantive proposals, such as species-related decisions or significant procedural changes, generally requires a two-thirds majority of the members present, although many decisions are still made by consensus. Proposals are to be distributed to all members (through the Secretariat) several months before the conference and are to include the documentation necessary to explain or justify them (e.g., population surveys, scientific studies, discussion papers). In October 2004, the thirteenth conference of the member countries will take place in Bangkok, Thailand. A number of committees conduct business in between the biennial or triennial conferences of the member countries. The standing committee serves essentially as a steering committee; among its responsibilities are providing policy and operational direction to the Secretariat, overseeing the development and execution of the Secretariat’s budget and expenditures, coordinating and advising other committees, and drafting resolutions for consideration by the Convention’s membership. Among the responsibilities of the animals and plants committees are providing advice and guidance to the membership on all scientific matters relevant to international trade in protected animal and plant species and developing decisions and resolutions to implement the Convention. For example, the committees may review and assess all available biological and trade information on species considered to be significantly affected by trade and, based on such assessments, form appropriate conclusions and recommendations. The nomenclature committee ensures clarity and consistency in the identification and classification of species. The Convention membership protects wildlife by first identifying species in need of protection and then regulating or monitoring trade in those species, depending on the risk that trade poses to a species’ survival. The Convention regulates trade primarily through a system of import and export permits that are sought by organizations and individuals wishing to use protected species. Such consumers include (1) zoos and circuses that use animals for display, entertainment, or research; (2) furniture and clothing manufacturers, for selling raw materials or finished goods to consumers in other countries; (3) medical and scientific institutions, for biological samples for research; (4) producers, for artificially propagated or captive-bred species; and (5) individuals, for various items ranging from curios to hunting trophies. Species in need of protection are identified in one of three appendixes to the Convention. The Convention extends the most stringent protections to the species it has included in appendix I. These are species that are considered at risk of extinction by virtue of meeting at least one of several criteria and are, or may be, affected by trade. Among the criteria are an observed, inferred, or projected decline in (1) the number of individuals, (2) the area and quality of habitat, (3) the area of distribution, (4) the number of subpopulations, or (5) reproductive potential. The Convention generally prohibits commercial trade in species included in appendix I but may allow trade in household goods, hunting trophies, or live animals for purposes of display, research, or breeding when such trade is not detrimental to species in the wild. Species currently listed in appendix I include the Ethiopian toad, the red-necked parrot, the short-nosed sturgeon, Brazilian rosewood, the Burmese peacock turtle, the Asian golden cat, the giant armadillo, living rock cactus, and the bowhead whale. Appendix II to the Convention includes species that are not yet but may become threatened with extinction at least in part due to trade; the Convention regulates trade in these species. Among the criteria for a species’ inclusion in appendix II are a known, inferred, or projected conclusion that (1) a species will meet at least one of the appendix I criteria in the near future unless trade in the species is subject to strict regulation or (2) the harvesting of specimens from the wild for international trade has or may have a detrimental effect on the species by exceeding, over an extended period, the level that can be continued in perpetuity. Species currently listed in appendix II include the strawberry poison-arrow frog, the crab-eating fox, the wrinkled hornbill, yellow pencil coral, fragrant prickly-apple, queen conch, the freckled monitor, Caribbean mahogany, the piebald dolphin, Himalayan yew, and the king cobra. Another criterion for inclusion in appendix II is that a species resembles another species listed in appendix I or appendix II, such that a nonexpert, with reasonable effort, is unlikely to be able to distinguish between them. In contrast to the generally prohibited trade in appendix I species, trade in appendix II species is generally allowed, although it is monitored and controlled to ensure that it does not pose a threat to the continued existence of the species. For example, the Convention requires that trade in appendix II species be monitored through trade reports that members must submit each year. These reports detail the number of species, parts, and products the country imported, exported, and reexported during the year. In some cases, limited populations of species found in appendix I are put in appendix II to allow for some trade to occur. In these cases, the downlisted populations are managed in some way that ensures that trade will not be detrimental to the survival of the species in the wild (see fig. 2). Finally, appendix III to the Convention includes species that a member country has identified as being subject to regulation to prevent or restrict exploitation and as needing other countries’ cooperation in controlling trade. Appendix III species are listed by individual member countries and are not put to a vote for their inclusion. Although member countries may trade in appendix III species, trade must be accompanied by an approved export permit from the country that listed the species or by a “certificate of origin” from a nonlisting country. The listing country can then monitor trade in the appendix III species through review of issued export permits and certificates of origin. Species currently listed in appendix III, and the country that listed them, include the red-breasted toucan (Argentina), the walrus (Canada), the Egyptian goose (Ghana), the ocellated turkey (Guatemala), the dog-faced water snake (India), the water buffalo (Nepal), the starry tree gecko (New Zealand), the Cape stag beetle (South Africa), and the naked-tailed armadillo (Uruguay). No clear consensus exists on the Convention’s effectiveness in conserving species. In the opening session of the last conference of the member countries, the Minister of Agriculture of Chile pointed to the fact that no species protected by the Convention has become extinct, as a sign of the Convention’s effectiveness. Others have highlighted the benefits of the Convention in raising awareness of conservation issues and strengthening wildlife legislation in member countries. According to the Fish and Wildlife Service, the Convention has a long history of adopting successful measures to support the conservation and sustainable use of wildlife species in trade. However, it is difficult to directly link protections provided under the Convention to improvements in a species’ status in the wild. The major issues complicating such assessments are the lack of data and the fact that typically numerous factors, in addition to trade, contribute to a species’ decline, such as habitat loss, overuse, and disease. In the United States, the Secretary of the Interior, through the Fish and Wildlife Service, is responsible for implementing the Convention. One of the Service’s responsibilities is to oversee the permitting process and enforce compliance with the terms of the Convention within the United States. Irrespective of the Convention, the United States requires that all wildlife species that enter or exit the country be declared to and approved by the Service. That is, wildlife shipments must be accompanied by the appropriate permits and must be in compliance with not only the Convention, but also other applicable wildlife laws. To enforce these laws and the Convention, the Service (1) issues permits to entities and individuals wishing to import, export, or reexport protected species, products, or parts if the intended uses and the applications meet Convention and U.S. regulation requirements; (2) enforces these permits at U.S. borders by inspecting permits and shipments; and (3) investigates cases of illegal trade. Penalties for violating the import or export requirements of the Convention or other wildlife laws are assessed based on the level of protection afforded the species. For example, penalties for a shipment of appendix I species or products that was not accompanied by the proper permits would generally be more stringent than if the shipment contained appendix II species. However, penalties for appendix II species could be severe if a shipment included a large number of protected species. Penalties for shipments that violate Convention requirements can range from monetary fines to criminal charges. Additionally, as shown in figure 3, illegal shipments may be confiscated. Another Service responsibility is to prepare and coordinate U.S. proposals for consideration by the Convention membership and advocate the U.S. position at each conference of the member countries. For the upcoming conference in October 2004, for example, the United States will propose the inclusion of several species of Asian turtles in appendix II and the downlisting of the bald eagle from appendix I to appendix II. In preparing the United States’ positions and proposals, the Service coordinates with other relevant federal agencies and holds public meetings, when appropriate. Although the Fish and Wildlife Service has the primary responsibility and authority for implementing the Convention within the United States, other agencies are involved as well: The National Oceanic and Atmospheric Administration’s National Marine Fisheries Service is involved in an advisory capacity. Although it has no legal authority to carry out the terms of the Convention, the National Marine Fisheries Service provides scientific advice and assistance as needed to the Fish and Wildlife Service, such as in assessing the status of marine species. In addition, the National Marine Fisheries Service provides liaison to marine resource organizations, such as the International Whaling Commission and regional fisheries management organizations. The National Marine Fisheries Service also organizes and carries out educational workshops and assists in law enforcement by monitoring for potentially illegal trade in marine species in areas other than designated ports of entry. The Department of State is responsible for providing U.S. annual contributions to the Convention and provides expertise and advice on international issues such as implementing multilateral environmental agreements and providing liaison with foreign governments. The department also provides funds for educational programs on Convention-related issues. The Animal and Plant Health Inspection Service is responsible for inspecting shipments of plants. The Customs Service inspects items brought into the country by citizens and visitors and assists the Fish and Wildlife Service in detecting items that consist of or contain wildlife or wildlife parts or products. The Department of Agriculture coordinates with the Fish and Wildlife Service on Convention policy related to plants. In several ways, implementing the Convention is currently more complex and controversial than it was in 1975, when it took effect. First, permitting and enforcement tasks have become more difficult, owing to increases in both the workload and the complexity of the individual tasks. Another change in the Convention is that the criteria for identifying species for protection have become more specific and science based. Although this is a positive step, it requires more resources for data gathering and reporting. And finally, proposals for protection of some species have become quite controversial because they address species that are subject to management by other multinational organizations. Since the Convention’s inception, the permitting and enforcement workload has become larger, and the tasks themselves more difficult. Workload has increased along with increases in the Convention membership. The number of countries that are party to the Convention has increased dramatically since 1975, reflecting increased global interest in species protection and trade participation. Convention membership has grown from the initial 18 countries, whose membership entered into force in 1975, to 166 countries as of July 2004 (see fig. 4). Along with the increase in membership has come an increase in the number of species protected by the Convention. The number of protected species has increased by about 20 percent since the early years of the Convention. In 1976, about 28,000 species were listed in the Convention’s appendixes I and II; currently, more than 33,000 species are protected. The biggest change has been in the number of protected animal species, which has increased by about 320 percent. Overall, though, plant species continue to make up the vast majority of protected species (see fig. 5). As the number of protected species has increased, so has the Service’s workload. In just the past 5 fiscal years, the Service’s permitting workload has increased by almost 9 percent. In total, over the 5-year fiscal period 1999 through 2003, the Service issued more than 28,000 permits for Convention-protected species, parts, and products (see fig. 6). Over the same period, the Service denied about 200 permit applications. As the number of imports and exports has risen, so too has the Service’s review and inspection workload. In many cases, according to several law enforcement officials at the Service, only the paperwork (e.g., permits) accompanying a wildlife shipment is reviewed to ensure compliance with appropriate wildlife laws, as well as the Convention. Decisions about which shipments are to be physically inspected are based on factors such as past experiences with the exporting country, the importer’s or exporter’s record and reputation, and the type and intended use of the item being shipped. Over the 5-year fiscal period 1999 through 2003, the Service reviewed import and export permits for nearly 600,000 wildlife-related shipments, of which about 170,000 were at least partly composed of items protected under the Convention (see fig. 7). According to law enforcement officials, about 25 percent of all shipments are physically inspected. The difficulty of the permitting and enforcement tasks has increased not only as a result of the growth and change in Convention membership and protected species, but also as a result of changes in the nature of trade in wildlife. In the early days of the Convention, trade was primarily conducted in whole animals or plants; currently, a significant portion of trade is in wildlife parts and products. This change is significant because in most cases it is more difficult to detect and identify parts and products. In addition, permitting and enforcement tasks are more difficult because of numerous resolutions and decisions that have added complexity to provisions governing species’ identification, protection, and packaging. Some resolutions, for example, have resulted in annotations (i.e., footnotes) to the appendixes that are intended to define the scope of a species’ protection. For example, some annotations may indicate that specific populations, parts, or products of a species are subject to different protection levels than are other populations, parts, or products. Another reason for many annotations (e.g., those about the vicuña) is to minimize the scope of the Convention’s restriction on trade in a species by focusing solely on trade resulting from wildlife harvesting methods that are detrimental to the species. Although resolutions and decisions have resulted in increased workload for member countries, the modifications have generally been intended, at least in part, to make the provisions of the Convention more workable and clear, according to Service officials. One of the more complex situations, with regard to annotations, is that of the African elephant. One annotation specifies the conditions under which elephant hides, live elephants, and ivory may be exported from the elephant population in Zimbabwe. Another annotation specifies the conditions under which ivory may be exported from the elephant populations in Botswana, Namibia, and South Africa (see fig. 8). The expanded use of such annotations has made it increasingly difficult for permitting and inspection officials to readily identify which species—and parts and products thereof—are protected. Thus, inspectors are faced with the difficult task of ascertaining whether shipments of elephant parts and products meet all the cited requirements and are indeed from elephants that came from the country listed on the permit. Service law enforcement officials told us that inspectors encounter shipments with elephant products daily and that headquarters frequently sends guidance to inspectors on how to deal with these shipments and the annotations. A similarly complex situation arises when annotations provide different protections for species from wild populations and those that were bred in captivity or artificially propagated. Such a distinction is often difficult for inspectors to make. According to Service officials, one of the Convention’s committees is working on ways to make it easier to identify the source of protected species. According to a Service official, taking enforcement actions against illegal trade is more complex when dealing with high-value commercial species and products like mahogany and caviar. In some cases, such as for caviar, the product is perishable, so the Service must ensure that the inspection process goes quickly, lest the product spoil. In addition, the perishable nature of some products makes their storage and handling more difficult. Caviar is a high-value product, and international demand for it is high— caviar from the beluga sturgeon, found in the Caspian Sea, sells for more than $1,500 per pound on the U.S. retail market. High-value products such as these can be tempting targets for smugglers. For example, in January 2003, a Russian citizen was sentenced to 30 months’ imprisonment for repeated violations of the Convention, including illegally importing into the United States 44 kilograms of osetra caviar (derived from Russian sturgeon) without the required permits. Another change in the Convention is that the criteria for identifying species that need protection have become more science based. In the early years of the Convention, according to the Secretariat’s Deputy Secretary General, if a country believed that a species was threatened and proposed its protection, the membership nearly always approved it—if the species was specific to that country. If, however, the species existed in other countries as well, and those countries disagreed with the protection proposal, then the protection was rarely approved. Over the years, though, the criteria for identifying a species’ need for protection have become increasingly rigorous and the associated information requirements more thorough. Some species in need of protection had been identified long before the Convention took effect in 1975. A first draft of the Convention appeared in 1964, and in 1969, a list of species in need of protection through trade regulation was presented at the General Assembly of the World Conservation Union. As a result, by 1976, when the Convention membership met for the first time, many species had already been included in the appendixes. At that first conference of the member countries, held in Bern, Switzerland, the membership adopted scientific criteria to guide countries’ listing proposals. These criteria, known as the “Bern criteria,” required the submission of data such as scientific reports on the population size or geographic range of the species. After a while, though, the Bern criteria were considered too general and, in some cases, contributed to some species’ being included in Convention appendixes with little or no supporting information. Accordingly, in 1979, the membership made it possible to delist species that had been included in an appendix without the normally required population data. In 1994, the Convention membership adopted standards for specific biological and statistical criteria to replace the Bern criteria for identifying species in need of protection. The 1994 criteria provided specific requirements for including a species in an appendix, deleting a species from an appendix, or uplisting or downlisting a species (i.e., moving a species’ listing between appendixes I and II). With the more stringent criteria provided in 1994, Fish and Wildlife Service and Secretariat officials believe that the Convention now has a strong science base. The 1994 criteria also defined key terms and specified the information to be submitted in support of any proposal. Such support includes information on the species’ distribution, habitat, population, and role in the ecosystem; the nature, intensity, and extent of threats to the species, such as competitors, pathogens, predators, toxins, and habitat loss; the purpose and level of use, including trends if possible, as well as the level and nature of national and international trade, along with the source of statistics used, such as Customs statistics, Convention annual report data, and industry reports; national legislation related to the conservation of the species, the nature of legal protection, and the effectiveness of this legislation; measures in place to manage populations of the species in question, such as captive breeding or artificial propagation, ranching, or quota systems, including details such as planned harvest rates and planned population sizes; and consultation undertaken with, and comments received from, other countries in which the species exists and any organizations that also manage the species, such as intergovernmental bodies that act through international agreements other than the Convention. In proposing inclusion of the humphead wrasse in appendix II, for example, the United States submitted the required information for consideration by the membership at the upcoming conference in Bangkok (see fig. 9). Although Service and Secretariat officials believe that decisions should be based on sound science, they also noted that the associated information gathering and reporting require additional staff and time. For example, Service staff spend more time collecting and analyzing species-specific information and responding to requests from the Secretariat for information on species or trade. Recent requests sought information on U.S. controls over the elephant ivory trade and information about sturgeon and the labeling of caviar. Complying with the increasingly rigorous monitoring and reporting requirements is difficult for all countries but is especially so for countries that lack the necessary capacity or resources to accomplish them. Accordingly, the Secretariat assists such countries, to the extent possible, in preparing their annual trade reports or conducting population surveys to support proposals for listing or delisting a species. Although proposals to protect species have generated controversy and debate in the past, controversy is expected to intensify as some proposals broaden the reach of the Convention, especially proposals to protect commercial fish species. In the past decade, extensive debate has occurred over the appropriate role for the Convention in the regulation of commercial fisheries. At the heart of the issue is whether the Convention should regulate trade in marine fish species or whether such species should be managed by other resource management or oversight organizations, such as regional fisheries organizations. When a marine fish species is already under the purview of such an organization, a proposal to manage its trade under the Convention implies that the other management structure has failed and could be considered an affront to those involved in managing the species. In addition, any further trade prohibitions or restrictions put in place as a result of a species’ listing in appendix I or II of the Convention could damage local economies that are dependent on trade in the species. Some commercial fish species have been put under the protection of the Convention, while proposals for other fish species have failed to achieve a two-thirds majority support. Opposition to such proposals generally centered on the belief that fisheries should be managed by regional or international fisheries organizations rather than by the Convention. Sharks: Past attempts to list shark species met with objections and were rejected based on the argument that regulation of the commercial fisheries trade should be outside the Convention’s purview. This argument was instrumental in rejecting, for example, a proposal at the 1997 conference to list the whale shark, which is widely traded for its meat. In 2002, however, global commitment to finding long-term conservation solutions for shark fisheries was strengthened by the member countries’ vote to list in appendix II whale sharks and basking sharks—the world’s two largest species of fish. The vote was preceded, however, by an intense debate over whether the Convention was an appropriate instrument for regulating trade in commercially fished marine species, even though neither of these shark species was subject to management by international or regional resource management organizations. Patagonian toothfish (commonly marketed as Chilean seabass): Citing evidence of rapid declines in stocks of the toothfish, Australia proposed at the 2002 conference of the member countries that the Patagonian toothfish and Antarctic toothfish be listed in appendix II. However, the Commission for the Conservation of Antarctic Marine Living Resources, which governs South American fishing waters, and several Convention members, argued that issues concerning marine fisheries resources should be dealt with under the auspices of the relevant regional fisheries organization (in this case, the commission), not under the Convention. After heated debate, Australia withdrew the listing proposal, but the membership voted to cooperate with the commission to strengthen controls over international trade in toothfish products and to eliminate illegal, unreported, and unregulated fishing. Humphead wrasse: The humphead wrasse was proposed by the United States to be included in appendix II at the 2002 conference. After considerable debate, the proposal was rejected by a vote of 65 to 42, with 5 abstentions. Proponents of the proposal noted that inclusion of the species in appendix II would help ensure sustainable fisheries practices. Among the opponents’ arguments were that the Convention should not be the entity responsible for commercial fish stocks; that the proposal would be difficult to implement; and that it would not address destructive fisheries practices, which were the major cause of the decline in the species. The United States will introduce the proposal again at the 2004 conference. The United States’ position in this debate, according to National Marine Fisheries Service officials, has been to consider the Convention as a useful adjunct to traditional fisheries management when the species meet the listing criteria, trade is of concern, and management is lacking or absent. Most of the marine fish species considered for Convention protection are not at this time managed by any resource management or oversight organization. In these cases, Convention protection can make a difference. For example, according to National Marine Fisheries Service officials, the inclusion of the queen conch in the Convention’s appendix II, together with the associated trade regulation and collection of trade data, have caused the affected member countries to undertake discussions that will likely lead to regional management of this species. Clearly decisions about regulating trade in commercial fisheries are controversial, and sometimes resource management organizations are offended by the implication that they have failed. Yet the effectiveness of fisheries management organizations in stemming the decline in various commercial fish species is questionable, as politics and economics are often the first considerations in making decisions on species’ management. Concerns about declines in fish species are sparking many countries to look to the Convention to regulate trade in some commercial species. As we reported in February 2004, about one-third of the U.S. fish stocks assessed by the National Marine Fisheries Service are overfished or are approaching overfished conditions. This situation threatens the $28 billion commercial fishing and fishing-related industries that rely on sustainable catches. The United States is not alone in facing this problem. According to the Food and Agriculture Organization, about 28 percent of the world’s major fish stocks are reported as overexploited, depleted, or recovering from depletion. Another 47 percent are fully exploited and are producing catches that have reached, or are very close to, their maximum sustainable limits. Similarly, a Secretariat official said that numerous species of commercial fish are being massively depleted by commercial fisheries and, in his opinion, should be protected under the Convention, including European cod, bluefin tuna, and the spiny lobster. However, he said, fisheries organizations can be quite powerful in arguing against Convention attempts to restrict commercial fisheries. Nevertheless, the Convention has the authority to examine and place under its protection any species that is threatened by trade, if a two-thirds majority of the member countries present at a conference agrees to do so. Although considerable tension and concern remain over the relationship between the Convention and regional and international fisheries organizations, discussions have recently moved toward rapprochement. For example, the Convention membership and the Food and Agriculture Organization have agreed to pursue development of a memorandum of understanding to promote information sharing and collaboration in deciding the appropriate and necessary management for commercial fisheries. In addition, at the 2002 conference, Chile introduced a draft resolution that outlined the main elements of cooperation needed between the Convention and the Commission for the Conservation of Antarctic Marine Living Resources to strengthen the commission’s management of toothfish. Further, at the 2002 conference, much of the debate about the individual fish listing proposals centered less on whether it is appropriate to apply the Convention to protection of marine species and more on whether the species in question met the listing criteria and what benefits might accrue from collaboration. Such discussions are useful in light of the need to resolve concerns about the health of the world’s commercial fisheries, major fish stocks, and indeed the entire marine ecosystem. As we reported in February 2004, greater competition for fewer fish increases the likelihood that stocks will decline further and catches will decrease. If a fishery cannot be sustained, the marine ecosystem could be transformed, thus threatening the livelihood of fishermen and the way of life in many communities. Other commercial species that may be subject to resource management organizations, such as timber species, are expected to generate similar controversy as fear of overexploitation spurs proposals for their protection. Proposals to protect mahogany and ramin under the Convention in the early 1990s were met with arguments similar to those presented for commercial fish species—that other resource organizations should be responsible for managing them, not the Convention. For example, arguments against protecting mahogany asserted that the International Tropical Timber Organization is the appropriate body for managing the species. Mahogany was, however, approved for listing in appendix II at the last conference of the member countries. Controversy is also expected as proposals are introduced for Convention protection of other marine resources, such as sea cucumbers and pipehorses. The United States spent more than $50 million, or about $6 million annually, on Convention-related activities from 1995 through 2003; data are not available for expenditures between 1975—when the Convention entered into force—and 1995 because Convention activities were not tracked separately from other species protection programs. The $50 million spent since 1995 includes about $37 million spent by the Fish and Wildlife Service on activities aimed at implementing the Convention and about $13 million spent by the Department of State for voluntary contributions to help administer the Convention internationally (see fig. 10). Service activities directed exclusively at implementing the Convention include coordinating U.S. proposals that will be negotiated at conferences of the member countries. Preparation for such proposals involves requesting public input through the Federal Register and coordinating with other federal agencies that have expertise in certain species. For example, the Service turns to the National Marine Fisheries Service for advice on marine species. Another Fish and Wildlife Service activity is issuing permits for the import, export, and reexport of Convention species. The Service ensures that each permit contains the information required under the terms of the Convention, such as the purpose of the import or export (e.g., hunting trophies, education, zoos, or commercial), the nature of the specimens being traded (e.g., live animals, skins, wallets, shoes), and the source of those specimens (e.g., animals born in captivity, specimens taken from the wild, specimens originating from a ranching operation). In fiscal year 2003, the Service allotted 49 full-time-equivalent staff to accomplish these tasks, among others. The $37 million spent by the Service does not include funds expended by the agency for activities, such as enforcement, that not only implement the Convention, but also serve other purposes. For example, Service wildlife inspectors review all the declaration paperwork for wildlife shipments, inspect selected shipments at specified points of entry into the United States, and investigate cases involving illegal trade. During the review and inspection process, the inspectors enforce not only the Convention but also U.S. laws and regulations that regulate the import or export of wildlife, such as the Endangered Species Act, the Marine Mammal Protection Act, the Wild Bird Conservation Act, and the Lacey Act. Convention-related enforcement expenditures cannot be broken out from the Service’s overall budget of $49 million and 445 full-time-equivalent staff for law enforcement activities in 2003. Figure 11 shows a wildlife inspector at work. The $13 million spent by the Department of State was provided to the Convention’s trust fund, as part of the United States’ voluntary contributions to the Convention. In 2003, the U.S. contribution was about $1 million. This amount was more than any other country contributed and made up about 22 percent of the total contribution of the membership in 2003. Other top contributors were Japan, 20 percent; Germany, 10 percent; France, 6 percent; and the United Kingdom, 6 percent. Not included in the $13 million contributed to the Convention by the Department of State are the funds the department has provided to the National Marine Fisheries Service over the past 3 years to support scientific, technological, or environmental initiatives for Convention members addressing newly protected species. For example, the department provided $130,000 to the National Marine Fisheries Service to conduct, among other things, a technical workshop on seahorse conservation in Mexico in February 2004. All seahorses came under Convention protection in May 2004. As noted previously, the National Marine Fisheries Service also advises the Fish and Wildlife Service on decisions about marine species. The National Marine Fisheries Service sets aside about $100,000 per year from its appropriations for general activities to help implement the Convention. The Fish and Wildlife Service also expends funds and technical assistance for activities that are not intended to implement the Convention but nevertheless help protect Convention-protected species. For example, the Service spent nearly $4 million and utilized 14 full-time-equivalent staff in 2003 for international conservation efforts. It spent an additional $4.4 million to support acts such as the African Elephant Conservation Act, the Asian Elephant Conservation Act, the Rhinoceros and Tiger Conservation Act, and the Great Ape Conservation Act. These funds are separate from the funds appropriated for implementation of the Convention or the Endangered Species Act. The Convention and U.S. laws share a common goal of protecting species, but they extend protection based on different criteria that reflect different underlying purposes. The purpose of the Convention is to protect species endangered by international trade, while the purpose of the Endangered Species Act is to protect species and their habitats that are threatened or endangered for any reason. The level of protection for a species dictates the allowable uses of that species, and uses allowed by the Convention sometimes differ from uses allowed by domestic laws. For example, U.S. laws sometimes afford stricter protections to species than the Convention does; as a result, some U.S. interests such as small businesses, aquariums, individual consumers, and big game hunters cannot participate in activities allowed by other member countries in accordance with the Convention. Stricter domestic measures, such as those imposed under the Endangered Species Act, can also create conflict among countries that are party to the Convention. There are arguments both for and against stricter domestic measures, and there is no consensus on how they affect species protection, member country economies and relations, individual consumers, or the efficacy of the Convention. As previously discussed, the Convention seeks to ensure that international trade in wild animals and plants does not threaten species’ survival, and the membership places species in appendix I or II, depending on the risk posed by trade. Appendix I species are in danger of extinction, in part due to trade; appendix II species are not now in danger of extinction but may be at future risk if trade is not controlled. Appendix III is a list of species included at the request of a member country that already regulates trade in those species and needs the cooperation of other countries to prevent unsustainable or illegal exploitation of the species. The criteria for identifying a species for protection by the Endangered Species Act are different from those employed by the Convention and reflect the act’s intent to protect species that are at risk of extinction for any reason—not just trade—and to conserve their habitats. Under the Endangered Species Act, a species is eligible for protection if it meets at least one of five criteria spelled out in the act. These criteria describe threats to survival such as disease, predation, destruction of habitat, and overuse. Species are considered either “endangered,” if they are in danger of extinction throughout all or a significant portion of their range, or “threatened,” if they are likely to become endangered within the foreseeable future. While most of the act’s protections apply to species found in the United States, the act also recognizes foreign species that meet the requirements for protection. Approximately 1,825 species are currently protected by the act; of these, about 560 are foreign species. The vast majority of the foreign species are mammals, birds, and reptiles. The criterion for protection by the Marine Mammal Protection Act is simply that a species is a marine mammal. The act seeks to ensure that populations of all marine mammal species are maintained at their optimum sustainable population levels, regardless of whether the species are at risk of extinction. As a result, any marine mammal that is protected by the Convention is also protected by the act. Marine mammals currently protected by the Convention include whales, dolphins, manatees, sea otters, and fur seals. The Convention allows limited trade of some appendix I species and requires permits for both import and export (and reexport) of these species. Permits to use appendix I species may be issued if the intended use is not primarily for commercial purposes and will not be detrimental to the survival of the species. For example, permits have been issued for giant pandas to be exported from China for scientific or research purposes. The Convention allows broader trade in appendix II species—generally allowing trade, although monitoring it. For appendix II species, only export and reexport permits are required and are issued if the species were legally obtained and, as with appendix I species, only if their intended use will not be detrimental to the survival of the species. For appendix III species, the Convention imposes the least stringent requirements. Trade in these species requires either an export permit showing that they were legally taken or a certificate proving their origin. The Endangered Species Act also allows some use of protected species, which may include trade, but it regulates use more stringently than the Convention. While the Convention is concerned with regulating trade that may be detrimental to wild populations of protected species, the Endangered Species Act goes beyond this standard and seeks to ensure that trade or any other use of threatened or endangered species contributes to the conservation of the species in the wild, unless the use is for scientific purposes or is incidental to an otherwise lawful use. Therefore, trade or other use of a protected species might not be allowed under the act if the use does not contribute to the conservation of the species in the wild. The Marine Mammal Protection Act is even more stringent than the Endangered Species Act in that its conservation goals and provisions apply to all marine mammals, regardless of their status. The act allows the use of marine mammals only for specified purposes, including public display and scientific research, and requires both import and export permits for trade. The act also provides certain exemptions for the use of marine mammals by Alaska Natives. For a number of species, trade allowed by the Convention is restricted by the Endangered Species Act. One example is trade in the cheetah, which is protected as endangered under the act. Although cheetah populations are protected under appendix I of the Convention, Botswana, Namibia, and Zimbabwe have established quotas, as allowed by the Convention, for the export of cheetahs hunted within their countries. However, under the Endangered Species Act, the Service has not allowed the import of sport- hunted cheetahs because it has not found that current hunting and management programs enhance the survival of cheetahs. Therefore, U.S. hunters may travel to those countries to legally hunt and kill cheetahs, but they may not bring home cheetah trophies such as skins, teeth, or mounted heads, while citizens of other countries may do so. The Service has, however, allowed the import of live cheetahs—both captive-bred and wild- caught—when it has determined that their importation and subsequent use would benefit the species. Another species for which the United States imposes stricter trade measures than the Convention is the Asian arowana, also known as the Asian bonytongue. The arowana is a fresh-water ornamental fish that is traded around the world and considered by some to bring good luck to its possessor. Although the species is protected by appendix I of the Convention, some exporting countries have arowana populations in Convention-registered captive-breeding programs; these populations are treated as appendix II species and thus may be traded. However, the arowana is also protected as an endangered species under the Endangered Species Act, and the Service has not determined that trade in captive-bred arowana will contribute to the conservation of the species in the wild. As a result, U.S. consumers cannot import Asian arowana and, therefore, cannot participate in some activities allowed under the Convention—activities in which citizens of other countries may participate. The Endangered Species Act accommodates Convention-approved trade in threatened or endangered species when the trade meets the requirements of section 10 or 4(d) of the act. Section 10 allows the Service to issue permits for “take” of a protected species, as long as the permitted action is incidental to carrying out a lawful activity, is intended for scientific purposes, or can be shown to enhance the survival of the affected species. Although section 10 of the act is more frequently used than section 4(d) when foreign species are involved, according to Service officials, the Service issues section 10 permits for foreign species only for the enhancement purposes allowed under the act (e.g., scientific research, conservation, and education); it does not issue section 10 permits for incidental take of foreign species. The Service has issued numerous section 10 “enhancement” permits for Convention-allowed trade in species that are protected as threatened or endangered under the act. For example, it has issued permits for the import of endangered giant pandas, cheetahs, and Asian elephants for the purpose of scientific research. The Service has not, however, used section 10 permits for some uses of endangered species, such as for the import of Asian arowana for display purposes or for the import of sport-hunted cheetah trophies, because—according to agency officials—the Service has not been able to show that such activities would enhance or conserve the species in the wild. The Service proposed a draft policy in August 2003 on the various circumstances under which the agency might be able to conclude that uses such as these do enhance the status of endangered species in the wild and would thus warrant a section 10 permit. However, the Service received a significant amount of negative comments on this proposal. In particular, several conservation groups indicated that allowing trade in endangered species for uses other than display and scientific purposes is contrary to the historical U.S. philosophy on species conservation; some groups asserted that killing or capturing wildlife is not the best way to protect endangered species. The proposal has not been finalized and is still under deliberation within the Department of the Interior. Section 4(d) of the act, which is used less frequently than section 10, provides another mechanism for allowing Convention-approved trade, but only for species that are protected as threatened under the act. Section 4(d) allows the Service to specify circumstances under which use of a threatened species can occur, including uses that would be prohibited if the species were endangered. The purpose of a “4(d) rule” is to further the conservation of the species, in addition to allowing otherwise prohibited activities to occur. Section 4(d) differs from section 10 in that it allows the Service to make blanket determinations about allowable uses of species, rather than requiring case-by-case evaluations of permit applications for individual uses. The Service has more than 60 “4(d) rules”—about one-third of which are for foreign species—including one for the use of Nile crocodile products from certain African countries and one for wool from live vicuñas from certain South American countries; both of these rules involve appendix II species in which member countries agreed to allow limited trade. Most recently, the Service proposed a 4(d) rule for beluga sturgeon—a species of fish best known for its expensive caviar. In each of these cases, the Service determined that allowing some commercial trade in the species would contribute to programs that assist in the conservation of these species in the wild. For the beluga sturgeon, for example, the 4(d) rule stipulates that, among other things, countries wishing to export beluga sturgeon caviar and meat to the United States must submit basin-wide beluga sturgeon management plans for the Black Sea and Caspian Sea basins, national regulations that implement the plans, and annual reports documenting management measures in place and the status of the species. As illustrated by sections 10 and 4(d), member countries’ domestic laws may provide greater protection for species than the Convention does. Article XIV of the Convention explicitly recognizes member countries’ sovereign right to impose such stricter domestic measures. These measures generally take on one of two main forms. One type imposes stricter measures on the import, export, hunting, or transport of specific species, regardless of the agreed-upon protections provided by the Convention, such as in the cheetah and Asian arowana cases. The other type imposes more stringent restrictions on the trade, possession, or transport of protected species, such as requiring import permits for appendix II or III species. While not enacted with the purpose of restricting trade in species protected by the Convention, certain protections of the Endangered Species Act and Marine Mammal Protection Act have that effect and go beyond the restrictions called for under the Convention. Other member countries—including both importing and exporting countries—have also enacted stricter domestic measures. For example, the European Union, Japan, and Namibia require import permits for trade in some or all appendix II species. Australia generally bans the export of live native wildlife species, regardless of whether the species may be traded under the Convention; and Ecuador and Nigeria have banned all commercial exports of wild flora and fauna. Costa Rica and Paraguay prohibit all international trade in wildlife. Stricter domestic measures can create heated conflict within and among member countries. Although there are arguments both for and against stricter domestic measures, there is no consensus on how these measures affect species protection, member country economies and relations, individual consumers, or the efficacy of the Convention. The following arguments represent the opinions of a variety of individuals at U.S. and international trade organizations, government agencies, nongovernmental organizations, and private businesses. We are presenting the opinions as presented to us; we did not verify the accuracy of the assertions. Those who support stricter domestic measures generally argue that they are necessary to protect species, for several reasons: Stricter domestic measures can help draw attention to tragically endangered species. For example, U.S. bans on trade in rhinoceros and tigers have aided those species by increasing worldwide awareness of their danger of extinction. U.S. decisions to provide additional protection for species can influence other countries to do the same. Stricter domestic measures allow countries to protect species without delay. Because the member countries to the Convention meet only every few years, species in danger of extinction may be harmed beyond recovery before the members meet to consider the species for protection. Domestic measures can provide critical interim protection. Stricter domestic measures facilitate enforcement in member countries. In the United States, for example, if the mere possession of a protected species is illegal under the Endangered Species Act, then U.S. law enforcement officials can prosecute the violator. Otherwise, enforcement officials would have to show that the species had been illegally imported, which, according to some officials we spoke with, is difficult to prove. Stricter domestic measures allow major consumer countries to leverage greater species protection efforts from other countries. For example, by requiring import permits for appendix II species (for which the Convention requires only export permits), a country can control the conditions under which it will import protected species. For example, the European Union requires import permits for appendix II species. This extra step allows the European Union to help ensure the sustainable management of species in the exporting countries. Stricter domestic measures allow countries to protect species for reasons beyond the scope of the Convention. For example, the Endangered Species Act protects species at risk of extinction for any reason—not just trade—and conserves their habitats. By itself the Convention cannot prevent the extinction of some species, let alone further their recovery, because they may suffer from threats other than those posed by trade. Supporters of stricter domestic measures also argue that they allow countries to prioritize species protection goals: Stricter domestic measures provide a mechanism by which countries can display their philosophy regarding species protection. For example, the United States has chosen a precautionary approach in implementing its own Endangered Species Act, as indicated in the act’s legislative history. Given the potential benefits of some species to the human race, such as offering possible cures for cancer, we should be careful to protect the continued existence of species, according to the House report associated with the act. A cautious approach is also reflected in the act’s extension of protections to not only species that are endangered, but also those that are at risk of becoming endangered. Stricter domestic measures can help focus attention on recovery of wild populations. As previously discussed, some trade in appendix I species is allowed if the intended use is not detrimental to the species’ survival. In the Asian arowana example, captive breeding is the reason the species is not threatened with extinction due to trade. However, captive breeding does nothing to help the declining wild population. Enacting a stricter domestic measure that requires documentation that some proceeds from the sale of captive-bred species are funneled into conservation could aid in species recovery. Opponents of stricter domestic measures argue that they can actually harm species: Stricter domestic measures can discourage developing countries from establishing programs to fund species conservation. Governments in exporting countries that benefit from trade in protected species have a vested interest in maintaining those species’ survival. If a major consumer country, like the United States, enacts a stricter domestic measure preventing U.S. trade in a species, the incentive for the exporting country to conserve the species may diminish. Loss of revenues from trade may also decrease a country’s ability to fund enforcement efforts, such as those addressing poaching. If stricter domestic measures diminish trade in a protected species, funding for existing conservation programs can decrease. Some countries have programs that take a percentage of proceeds from the sale of protected species and channel the funds into species conservation. For example, the export of giant pandas, an appendix I species, has generated $11 million for panda conservation projects in China. Similarly, sport hunting of Namibian cheetahs generates revenue for cheetah conservation. If China or Namibia were to implement a stricter domestic measure barring the export of pandas or cheetahs, or if a country that currently imports these species were to implement a measure to prevent future imports, then the trade-based conservation revenue for these species could decrease or even cease. Another argument against stricter domestic measures is that they can harm foreign economies and consumer interests: Stricter domestic measures can affect the economy of an exporting country, particularly if export of a protected species is a major source of income, and can restrict the ability of an exporting country to benefit from its natural resources. Stricter domestic measures prevent some users from participating in activities that are allowed by the Convention. In the Asian arowana and cheetah examples, U.S. consumers and big game hunters are prohibited from engaging in activities permitted by other member countries, in accordance with the Convention—as noted previously, the United States is the largest consumer of wildlife and wildlife products. Stricter domestic measures may act as trade barriers against the exporting country. Countries that are also members of the World Trade Organization may choose to resolve such issues through it rather than continue to work within the Convention. To date, however, no such resolution has been sought. Some opponents of stricter domestic measures argue that they provide little benefit to the species: Stricter domestic measures provided under the Endangered Species Act do little for foreign species because the Service cannot regulate “take” or habitat destruction in foreign countries, nor does the Service develop recovery plans for species that do not occur in the United States. Finally, opponents of stricter domestic measures argue that they run counter to the spirit of the Convention: Some member countries believe that stricter domestic measures, although in accordance with the Convention, undermine the multilateral goals the Convention espouses. The Convention is based on a collaborative decision-making process; when one country contravenes a decision made by the majority by disallowing trade that is allowed by the Convention, that action undermines confidence in the majority’s decisions. For example, countries in southern Africa are outspoken in arguing that the unilateralism represented by stricter domestic measures is inappropriate in a multilateral agreement like the Convention. Stricter domestic measures foster discord among the Convention’s member countries. Some member countries resent it when major consumer countries (e.g., the United States) use stricter domestic measures because doing so implies that those countries believe they know how to manage a species better than the exporting countries and Convention membership. We heard support for and against stricter domestic measures under the Endangered Species Act but not under the Marine Mammal Protection Act, even though the Convention allows some trade in marine mammals (that would otherwise be prohibited under the Marine Mammal Protection Act). Some officials we interviewed speculated that the act’s provisions generate fewer concerns because there is not a large demand for trade in marine mammals in the United States. The use of stricter domestic measures reflects the varying philosophies around the world on species protection and stimulates intense and often emotional debate among and within countries. At the last conference of the member countries, for example, wide-ranging views were expressed over a suggestion that the Convention be modified to encourage countries to avoid the use of stricter domestic measures. In addition, concerns have been expressed within the United States about a potential change in the country’s policy on international species protections. The United States has historically taken a precautionary approach to species protection, although recent actions, such as voting in support of allowing limited trade in African ivory, have raised concerns among conservation groups that these actions indicate a change in that approach. The Convention on International Trade in Endangered Species of Wild Fauna and Flora has changed significantly since its inception in the early 1970s—in size, complexity, and the number and type of species it protects. With these changes have come an increase in member countries’ workload pertaining to permitting, enforcement, and reporting. Further, protections called for under the Convention have become more controversial, with some countries proposing the protection of commercial species that other countries believe should be managed by organizations or agreements other than the Convention. Accordingly, it appears that implementing the Convention will entail a continuing commitment of resources and that debating the merits of its application to commercial species will continue to spark international and organizational flashpoints in establishing an appropriate relationship between the Convention and other resource management organizations. Stricter domestic measures elicit intense opinions and debate. Given the United States’ strong laws and historically aggressive protection of vulnerable species, it has received criticism from the Convention’s member countries, as well as from some of its own citizens and businesses, when it goes beyond the protections to which the Convention member countries have agreed, while at the same time it hears concerns about any potential relaxing of protections afforded species under current laws. Whether the United States continues with its preference, as articulated in current law, to provide stricter protections for Convention-protected species or changes its approach in deference to Convention agreements, either approach will be met with a mixture of concern and support. Making decisions about how to properly manage species both at home and abroad will continue to be challenging, particularly given the pressure to continue managing species with a precautionary approach. The Department of the Interior and the National Oceanic and Atmospheric Administration provided written comments on a draft of this report. (See app. I and II for the full text of these comments.) The Department of the Interior said that it appreciated the spirit of the report in examining issues that can help it improve the implementation of the Convention. The department agreed that the complexity of work for port inspectors and law enforcement personnel has increased along with increases in the number and types of species, parts, and products protected under the Convention. The department noted, however, that Convention members, with strong U.S. support, have made a concerted effort over the last decade to mitigate the effects associated with the complexity of the Convention by creating a streamlined set of resolutions and decision documents as well as developing practical processes for implementation. The member countries, in considering actions to be taken, have also been mindful of the need to reduce the administrative and implementation burden on the members. The department also agreed that new issues have brought new areas of controversy for consideration by the Convention membership but noted that controversy has accompanied every phase of the Convention’s evolution. The department was concerned, however, that the report appears to highlight the negative and understate the positive effects of the Convention. For example, the department was concerned that the “Results in Brief” emphasizes the negative aspect of controversy and implies that the Convention may be inappropriately duplicating the work of other agreements. According to the department, an important impetus for the Convention’s involvement in species protection is the continuing deterioration of the status of the various species in question and the failure of other institutions and organizations to deal with the deterioration effectively. Also, the department was concerned that our discussion of increased complexity portrays it as a negative aspect of the Convention, when in the department’s view, the growth in the number of parties and listings reflects widespread support for the Convention and is a positive trend to which complexity is a side effect. We did not intend to portray the increased controversy or complexity associated with the Convention as either negative or positive, but rather as descriptive characterizations of the Convention’s evolution. We also did not intend to imply that the Convention duplicates the work of other agreements. Rather, we intend to reflect the range of opinions among member countries about the appropriate role for the Convention in managing some species. We have changed the report to clarify our discussion and to include the department’s views. Regarding our discussion of the Convention’s recent involvement in marine fisheries, the department noted that the Convention has helped support other management bodies, such as the International Whaling Commission, which requested the Convention’s assistance. The department also noted that the Convention regulates trade, while international fisheries organizations and agreements regulate harvest; thus, the Convention’s involvement can as easily be complementary as competitive. The department stated that the report accurately portrays the range of views on the use of stricter domestic measures by Convention members, including the United States. The department noted, however, that the U.S. “preference” to provide stricter protections is reflected in law and that the department is required to implement the legislated responsibilities under its jurisdiction, including the implementation of the Endangered Species Act and the Marine Mammal Protection Act, as written. We have clarified in the report that the United States’ “preference” to provide stricter protections is articulated in current laws. The department disagreed with the report’s statement that “there is no clear consensus on the effectiveness of the Convention in conserving species.” In the department’s view, the Convention is effective and highly functioning and has a long history of adopting successful measures to support the conservation and sustainable use of wildlife species in trade. In the department’s opinion, the effectiveness of the Convention is demonstrated by the high number of countries who are party to the Convention, thereby endorsing the Convention’s basic principles, and by the overall success of the conferences of the member countries in coming to agreement on very difficult issues concerning species listing and Convention implementation. Although we appreciate the department’s view and note that it is shared by others, the department did not provide information to show that there is consensus among member countries about the Convention’s effectiveness in conserving species. Finally, the department viewed our observation that there will be continued flashpoints between the Convention and other multinational agreements as too broadly stated, given that our study did not consider the relationship of the Convention to other multilateral agreements. Although our evaluation did not compare the Convention with other multilateral agreements, we stand by our observation. Judging by the controversy and spirited debates that have been the hallmark of the Convention for a quarter of a century, it seems clear that these are likely to continue. Nevertheless, our report recognizes that cooperative efforts are under way to reconcile longstanding differences of opinion about the Convention’s appropriate role in managing marine fish species. Additionally, the department notes that the Convention has formed memoranda of understanding with the Convention on Migratory Species, the Convention on Biological Diversity, and the United Nations Environment Programme. The National Oceanic and Atmospheric Administration commended our comprehensive look at how the Convention is implemented and how its regulatory regime differs from domestic laws protecting wildlife species. The administration agreed that one of the most controversial issues before the Convention is the regulation of international trade in marine fish species and noted that, for species under the administration’s jurisdiction, it has the expertise to participate fully in implementing the Convention. The administration recommended that we clarify the role of the Food and Agriculture Organization and the difference between the Convention and the Endangered Species Act, which we have done. In addition, the administration recommended that we revise our discussion of the controversy over regulation of commercial fisheries trade. Specifically, the administration noted that most of the marine fish species considered for listing in the Convention appendixes are not managed by any resource management or oversight organization at this time. We changed the report to reflect the administration’s comments on this discussion. The administration also noted that the position of the United States has been to consider the Convention as a useful adjunct to traditional fisheries management when the species meet the listing criteria, trade is a concern, and management is lacking or absent. In addition to their overall comments, the department and the administration provided numerous technical and editorial suggestions, which we appreciate and have incorporated in the report as appropriate. We conducted our work primarily at the Department of the Interior’s Fish and Wildlife Service, which is the primary agency responsible for implementing the Convention. We obtained documents on implementation of the Convention in the United States and budget data from the Service. We assessed the reliability of data on shipments inspected and permits issued and determined that they were acceptable for our purposes. We also contacted officials at the Department of Commerce’s National Oceanic and Atmospheric Administration, which advises the Department of the Interior on marine mammal and fisheries issues. We performed a comparative analysis of the Convention, the Endangered Species Act, and the Marine Mammal Protection Act, to identify the relationships between them. We also discussed the Convention and acts with numerous federal and nonfederal officials involved in international trade and species protection, including officials at the Fish and Wildlife Service, National Marine Fisheries Service, industry groups, and conservation groups; and an individual business owner. We also obtained documents on implementation of the Convention and the upcoming conference from the office of the Secretariat for the Convention in Geneva, Switzerland. We conducted our work from March 2004 through August 2004 in accordance with generally accepted government auditing standards. As arranged with your office, unless you publicly announce its contents earlier, we plan no further distribution of this report until 8 days after the date of this letter. At that time, we will send a copy of the report to the Secretaries of the Interior and Commerce and to appropriate congressional committees. We will make copies available to others on request. In addition, the report will be available at no charge on the GAO Web site at http://www.gao.gov. If you or your staff have any questions about this report, please contact me at (202) 512-3841 or my Assistant Director, Trish McClure, at (202) 512- 6318. Other key contributors to this report were Claire Cyrnak, Cynthia Norris, Michelle K. Treistman, and Pamela Tumler. 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To have GAO e-mail you a list of newly posted products every afternoon, go to www.gao.gov and select “Subscribe to Updates.” | International trade in wildlife is a multibillion-dollar industry that, in some cases, has taken species to the brink of extinction. To address the problem, several countries, including the United States, created an international treaty--the Convention on International Trade in Endangered Species of Wild Fauna and Flora--that took effect in 1975. The United States also has domestic laws, such as the Endangered Species Act, that protect species. The protections provided by the Convention and domestic laws can differ. For example, in some cases, U.S. laws afford more stringent protections to species than the Convention does; such stricter protections can prevent U.S. interests from participating in trade that is permitted by the Convention. The Convention's member countries meet periodically to discuss implementation of the Convention and are scheduled next to meet in Thailand in October 2004. In anticipation of this meeting, GAO was asked to report on (1) how implementation of the Convention has changed over the years, (2) U.S. funding and other resources spent on Convention-related activities, and (3) the relationship between the Convention and some domestic laws. The Department of the Interior and the National Oceanic and Atmospheric Administration generally agreed with the information in the GAO report. Implementation of the Convention on International Trade in Endangered Species of Wild Fauna and Flora has become increasingly complex and controversial since its inception. Complexity has increased in part because of the sheer number of member countries (166) and species protected (more than 33,000) and because the criteria for identifying protected species have become more scientific and specific, resulting in heavier data-gathering, permitting, enforcement, and reporting requirements for member countries. Controversy, in turn, has increased because the Convention membership has recently contemplated, and in some cases approved, protection of commercial species such as sharks and Patagonian toothfish (commonly marketed as Chilean seabass)--species that in some cases are already managed under regional fisheries agreements. Over the 9-year fiscal period 1995 through 2003, the United States spent more than $50 million on Convention-related activities. As the agency primarily responsible for U.S. implementation of the Convention, the Fish and Wildlife Service spent the largest portion of these funds--about $37 million over the period. Other agencies have roles as well, including the Department of State, which makes U.S. contributions to help administer the Convention internationally. The Convention and the Endangered Species Act protect species differently. In some cases, the act prohibits imports that are allowed by the Convention. For example, the act generally prohibits the import of a popular exotic fish, the Asian arowana, although the Convention allows some commercial trade in the species. The Convention establishes mandatory requirements and recognizes countries' rights to establish stricter protections. However, such protections have generated heated debates among affected parties. Those in favor say that the United States should impose stricter protections than the Convention, when needed to protect endangered species or their habitats. Opponents say that U.S. actions should be consistent with the agreements reached by a majority of the Convention's members. |
Officer candidates must complete education and military training programs, some of which take up to 4 years, before they are commissioned into the officer corps. The three federal accession programs that produce the most officer commissions are (1) military service academies; (2) ROTC; and (3) Officer Candidate School for the Army, the Navy, the Marine Corps, and the Coast Guard or Officer Training School for the Air Force. Military service academies: The U.S. Military Academy, the U.S. Naval Academy, the U.S. Air Force Academy, and the U.S. Coast Guard Academy operate 4-year programs that provide successful candidates with bachelor’s degrees and commissions as military officers. ROTC: The services’ respective ROTC units are located at civilian colleges and universities throughout the United States, with some academic institutions offering ROTC for more than one service. Officer candidates enrolled in ROTC programs must meet all graduation requirements of their academic institutions and complete required education and military training to receive commissions as officers, usually after 4 years. The Coast Guard does not have an ROTC program. Officer Candidate Schools/Officer Training School: These officer commissioning programs are designed to augment the services’ other commissioning programs. Because these programs focus only on military training, they are short, ranging from 6 weeks (Marine Corps candidates participate in the Naval Reserve Officers’ Training Corps) to 17 weeks (Coast Guard). Various offices within each military service, including the Coast Guard, are responsible for recruiting for these commissioning programs. In general, the military service academies recruit their own candidates and the service recruiting commands recruit for the other accession sources. Table 1 lists the office that primarily conducts recruiting for each major accession source. According to the 2011 Military Leadership Diversity Commission report, the military can recruit from a pool of individuals using specific eligibility requirements that can potentially present a barrier to service. According to the report, those who wish to serve in the military must first meet standards related to age, citizenship, number of dependents, financial status, education level, aptitude, substance abuse, language skills, moral conduct, height and weight, physical fitness, and medical qualifications. Furthermore, commissioned officers must have a bachelor’s degree. Together, these requirements define the eligible population from which the services can recruit. According to the Military Leadership Diversity Commission report and DOD officials, large portions of young people do not meet these requirements and are not eligible to join the military. In addition, according to a DOD Joint Advertising, Market Research and Studies survey, fewer women than men have an interest in military service and that may be due in part to women’s greater interests in education and professional careers, which women often see as incompatible with military service. The general approach used by the services to meet their accession needs has been to start with their service academies and ROTC programs. When these programs are unable to meet a service’s needs for newly commissioned officers, the service uses the Officer Candidate Schools/Officer Training School to bridge the gap. Conversely, during periods of downsizing, all of the commissioning sources may reduce their numbers of officer candidates, but the Officer Candidate Schools/Officer Training School provide the immediate means for achieving the downsizing. Unlike the military service academies and ROTC programs that require up to 4 years to produce an officer, the Officer Candidate Schools/Officer Training School can quickly expand or diminish the size of their candidate pools. To various extents, these accession sources commission officers for both the active and the reserve components, including the National Guard. For example, the ROTC programs commission higher rates of officers for the reserves and the National Guard than do the military service academies. Additionally, the Air National Guard Academy of Military Science commissions the majority of the Air National Guard’s officers. The Air National Guard Academy of Military Science is similar to the Air Force Officer Training School program and is a 6-week military training course. In contrast, state level officer candidate school programs, which are not included in this review, recruit and produce a significant portion of Army National Guard officers. Other accession sources for the federal components of the National Guard include ROTC, federal Officer Candidate School, and direct commissioning programs. Additionally, each service directly commissions officers with particular professional skills—such as physicians, dentists, nurses, lawyers, and chaplains—who do not in all cases attend the major commissioning programs. The Coast Guard also has direct commissioning programs for certain professions, such as aviators, engineers, lawyers, and physician assistants. Each military service, including the Coast Guard, also offers enlisted-to-officer commissioning programs that provide the enlisted population with opportunities to earn commissions as officers. Figure 1 shows the overall distribution of DOD military officers by accession source as of fiscal year 2012. DOD and Coast Guard data from fiscal year 2010 through fiscal year 2014 show a slight percentage increase for female officer accessions. Specifically, the Marine Corps and the Coast Guard increased the rate of female officer accessions every year from fiscal year 2010 through 2014. In contrast, female officer accession rates for the Army, the Navy, and the Air Force fluctuated from fiscal year 2010 through fiscal year 2014, but were higher in fiscal year 2014 than in fiscal year 2010. Additionally, DOD and the Coast Guard have not determined resources and funding to increase the recruitment and accessions of female officers. Female officer accession rates have increased from fiscal year 2010 through fiscal year 2014 for all of the Armed Forces, including the Coast Guard. For example, the Marine Corps increased female officer accessions by 4.2 percent from fiscal year 2010 through fiscal year 2014, and the Coast Guard increased female officer accessions by a total of 6.4 percent. The Army increased female officer accessions by about 0.8 percent, the Air Force increased female officer accessions by about 0.4 percent, and the Navy increased female officer accessions by about 0.2 percent from fiscal year 2010 through fiscal year 2014. Collectively, DOD increased female officer accessions by 1.0 percent from fiscal year 2010 through fiscal year 2014. Figure 2 shows female officer accession rates for DOD and the Coast Guard for fiscal years 2010 through fiscal year 2014. Although collectively the services slightly increased female officer accession rates during this time period, female officer accessions for the Army, the Navy, and the Air Force individually fluctuated from fiscal year 2010 through fiscal year 2014. For example, the highest rates for female officer accessions during this time frame for the Army and the Air Force occurred in fiscal year 2012, and fiscal year 2014 rates were lower in comparison. However, both the Army and the Air Force fiscal year 2014 female officer accessions occurred at a slightly higher rate than they did in fiscal year 2010. In fiscal year 2014, female officer accession rates were 30.4 percent for the Coast Guard, 27.4 percent for the Air Force, 22.7 percent for the Navy, 21.4 percent for the Army, and 11.8 percent for the Marine Corps. Figure 3 shows a comparison of accession rates for female and male officers in DOD and the Coast Guard from fiscal year 2010 through fiscal year 2014. Similar to the increases in female officer accession rates, the representation of women in general in the officer corps for DOD and the Coast Guard has also increased. Appendix II provides a comparison of female and male representation in the officer corps in DOD and the Coast Guard from fiscal year 2010 through fiscal year 2014. DOD and the Coast Guard have not determined the resources and funding to increase the recruitment and, ultimately the accessions, of women into the officer corps. DOD has budget line items in its operation and maintenance budget for recruiting and advertising totaling over $1 billion for fiscal year 2016 (see table 2). Additionally, the Coast Guard has a budget line item for recruiting and training, which was about $202.9 million in fiscal year 2014, about $197.8 million in fiscal year 2015, and the Coast Guard requested $205.8 million in fiscal year 2016. According to Coast Guard officials, the Coast Guard budget line item does not include advertising. There is not a requirement for DOD or the Coast Guard to report budget line items on the recruitment and accessions of women officers. We asked 11 offices that recruit or advertise for DOD and the Coast Guard if they could identify how much was spent specifically on recruiting and advertising for women officers. Of the 11 DOD and Coast Guard offices, 3 DOD offices identified expenditures specifically for recruiting and advertising for women accessions into the officer corps, 6 DOD and Coast Guard offices could not identify how much was spent specifically for recruiting and advertising for women accessions because their budgeting was not reported by gender, and 2 offices did not respond to the question. Given that there is not a requirement to report budget information on recruitment and accessions of women into the officer corps, we asked DOD and Coast Guard offices in our questionnaire whether they could identify resources and funding for their specific initiatives, if any, directed at increasing women officer accessions. We sent questionnaires to 19 DOD and Coast Guard offices regarding initiatives directed at the recruitment and accessions of women officers. Of the 18 offices that responded to the questionnaire, 12 offices reported initiatives. Of those 12 offices, 2 identified resources and funding for all of their reported initiatives. The other 10 offices identified resources and funding for some, but not all, of their reported initiatives. The military service academies have identified several types of both monetary and non-monetary resources required to increase the number of women candidates they enroll through their recruitment initiatives. According to academy officials, these initiatives are funded in part through the military service academies’ direct budgets. The following four examples illustrate both monetary and non-monetary resources directed at initiatives for female officer candidates. U.S. Military Academy officials stated they implemented a direct mailing campaign directed at increasing overall awareness among potential applicants. The U.S. Military Academy purchased the names of highly qualified, top-performing, college-bound high school students from college testing services and then targeted the potential applicants through the direct mailing campaign. Officials reported allocating approximately $462,000 overall and $71,000 for women specifically since the campaign started in 2013. The U.S. Naval Academy reported that as of January 2015 it dedicated staff time resources to implement a Call-Out Program through which female candidates with offers of appointments are contacted to enable U.S. Naval Academy officials to answer any questions they may have and thereby help them decide to accept the offers of appointment. The U.S. Air Force Academy admissions office reported that it dedicated time and resources of staff, cadets, and faculty to offer women a 5-day, fully immersive cadet experience through a summer seminar. According to officials, this initiative allows women to see the opportunities available and experience life at the U.S. Air Force Academy, which they consider critical to overcoming the cultural biases that may deter some women from considering military service as a viable career. U.S. Coast Guard Academy officials reported that they utilized travel expenditures to conduct outreach visits to all-female high schools to recruit women and introduce them to the opportunities at the U.S. Coast Guard Academy. In response to our questionnaire, DOD and the Coast Guard reported 10 initiatives directed specifically at increasing the recruitment and accessions of women into the officer corps. In addition, DOD reported another 10 initiatives directed generally at increasing recruitment and accessions of women. However, there is no oversight framework for the initiatives, related to increasing women in the applicant pool, consistent with applicable law, to include program goals, performance measures linked to program goals, and resource allocation linked to program goals. In addition, DOD and the Coast Guard have not conducted evaluations of all of these initiatives, which could help ensure key initiatives are achieving their intended purpose. In response to our questionnaire, DOD and the Coast Guard reported 10 initiatives directed specifically at increasing female officers’ recruitment and accessions. For example, as discussed earlier, U.S. Coast Guard Academy admissions officers visit all-female high schools to promote the opportunities available for women at the U.S. Coast Guard Academy. Additionally, in response to a Secretary of the Air Force memorandum that directs the Air Force to increase the applicant pool for female officers, the Air Force ROTC is examining how its enrollment process and criteria affects the ability of women to meet recruiting requirements. DOD identified another 10 initiatives generally directed at increasing the recruitment and accessions of women, but not specifically directed at female officer accessions. For example, the Marine Corps hosts workshops for women’s college basketball coaches to increase awareness and support among the athletic coaching staff and to facilitate engagement with female college athletes. While this initiative is directed at women, the Marine Corps did not report this initiative as directed at female officer accessions but rather at increasing awareness of the Marine Corps among college athletes and coaching staff. The Navy Recruiting Command created a Facebook page specifically for women to provide them with a digital forum to exchange information and questions about the Navy. In table 3 we show that, on the basis of our analysis of DOD’s and the Coast Guard’s responses to the questionnaire, as of July 2015 the 20 initiatives (the 10 directed specifically at increasing female officers’ recruitment and accessions and the 10 directed at increasing the recruitment and accessions of women in general) fall into three main categories—advertising/marketing, outreach, and policy/program review and changes. In addition to the 20 initiatives mentioned above, DOD and the Coast Guard reported another 37 initiatives that they are currently using to increase recruitment and accessions generally. While these 37 initiatives are inclusive of women and could serve to increase the recruitment and accessions of women into the officer corps, they are not exclusively directed at women or at female officers’ accessions. For example, the Navy Recruiting Command hosts a program called Influencers-to-Sea Embarks that is directed at increasing diversity generally and not directed only at women. Through this program, the Navy invites influencers, such as university presidents and mayors, to embark on a Navy vessel and learn about the opportunities the Navy offers. In addition, the Coast Guard Recruiting Command has a hometown recruiter program in which current Coast Guard servicemembers return to their hometown to attend outreach events, such as visiting local schools to talk about their Coast Guard experience. While the Coast Guard Recruiting Command told us that it uses this program to increase women’s accessions, the program is directed at increasing accessions generally. For a complete list of the 57 initiatives that DOD and the Coast Guard reported were directed at increasing recruitment and accessions (10 specifically at female officers’ accessions, 10 at women in general, and 37 at increasing recruitment and accessions), see appendix III. The Navy and the Air Force also reported planned initiatives that are not yet in use to increase the recruitment and accessions of women into the officer corps. According to U.S. Naval Academy officials, the U.S. Naval Academy is in the process of hiring a marketing consultant who will help in developing a strategic messaging and marketing campaign directed at young women as well as development of new marketing materials, videos, and social media channels to reach them. Additionally, according to Air Force officials, the Air Force Recruiting Service is planning to establish a cadre of officer recruiters dedicated to targeting applicants in accordance with the Secretary of the Air Force memorandum, which identifies increasing the applicant pool for women officers. DOD and the Coast Guard do not have an oversight framework for their initiatives. More specifically, they do not have an oversight framework that includes (1) program goals; (2) performance measures linked to program goals to measure progress toward achieving those goals; and (3) resource allocation linked to program goals. Our prior work has demonstrated the importance of establishing an oversight framework and has shown that having an effective plan for implementing programs and measuring progress can help decision makers determine whether initiatives are achieving the desired results. Moreover, key practices for implementing a results-oriented oversight framework requires agencies to clearly establish program goals for which they will be held accountable, measure progress toward achieving those goals, determine strategies and resources to effectively accomplish those goals, and use performance information to make programmatic decisions necessary to improve performance. Additionally, evaluations can play a key role in program planning, management, and oversight by providing feedback on both program design and execution. Program evaluation analyzes performance measures to assess the achievement of performance objectives. Although DOD and Coast Guard officials agree that increasing the representation of women is important, DOD and the Coast Guard do not have a clearly defined role for providing oversight of the various initiatives and the Army, the Navy, the Marine Corps, and the Coast Guard do not have program goals for their initiatives directed at increasing the recruitment of women into the officer corps. While federal law places limits on DOD’s ability to set certain kinds of recruitment or accessions goals and officials with several of the recruitment and accession sources stated that there are legal concerns with quantifiable accession goals, officials also stated that there are not legal concerns with goals related to recruitment, such as applicant pool goals. For example, an Air Force official stated that there were legal concerns with setting goals for actual accessions, or hires, since they cannot consider ethnicity, race, or gender when making decisions about hiring. However, Air Force officials stated there were not any legal concerns with targeting certain demographic groups in recruiting efforts in an attempt to shape the applicant pool. Officials at the U.S. Naval Academy also stated that they have no legal concerns with recruiting initiatives, but that gender-based accessions plans must serve an important, governmental objective and be substantially related to achieving that objective. One of the five Armed Forces we met with has a current quantifiable goal related to the recruitment of women into the officer corps. The Air Force has a quantifiable goal related to increasing the applicant pool of women into the officer corps, which could in turn serve to increase female officers’ accessions. In a June 2014 memorandum, the Secretary of the Air Force directed the Air Force to institute a wide range of diversity goals for its active duty officer applicant pools, including a 30 percent applicant pool goal for female officers. An Air Force official stated that the officer applicant pool goal was developed to provide the Air Force’s officer accession sources with the incentive to identify and recruit from untapped sources of officer applicants. An Air Force official also stated that establishing this goal generated discussions among the officer accession sources about how to achieve this common goal in light of these sources’ respective operational differences and that the need to meet the broader goal might potentially result in the accession sources developing their own respective performance measures. Such applicant pool goals were also noted in the 2011 Military Leadership Diversity Commission report, which recommended developing similar goals for qualified minority applicants to precommissioning officer programs. The Military Leadership Diversity Commission stated that one way to ensure that there is a demographically diverse applicant pool is to develop goals for qualified minority applicants. According to the Military Leadership Diversity Commission, the goals would not be used during the actual admissions decision but would help ensure that there is a demographically diverse applicant pool from which to select each year. A similar recommendation was made by the Defense Advisory Committee on Women in the Services in its 2013 report. The Defense Advisory Committee on Women in the Services recommended that all of the services have targets to gauge progress in increasing the representation of women in the officer corps (and therefore in the principal accession sources for officers). Officials with the other recruitment and accession sources with whom we met stated that they do not have clear goals with quantifiable metrics linked with those goals related to the recruitment and accessions of women into the officer corps. Army officials stated that they had not received any documented guidance or goals directing them to increase the number of female applicants for officer positions or female officer accessions. Similarly, while the Secretary of the Navy publicly expressed the importance of increasing the number of women in the Navy and Marine Corps, with the exception of submarines, Navy and Marine Corps officials stated that they currently do not have documented guidance or goals directing them to increase the number of female officer applicants or accessions. Coast Guard officials also stated that although there is an overall intent to increase diversity, they had no specific goals associated with increasing the number of female officer applicants or accessions. Moreover, DOD and the Coast Guard reported evaluating seven out of ten of their initiatives focused exclusively on the accessions of women into the officer corps. However, in the absence of program goals for initiatives directed at increasing the applicant pool and ultimately the accessions of women into the officer corps, they do not have performance measures linked to program goals to evaluate the extent to which their initiatives are achieving their intended purpose. In response to our questionnaire, DOD and the Coast Guard reported they had conducted evaluations of seven of the initiatives focused exclusively on the accessions of women into the officer corps, although we could only verify the evaluation of an initiative from Navy Recruiting Command. For example, Navy Recruiting Command conducted targeted direct mail and e-mail initiatives with female-specific content and tracked the leads generated in response to the initiative and the percentage of leads that resulted in a recruit joining the Navy. Additionally, Coast Guard Recruiting Command reported implementing an online and print marketing campaign directed toward women and using online user metrics to track the effectiveness of its online advertising materials. According to military service academy officials, they use data on applicants and accessions of women from the military service academies to measure how well current recruitment and accessions initiatives are working to increase the recruitment and accessions of female officers. Military service officials provided a variety of reasons for not evaluating the initiatives, including the subjectivity of the information, the lack of funding for evaluations, and the newness of the program. For example, the Marine Corps provides take-home recruiting materials that feature stories of female Marine Corps officers. Officials reported that, although they have collected some data, they have not developed a way to evaluate the effectiveness of the initiative using those data. The Air Force ROTC reported an initiative implementing additional height measurements that could provide more waiver requests for women, since the current restrictions for undergraduate pilot training eliminates approximately 50 percent of female candidates. Although Air Force ROTC reported it has collected initial data on this initiative, it reported that it is too early in the process to evaluate this initiative. While it may be impossible and impractical to measure the effectiveness of all of DOD’s and the Coast Guard’s initiatives to increase the applicant pool and ultimately female officer accessions, developing performance measures and conducting evaluations are critical to assessing the effectiveness and quality of performance over time toward meeting program goals. Without an oversight framework that includes program goals (consistent with applicable law), such as goals related to the composition of the applicant pool and performance measures, DOD and the Coast Guard are unable to ensure that resources are linked to program goals. As previously discussed, DOD and the Coast Guard have reported allocating resources and funding for initiatives directed at increasing the recruitment and accessions of women into the officer corps; however, many recruitment and accessions sources identified resources and funding for some, but not all, of their reported initiatives. Moreover, without evaluations of key initiatives, DOD and the Coast Guard are unable to ensure resources are dedicated to those initiatives most effective at achieving their intended purpose. DOD and the Coast Guard have expressed their intent to increase the number of female officers beyond current levels. Data show that female officer accessions have increased slightly and DOD and the Coast Guard have several initiatives aimed at further increases. DOD and the Coast Guard have also targeted resources to some of these initiatives. However, without an oversight framework that includes program goals with performance measures and resource allocation linked to those goals and evaluations of key initiatives, decisions makers do not have the information they need to determine the effectiveness of DOD’s and the Coast Guard’s efforts to increase female officer recruitment and accessions. Given the effect of continuing fiscal challenges due to sequestration and reduced budgets, it is important that DOD and the Coast Guard are able to identify which initiatives are the most effective at increasing the recruitment and accessions of women and whether limited resources are being directed toward the most effective initiatives. To improve DOD’s management of initiatives directed at increasing the recruitment and accessions of women into the officer corps, we recommend that the Secretary of Defense direct the Under Secretary of Defense, Personnel and Readiness, in collaboration with the service Secretaries, to take the following actions: Develop an oversight framework that includes or incorporates (consistent with applicable law): Service-wide program goals for initiatives directed at female officers’ recruitment, such as goals related to the composition of the applicant pool; Performance measures linked to program goals; and Resource allocations linked to program goals. Conduct evaluations for key recruitment initiatives to help ensure these initiatives are achieving their intended purpose. To improve the Coast Guard’s management of initiatives to increase the recruitment and accessions of women into the officer corps, we recommend that the Commandant of the Coast Guard take the following actions: Develop an oversight framework that includes or incorporates (consistent with applicable law): Service-wide program goals for initiatives directed at female officers’ recruitment, such as goals related to the composition of the applicant pool; Performance measures linked to program goals; and Resource allocations linked to program goals. Conduct evaluations for key recruitment initiatives to help ensure these initiatives are achieving their intended purpose. We provided a draft of this report to DOD and the Department of Homeland Security (DHS) for review and comment. Written comments from DOD and DHS are reprinted in their entirety in appendixes IV and V, respectively. In summary, DOD concurred with the first recommendation and did not state whether it concurred with the second recommendation. DHS concurred with both of the recommendations. DOD concurred with the first recommendation to develop an oversight framework that includes or incorporates (consistent with applicable law), (1) service-wide program goals for initiatives directed at female officers’ recruitment, such as goals related to the composition of the applicant pool; (2) performance measures linked to the program goals; and (3) resource allocations linked to program goals. In its comments, DOD noted that the services have taken steps, through targeted outreach and recruiting efforts, to increase minority and female representation in the officer applicant pool for DOD’s commissioning programs. DOD stated that it had updated relevant service academy guidance that will address the development of quantifiable performance goals and measures linked with the program mission and goals of the service academies. DOD stated that it plans to publish updated guidance by February 2016 for the services’ respective ROTC programs to measure the quality, demography, and resources of each unit to monitor and assess the performance, growth, and progress of programs in meeting the officer accession needs of the services. While these steps are positive, we continue to believe that fully addressing this recommendation by developing an oversight framework that includes service-wide program goals and performance measures and resource allocation linked to program goals would allow the department to improve DOD’s management of initiatives directed at increasing the recruitment and accessions of women into the officer corps. DOD did not state whether it concurred with the second recommendation to conduct evaluations for key recruitment initiatives to help ensure these initiatives are achieving their intended purpose. DOD stated that it is studying the dynamics of female accession and retention and that the RAND Corporation is preparing studies related to recruiting women and explaining gender differences in officer career progression. DOD also stated that the Joint Advertising, Marketing Research and Studies activity conducts surveys and analysis on the dynamics of the recruitment market, including the recruitment and accession of women. Lastly, DOD stated that revised DOD guidance reestablishes an annual assessment and report of the commissioning programs and would assist in evaluating the progress made by the service academies and ROTC in achieving program objectives. While these actions represent positive steps, we continue to believe that evaluations of the services’ initiatives could help to ensure key initiatives are achieving their intended purpose. We found that DOD had not evaluated all of their initiatives directed at increasing female officers’ recruitment and accessions, and while it may be impossible and impractical to measure the effectiveness of all of the initiatives, evaluations are critical to assessing the effectiveness and quality of performance over time toward meeting program goals. In its written comments, DHS concurred with the recommendation to develop an oversight framework that includes or incorporates (consistent with applicable law), (1) service-wide program goals for initiatives directed at female officers’ recruitment, such as goals related to the composition of the applicant pool; (2) performance measures linked to the program goals; and (3) resource allocations linked to program goals. In its comments, DHS stated that the Coast Guard has a goal for female officer accessions and will collect data to determine whether the goal is being achieved and allocate resources for officer recruitment focused on female campaigns. DHS also concurred with the recommendation to conduct evaluations for key recruitment initiatives to help ensure these initiatives are achieving their intended purpose. DHS stated that the U.S. Coast Guard Academy routinely evaluates recruiting initiatives to determine measures of success and that this data collection resulting from these evaluations will be tailored to specifically account for females. DHS also stated that the Coast Guard will collect data to determine whether the goals have been achieved, which will allow for processes and policies to facilitate collecting gender-based recruiting metrics. DHS provided an estimated completion date of October 2016 for these actions. We believe these are positive steps and if implemented as planned would meet the intent of our recommendations. We are sending copies of this report to the appropriate congressional committees, the Secretary of Defense, the Under Secretary of Defense for Personnel and Readiness, the Chairman of the Joint Chiefs of Staff, the Secretaries of the military departments, the Secretary of Homeland Security, and the Commandant of the Coast Guard. The report is also available at no charge on the GAO website at http://www.gao.gov. If you or your staff have any questions about this report, please contact me at (202) 512-3604 or [email protected]. Contact points for our Offices of Congressional Relations and Public Affairs may be found on the last page of this report. GAO staff who made key contributions to this report are listed in appendix VI. The scope of our analysis included female officer accessions from all Department of Defense (DOD) and Coast Guard officer accession sources, which include the military service academies, the Reserve Officers’ Training Corps (ROTC), Officer Candidate Schools/Officer Training School, and direct commissioning programs. We included both the active and reserve components of the officer corps, including the federal components of the National Guard. Table 4 contains a list of the agencies and offices we contacted during the course of our review. For our first objective, to evaluate the extent to which accessions of women into the officer corps have increased, and DOD and the Coast Guard have determined resources and funding to increase the accessions of women into the officer corps, we obtained accessions data maintained by the Defense Manpower Data Center from fiscal year 2010 through fiscal year 2014. We chose to review data from the last 5 fiscal years to focus on current initiatives. We analyzed the data to identify trends in female officer accessions over this time period. We also analyzed the data to identify trends in female officer representation for this same time period. We assessed the reliability of the accessions and representation data by reviewing the Defense Manpower Data Center’s methodology for collecting these data and by conducting a review of the completeness of the data. We found the data to be sufficiently reliable for the purposes of this report. We also obtained and reviewed budget justification reports, focusing on budget line items for recruiting and advertising. We identified obligations for these activities from fiscal year 2014, appropriations from fiscal year 2015, and estimated budgets for fiscal year 2016. In addition, we obtained recruiting and advertising expenditures for women officers from 11 offices we identified in DOD and the Coast Guard with responsibilities related to recruiting or advertising. We also obtained information on resources and funding through a questionnaire that we developed and distributed to 19 DOD and Coast Guard offices we identified in consultation with DOD and Coast Guard officials that conduct recruiting and accessions of women into the officer corps, such as the military service academies, recruiting commands, and service commands responsible for overseeing the ROTC, Officer Candidate Schools/Officer Training School, and direct commissioning programs. To identify these 19 offices, we reviewed DOD and Coast Guard guidance and we discussed the services’ roles and responsibilities related to recruitment and accessions with officials from each military service, including the Coast Guard. In an e-mail in advance of the questionnaire, we asked the relevant DOD officials to confirm the offices that could have initiatives directed at increasing recruitment and accessions of women officers. We did not receive feedback from the headquarters officials that we should add any other offices to our questionnaire recipient list. In the questionnaire, we asked these 19 offices to identify resource and funding information for the initiatives they are currently using to increase the accessions of women into the officer corps. Of the 19 questionnaires we distributed, we received responses to the questionnaires from 18 offices. Of these, 12 offices reported initiatives. We assessed the reliability of the marketing budget and expenditures reported by the U.S. Military Academy by sending a questionnaire and interviewing academy officials. We found the data to be sufficiently reliable for the purposes of this report. For our second objective, to evaluate the extent to which DOD and the Coast Guard have initiatives to increase the recruitment and accessions of women into the officer corps and an oversight framework, we reviewed responses to our questionnaire regarding initiatives the services have directed at increasing the accessions of women into the officer corps. We also contacted officials in DOD and the Coast Guard offices that have roles and responsibilities related to the recruitment and accessions of women. In the questionnaire, we asked these offices to identify current initiatives they were using to increase the accessions of women into the officer corps. For the National Guard, we requested that they report initiatives at the headquarters and not the state level. For each initiative, we asked officials to report whether the initiative was ongoing or ended and whether the initiative focused (1) exclusively on increasing the accessions of female officers, (2) exclusively on women but not only for accessions, (3) exclusively on accessions but not only for women, or (4) not only for women and not only for accessions. We also asked the offices to report whether they had evaluated the initiatives and if so to provide any documentation related to the evaluations. In addition to the questionnaire, we interviewed agency officials to determine if there were any new or planned initiatives to increase the accessions of women into the officer corps. We analyzed the questionnaire responses to identify initiatives underway to increase the recruitment and accessions of women. The initiatives included in this report are those that were reported by DOD and the Coast Guard in response to our questionnaire. There may be additional initiatives that exist but were not reported. We conducted a content analysis of the questionnaire responses. We categorized all of the initiatives into three types: (1) advertising/marketing, (2) outreach, and (3) policy/program review and changes. Initiatives placed in the advertising category included videos, print, social media, and mailing campaigns. Outreach initiatives included speaking engagements, conferences, career fairs, campus visits, and phone calls. Policy/program review and change initiatives include those that are aimed at reviewing and revising current policies and programs. Initiatives could be placed in only one category. One GAO analyst conducted this analysis, categorizing the information and entering it into a spreadsheet, and a different GAO analyst reviewed the categorizations. Any initial disagreements in the categorization were discussed and reconciled by the analysts. To evaluate the extent to which DOD and the Coast Guard have developed an oversight framework to increase the accessions of women into the officer corps, we compared the questionnaire responses, documentation, and information from our interviews against key elements of an oversight framework, which includes establishing program goals, performance measures, and resource allocation linked to program goals. We interviewed officials to determine if there were agency goals for the recruitment and accessions of women into the officer corps and if the reported initiatives were linked to agency goals, if any. To evaluate the extent to which DOD and the Coast Guard evaluated their initiatives to ensure initiatives are achieving their intended purposes, when possible, we reviewed the evaluations that questionnaire respondents said had been conducted on initiatives directed at increasing the recruitment and accessions of women into the officer corps. Two GAO methodologists reviewed the documentation to assess whether an evaluation had been conducted. We focused the review of the reported evaluations on the 10 initiatives focused exclusively on the accessions of women into the officer corps. Of those initiatives, 7 responding offices reported conducting some form of evaluation. Of those 7 initiatives, 5 did not provide documentation of the evaluation so we could not assess whether they had conducted an evaluation. The methodologists used a broad definition of evaluation to include any analysis of a specific initiative’s process or outcome (including costs, effectiveness, or other possible measures) and applied professional judgment to decide whether the documentation provided sufficient evidence that such an analysis had been conducted. The methodologists concluded that the documentation for one initiative indicated that the accession source had tracked response rates to a specific e-mail initiative, which is a minimal yet reasonable measurement of the immediate output of the initiative. However, they concluded that the documentation for the other initiative reported general accession results but provided no evidence of an analysis that linked those results with any specific initiative. We conducted this performance audit from February 2015 to November 2015 in accordance with generally accepted government auditing standards. Those standards require that we plan and perform the audit to obtain sufficient, appropriate evidence to provide a reasonable basis for our findings and conclusions based on our audit objectives. We believe that the evidence obtained provides a reasonable basis for our findings and conclusions based on our audit objectives. The percentage of women represented in the officer corps for DOD and the Coast Guard has increased since the early 1970s, including over recent years. According to the Population Representation in the Military Services: Fiscal Year 2013 Summary Report that is released by the Office of the Under Secretary of Defense, Personnel and Readiness, female representation in the active component commissioned officer corps has increased since 1973. We reviewed active and reserve officer corps data from the Defense Manpower Data Center for fiscal years 2010 through fiscal year 2014. The data indicate that the percentage of women in the officer corps for DOD and the Coast Guard slightly increased during those years. Collectively, the percentage of women in the officer corps for DOD has increased by 0.7 percent. For the Coast Guard, the percentage of women in the officer corps has increased by about 2.1 percent. Figure 4 shows female officer representation rates for DOD and the Coast Guard from fiscal year 2010 through fiscal year 2014. The percentage of women represented in the officer corps from fiscal year 2010 through fiscal year 2014 slightly increased each year across the services, including the Coast Guard. Similarly, the overall increase in female officer representation during this time period was 1.4 percent for the Navy, about 1 percent for the Air Force, about 0.7 percent for the Marine Corps, and 0.4 percent for the Army. Figure 5 shows female officer representation rates by Armed Force from fiscal year 2010 through fiscal year 2014. In response to our questionnaire, DOD and the Coast Guard reported 57 initiatives that are used specifically or generally to increase the accessions of women into the officer corps. Responding offices were asked to place the reported initiatives in one of four types to describe whether the initiative was focused exclusively on women officer accessions or had a broader focus. The four types of initiatives are (1) exclusively women officer accessions; (2) women only, but not only for accessions; (3) accessions only, but not only for women; and (4) not only women and not only accessions. Table 5 shows initiatives DOD and the Coast Guard reported as “exclusive to women officer accessions;” table 6 shows initiatives that are for “women only and not only accessions;” and table 7 shows initiatives that fall into either of the last two types of initiatives—”accessions only, but not only for women” and “not only women and not only accessions.” In addition to the contact named above, Kimberly C. Seay (Assistant Director), Timothy Carr, Nicole Collier, Cynthia Grant, Mae Jones, Amie Lesser, Elisha Matvay, Terry Richardson, Matthew Sakrekoff, Michael Silver, Paola Tena, Cheryl Weissman, Alexander Welsh and Michael Willems made major contributions to this report. Military Personnel: DOD Is Expanding Combat Service Opportunities for Women, but Should Monitor Long-Term Integration Progress. GAO-15-589. Washington, D.C.: July 20, 2015. Military Personnel: Actions Needed to Improve Evaluation and Oversight of Reserve Officers’ Training Corps Programs. GAO-14-93. Washington, D.C.: November 13, 2013. Military Education: Additional DOD Guidance Is Needed to Enhance Oversight of the Service Academies and Their Preparatory Schools. GAO-12-327R. Washington, D.C.: February 27, 2012. Military Personnel: Strategic Plan Needed to Address Army’s Emerging Officer Accession and Retention Challenges. GAO-07-224. Washington, D.C.: January 19, 2007. Military Education: DOD Needs to Enhance Performance Goals and Measures to Improve Oversight of Military Academies. GAO-03-1000. Washington, D.C.: September 10, 2003. Gender Issues: Trends in the Occupational Distribution of Military Women. GAO/NSIAD-99-212. Washington, D.C.: September 14, 1999. Gender Issues: Perceptions of Readiness in Selected Units. GAO/NSIAD-99-120. Washington, D.C.: May 13, 1999. Gender Issues: Information to Assess Servicemembers’ Perceptions of Gender Inequities Is Incomplete. GAO/NSIAD-99-27. Washington, D.C.: November 18, 1998. Gender Issues: Improved Guidance and Oversight Are Needed to Ensure Validity and Equity of Fitness Standards. GAO/NSIAD-99-9. Washington, D.C.: November 17, 1998. Military Academy: Gender and Racial Disparities. GAO/NSIAD-94-95. Washington, D.C.: March 17, 1994. Military Downsizing: Balancing Accessions and Losses is Key to Shaping the Future Force. GAO/NSIAD-93-241. Washington, D.C.: September 30, 1993. Air Force Academy: Gender and Racial Disparities. GAO/NSIAD-93-244. Washington, D.C.: September 24, 1993. Naval Academy: Gender and Racial Disparities. GAO/NSIAD-93-54. Washington, D.C.: April 30, 1993. Officer Commissioning Programs: More Oversight and Coordination Needed. GAO/NSIAD-93-37. Washington, D.C.: November 6, 1992. | Since the end of the Second World War, the role of women in the military has been evolving. Changes to laws and DOD policies have either eliminated or clarified restrictions on women serving in the military. A 2011 Military Leadership Diversity Commission reported that women comprise more than 50 percent of the recruiting pool for the officer corps. Public Law 113-291 included a provision for GAO to review the Armed Forces' outreach and recruitment efforts directed at women's representation in the officer corps, among other things. GAO evaluated the extent to which (1) accessions of women into the officer corps have increased, and DOD and the Coast Guard have determined resources and funding to increase the accessions of women into the officer corps and (2) DOD and the Coast Guard have initiatives and an oversight framework to increase the recruitment and accessions of female officers. GAO analyzed fiscal years 2010-14 female officer accessions data, reviewed budget reports, distributed a questionnaire to offices responsible for the recruitment and accessions of female officers, and interviewed agency officials about their efforts. Department of Defense (DOD) and Coast Guard fiscal year 2010-14 data show an overall slight increase in female officer accessions rates (e.g. the number of female officer accessions during a period of time, expressed as a percentage of total accessions) for all of the Armed Forces, with the Coast Guard having the highest percentage increase. Female officer accession rates for the Army, the Navy, and the Air Force fluctuated from fiscal year 2010 through fiscal year 2014. The Marine Corps had slight increases from 7.6 percent to 11.8 percent. DOD and the Coast Guard have not determined the resources and funding to increase accessions of women. DOD has requested $1.36 billion in general for recruiting and advertising in its fiscal year 2016 operation and maintenance budget request. However, DOD and the Coast Guard have not identified resources for all initiatives directed at the recruitment and accessions of female officers. In response to GAO's questionnaire, DOD and the Coast Guard reported 10 initiatives specifically designed to increase the recruitment and accessions of female officers. For example, Coast Guard officials reported that U.S. Coast Guard Academy admissions officers visit all-female high schools to promote the opportunities available for women at the U.S. Coast Guard Academy. However, DOD and the Coast Guard do not have an oversight framework for recruitment initiatives, to include program goals, performance measures, and resource allocation linked to program goals. One of the five Armed Forces has a goal related to the recruitment of women into the officer corps; however, the others do not. DOD and the Coast Guard also have not conducted evaluations of all 10 initiatives. Without an oversight framework and evaluations of initiatives, which can demonstrate that initiatives are achieving their intended purpose, DOD and the Coast Guard will be limited in identifying which initiatives are the most effective at increasing the recruitment and accessions of women, and in directing limited resources to the most effective initiatives. GAO recommends that DOD and the Coast Guard develop an oversight framework and conduct evaluations for initiatives. DOD concurred with the first recommendation and did not state whether it concurred with the second recommendation. The Department of Homeland Security concurred with both of the recommendations. |
Congress and other stakeholders have raised questions about USPS’ participation in the e-commerce area. Some stakeholders have expressed concerns that USPS is establishing e-commerce products and services in competition with those already existing in the private sector, a role they regard as not appropriate for a government entity. For example, USPS has established an electronic bill payment and presentment service when many private-sector companies in the financial services industry, such as banks, already provide such services. In August 2000, USPS stated that it had a valid and appropriate role to play in the e-commerce area: “our long history as a trusted provider of universal communications services for the American people and the unquestioned value of our presence in and service to every community make it logical and, we think, imperative that we continue to develop the e-commerce products and services that our customers will need and demand both now and in the future for their business and personal lives.” USPS has stated that the pace of the e-commerce revolution is highly uncertain and that the evolution of market and customer requirements will increase the need for a more flexible, innovative, and responsive Postal Service. According to USPS, many of its direct competitors have taken their business online, and many new competitors are threatening other parts of its business. Further, competition is evolving through electronic diversion and alternatives in the areas of electronic bill payment and presentment, and payment options; secure messaging services; and digital security services, such as digital certificate authorities. Intense competition from online shipping services exists from two major competitors—FedEx and United Parcel Service (UPS). The key players each have unique approaches to new electronic business opportunities. According to USPS, it also faces competition from foreign postal administrations, many of which have developed a formal strategy for e- commerce development, in some cases, supported by a dedicated business unit. USPS offers a variety of e-commerce and Internet-related products and services that deal with the delivery of money, messages, and merchandise. Over the past year, USPS has added specific goals and strategies for its e- commerce program. In September 2000, USPS stated that the e-commerce goal for fiscal year 2001 was to “Use the Internet channel to offer new and enhanced products and services that provide the U.S. Postal Service with revenue such as license fees and user charges.” More specific e-commerce fiscal year 2001 goals included (1) generating $104 million in revenue from e-commerce initiatives, (2) increasing customer traffic to USPS’ Web channel (USPS.com), and (3) improving customer overall satisfaction with USPS’ channel/service offerings. In February 2001, USPS’ three primary goals for USPS.com, from which many e-commerce and Internet-related offerings are accessed, were to (1) increase USPS revenue, (2) maximize customer satisfaction, and (3) reduce costs for USPS. In June 2001, USPS said that its goals were to use the best available and emerging technologies, including the Internet, to enhance the value, availability, and affordability of postal products and services for all customers and to expand universal access to the delivery of messages, merchandise, and money by providing customers with choices when doing business with USPS. Recently, USPS appears to be narrowing its focus in the e- commerce area. In September 2001, the Postmaster General stated that “I will take a close look at our e-commerce activities and we will retain those that support growth of our core products and others that are profitable.” Significant changes have affected the marketplace in the past year, particularly in the e-commerce sector, with many dot.com companies going out of business. Due to this market volatility, some e-commerce providers, such as USPS, have experienced slower rates of adoption and lower revenue than anticipated. Yet e-commerce plays an ever-growing role in the national economy. According to a recent report, the number of American adults with Internet access grew by 16 million in the second half of 2000. More than half of those surveyed for the report who had Internet access had bought a product online at one time or another. The Census Bureau of the Department of Commerce estimated that total e-commerce sales for 2000 were $25.8 billion, about 0.8 percent of total retail sales, and for the second quarter of 2001, about 0.9 percent. Privacy concerns are widely regarded as one of the main issues delaying greater use of the Internet and e-commerce. In particular, consumers appear concerned about the extent to which some Web site operators collect personal information and share that information with third parties without the consumer’s knowledge. Surveys have also shown that some potential e-commerce customers avoid using these products and services because of fear that their personal information will be misused. Since we issued our report in September 2000, USPS has taken actions to respond to our recommendations, but it has only made limited progress in resolving the problems that our recommendations were aimed to correct. Over the past year, USPS has continued to struggle with the management and performance of its e-commerce program. Implementation of USPS’ e- commerce initiatives has continued in a fragmented and inconsistent manner. We recommended that the Postmaster General (1) take appropriate actions to help ensure that e-commerce and related initiatives are appropriately identified and maintain accurate and complete information related to the status of these initiatives, (2) follow processes and controls that have been established for developing and approving e- commerce initiatives, and (3) provide complete and accurate information on costs and revenues for the financial data on e-commerce initiatives. USPS continues to have difficulty defining, identifying, and classifying its Internet-related initiatives, including e-commerce initiatives; and inconsistency remains in the implementation of its processes and controls for developing, approving, and monitoring the performance of e-commerce initiatives. Finally, financial information related to USPS’ e-commerce and Internet-related activities is still not complete, accurate, and consistent. We discussed USPS’ difficulties with its e-commerce program with the Deputy Postmaster General. He acknowledged the difficulties and described USPS’ planned actions for addressing the problems. He stated that USPS intends to be able to provide complete financial reporting on all of its e-commerce initiatives by the end of calendar year 2001. USPS continues to have difficulty defining and determining which of its Internet-related initiatives are e-commerce initiatives. In our previous report, we recommended that USPS take actions to appropriately identify e-commerce and related initiatives and maintain complete information on their status. At the time we issued our previous report, USPS defined its e- commerce activities as those products and services that required the Internet to do business and generated revenue to USPS through user charges or licensing fees. Throughout our review, USPS was in the process of revising this definition. According to the Deputy Postmaster General, USPS was refining the definition to deal with what it says were anomalies that have surfaced that made this definition confusing and inappropriate. In October 2001, he stated that USPS’ difficulty in reaching agreement among its various business units on which initiatives were e-commerce was faced by many companies where there was an overlap between e- commerce and core product activities and infrastructure development to reduce costs. Differing internal views about the definition and classification of Internet- related initiatives, including e-commerce initiatives, made it difficult for USPS to provide us with a complete list of e-commerce initiatives. Over the past few months, USPS officials explained the difficulties they had experienced due to differing opinions as to how e-commerce initiatives should be defined and what initiatives should be considered e-commerce versus those that support or enhance existing core products and services. E-commerce initiatives are just one subset of USPS’ new products and services, which may include other Internet-related initiatives as well as retail and advertising initiatives. How an initiative is defined and classified also affects how its costs, particularly indirect costs, and revenues are reported. Without a clear understanding of which initiatives are e- commerce, USPS cannot provide complete, accurate, and consistent information on its e-commerce program. USPS’ criteria for different categories of e-commerce and other Internet- related initiatives have changed several times over the past few months. In a letter dated December 4, 2001, commenting on a draft of this report, the Deputy Postmaster General stated that USPS now defines as e-commerce “those products or services that require the Internet for the customer to do business with us and whose primary objective is to directly generate new revenue.” Further, he stated that USPS also said that it recognized that some of its new products and services might either use the Internet or generate new revenue, but only those that met both tests would be defined as e-commerce. However, USPS noted that initiatives defined as “non-e- commerce” would not receive any less management scrutiny. Applying this definition, USPS stated that it currently has 5 e-commerce initiatives: ePayments, PosteCS, NetPost Certified, NetPost Mailing Online/NetPost Cardstore, and Secure Electronic Delivery Services/Electronic Postmark. USPS officials explained that the difficulty they have encountered in attempting to define and classify e-commerce and Internet-related initiatives is due to differences in the purposes for various initiatives. They further explained that these different purposes could be grouped into three major categories of Internet-related initiatives. First, some initiatives are intended to directly generate revenue as stand-alone products. Second, other initiatives may indirectly generate revenue by supporting existing core products and services. Third, still other initiatives may or may not generate revenue, but are primarily intended to provide customers with easier access to other products and services. Examples of these different categories follow. An example in the first category would include eBillPay. According to USPS, eBillPay, part of USPS’ ePayments initiative, was developed primarily for the purpose of directly generating revenue from retail customers and has not generated revenue toward any existing core postal product, such as stamps. Thus, USPS considers ePayments a stand-alone e-commerce initiative. Other examples of stand-alone initiatives include NetPost Certified and PosteCS (see app. II for more details on the initiatives). An example of the second category of initiatives is the Postal Store (an enhancement of its previous initiative, Stamps Online), which was intended primarily to provide an electronic alternative for customers desiring to purchase stamps via the Internet. Thus, according to USPS officials, it indirectly generates revenue toward an existing USPS core product, that is, postage stamps, and is not considered an e-commerce initiative. The third category of initiatives includes Delivery Confirmation, which is a special feature added to other products and services that is intended to provide customer ease of use as well as generate direct revenue. USPS also does not consider Delivery Confirmation to be an e- commerce initiative. USPS officials have noted that it has become increasingly difficult to separate e-commerce initiatives from core products because in the future many new products and services will involve some form of Internet component. Since our previous report was issued in September 2000, USPS has implemented four e-commerce-related initiatives or enhancements to initiatives that were mentioned in that report, with the exception of Net Post Cardstore: NetPost Mailing Online was implemented in September 2000, NetPost Cardstore in December 2000, and NetPost Certified in January 2001. In addition, USPS implemented enhancements to its ePayments initiative in September 2001. Two other e-commerce initiatives—the Postal Store and MoversNet (MoversGuide.com)—also mentioned in our previous report were implemented, but as of December 2001, USPS no longer considers these to be e-commerce initiatives. Overall management of USPS’ e-commerce program has been fragmented and inconsistent across the nine business units involved in developing and managing e-commerce and Internet-related initiatives. There has been no clear accountability or consistency in the development, approval, implementation, performance and day-to-day monitoring of initiatives. Since our September 2000 report recommending that USPS follow its processes and controls for developing and approving e-commerce initiatives, USPS has made several revisions to its processes for approving and implementing e-commerce and other new Internet-related products and services. However, over the past year inconsistencies remain in the implementation of USPS’ processes for its e-commerce activities. In September 2001, the Postmaster General announced a sweeping management restructuring, changing both the reporting structure and managers responsible for its e-commerce program. Management of USPS’ e-commerce program has been fragmented because of various factors. The internal processes and requirements for developing and approving e-commerce initiatives have been revised twice in just over 1 year. As noted in our previous report, USPS recognized that its New Products Development process for reviewing and approving new products that it established in 1996 was not suited to e-commerce initiatives. Consequently, in May 2000, it set up the eBusiness Opportunity Board (eBOB) review and approval process. The eBOB process was intended to result in quicker approval of initiatives than had occurred using its previous review and approval process for new products and services. However, over the past year, the eBOB process was not consistently followed for business development and planning for e-commerce initiatives. Since we issued our previous report, some business plans for the e-commerce initiatives were not regularly updated to reflect changing market conditions and required approvals were not always obtained consistently under the eBOB process. Implementation of initiatives has been inconsistent, with some initiatives being implemented either before business plans were prepared or without business plan approval, such as NetPost Cardstore. In July 2001, about a year after setting up the eBOB process, USPS revised its review and approval process, creating both another process—BizDev— and a new management group—Corporate Business Development (CBD). BizDev was intended to be a process through which all new business development ideas would be channeled. In July 2001, CBD officials told us that they intended to update business plans every 6 months. They also told us that business plans were not only to contain new elements but were to be prepared following more strict guidelines. For example, a USPS official noted that a tool kit would be used to specify how business plans were to be written. In September 2001, USPS announced a reorganization and shifted responsibility for e-commerce initiatives to new management and to a new group called Product Development. Although it is not yet clear what processes will be used for approving and reviewing e-commerce initiatives, and it is too soon to determine whether the fragmentation and inconsistency across units has been addressed, recent actions to clarify management responsibility appear to be a step in the right direction. In our previous report, we found deficiencies in the financial information that USPS provided on its e-commerce initiatives and reported that the steps USPS took in this area were important and needed to be effectively implemented. We recommended that USPS provide complete and accurate financial information on costs and revenues for its e-commerce initiatives. Without reliable financial information, USPS will not be in a position to assess its progress toward meeting its overall financial performance goals. USPS’ ability to report accurate and complete financial data for its Internet-related initiatives, including e-commerce, is important to the budget process, ratepayers, and congressional oversight. USPS agreed with this recommendation, and at the beginning of fiscal year 2001 began instituting a standard financial reporting procedure for the seven e- commerce initiatives that were planned or implemented at that time, which USPS continues to refine. The Deputy Postmaster General stated in USPS’ comments on our draft report dated December 2001 that USPS intends to be able to provide complete financial reporting on its five current e-commerce initiatives by the end of calendar year 2001. Although some improvements have been made to the financial statements provided to us during this review, these statements, which have been prepared on a quarterly basis, still are not complete, accurate, and consistent. In September 2000, we reported that because of the data deficiencies, we lacked confidence that the financial information was sufficiently reliable. USPS officials have since told us that USPS has made progress in tracking and reporting e-commerce financial data, including creating a detailed statement of revenues and expenses for each e- commerce initiative; providing a more complete set of costs, such as tracking direct costs on an initiative-specific basis; and providing training to help managers report costs on a consistent basis. We agree that the financial statements provided to us for fiscal year 2001, quarters 1 through 3, were improved. They included more detailed information on expenses, such as developmental and operational expenses; planned revenue and net income; and actual net income (loss); as well as program information, such as volume, number of accounts; and identification of opportunities for improvement. However, these financial statements do not currently capture all of the revenues and costs associated with the e-commerce initiatives, and it is not clear how USPS plans to report the necessary financial information that is not included in the current financial statements. Numerous deficiencies remain in USPS’ financial information for its e- commerce initiatives. USPS has not reported aggregate data on its e- commerce activities as a whole, which would be necessary to track its progress toward USPS’ financial goals for its e-commerce activities. In July 2000, USPS stated that “. . . infrastructure and other costs associated with eCommerce . . . will be calculated as part of our ongoing obligation to appropriately report those incurred costs.” However, in August 2001, USPS officials told us that USPS did not yet have a system to attribute costs for infrastructure that supports e-commerce products and services (e.g., the “Web site infrastructure” initiative). Additionally, in order to compile aggregate costs on USPS e-commerce activities as a whole, the following information would also need to be included: Any common costs to the e-commerce area that could not be allocated to specific e-commerce initiatives. Operating costs and revenues for any e-commerce products and services discontinued during the fiscal year, or whose development is discontinued during the fiscal year, for the fiscal year that aggregate costs are to be reported. Depreciation costs for capital assets acquired for discontinued e- commerce products and services that have not been written off or fully depreciated. USPS stated last year that it would “require that complete and accurate cost, revenue, and performance data be tracked and periodically reported to senior management” for each e-commerce initiative. We are concerned that USPS may only be preparing quarterly financial statements for its current five e-commerce initiatives. Other Internet-related initiatives, that are not considered e-commerce, have generated revenues and expenses in fiscal year 2001 but are not tracked through quarterly financial statements. For example, USPS data for the Delivery Confirmation initiative, which is not considered e-commerce, showed revenues of over $278 million and expenses of over $35 million through the first 3 quarters of fiscal year 2001. Given USPS’ difficulties in determining e-commerce versus other Internet-related initiatives and the probability that many, if not most, future new products and services that generate revenues will have some Internet-related component, it is not clear why quarterly financial statements are required only for e-commerce initiatives at this time. The Deputy Postmaster General stated in USPS comments on our draft report dated December 4, 2001, that “This does not mean, however, that initiatives defined as ‘non-e-commerce” will receive any less management scrutiny.” We also found that USPS reported inaccurate and/or inconsistent cost and revenue data on some e-commerce initiatives. For example, although some postage revenues for Mailing Online were reported as e-commerce revenue, the corresponding processing and delivery costs associated with this mail volume were not reported as e-commerce costs. Further, as the following examples show, revenue and cost data were calculated and reported inconsistently in the quarterly financial statements provided to us: Revenues were reported differently across e-commerce initiatives. For Mailing Online, 38 percent of the postage revenues were estimated as “new postage” generated by this e-commerce initiative—that is, additional postage generated because Mailing Online gave customers an additional way to mail material to consumers. In contrast, no revenues generated by the Postal Store were reported as e-commerce revenues—that is, according to the Postal Store financial statement, the revenues generated via the sale of postal merchandise (e.g., Postal Service bicycling merchandise, stamps, and philatelic products) through the Internet-based Postal Store initiative were not considered e-commerce revenues. Although no revenues for the Postal Store initiative were reported as e- commerce revenues, all costs for this initiative were reported as e- commerce costs. Thus, the net income reported for this initiative factored in only the costs, but not the corresponding revenues. Although most financial statements covered only one e-commerce initiative, others covered multiple initiatives. For example, a single statement for the ePayments initiative covered both eBillPay and other ePayment enhancements that had not yet been implemented. In this statement, eBillPay costs were not reported separately from other ePayment initiatives that were under development. Thus, the net income that was reported was the consolidated net income for the eBillPay initiative as well as the ePayment initiatives. No Postal Store costs were reported in fiscal year 2001 for 8 of 10 cost categories that generated direct costs in prior years, including supplies and services, equipment rent and repair, communications, and travel. USPS stated that costs reported for these eight categories prior to fiscal year 2001 were “start-up costs.” However, according to the Postal Store financial statement provided to us, the total direct costs for these eight categories prior to fiscal year 2001 were $1.4 million, while the “Developmental/Start-up Expenses” were only $800,000. Further, USPS said that to the extent that such costs were incurred in fiscal year 2001 for these eight categories, they were included under “Other Allocated Expenses” or “rolled into a separate administrative budget for a wider function that includes the Postal Store.” However, for other initiatives after their start-up periods, costs for these eight categories continued to be itemized, rather than being included as other allocated expenses. According to a USPS official, the e-commerce financial statements are provided to top USPS officials, including the Board of Governors and the Postmaster General, so that they can have summary information on the performance of the e-commerce initiatives. Complete, accurate, and consistent information would assist these top USPS officials in tracking, evaluating, and making decisions about the e-commerce initiatives. In this regard, we have additional concerns that the financial statements for USPS’ e-commerce products and services were not as useful as they could have been. These concerns include the following: Although the financial statements included quarterly revenue goals and planned costs for the e-commerce initiatives, based on what had been approved during the budgeting process, the statements did not include revised revenue and cost expectations—that is, goals that have changed during the fiscal year from the original budget goals—to clearly indicate what goals e-commerce program managers are working to achieve. Specifically, the financial statements did not disclose substantial downward revisions made during fiscal year 2001 to planned revenues and costs. The financial statements reported total planned revenues for each e- commerce initiative for the full fiscal year, but did not report total planned costs for the full year. For example, planned advertising and program staff costs were not included in the planned full-year costs reported in the financial statements. In certain cases (i.e., ePayments and NetPost Certified) these expenses have made up a significant portion of total expenses. During this review, we identified several issues concerning the e- commerce financial data that remain unresolved, which include (1) whether some or all of the revenues and the corresponding costs of e- commerce products and services are being included with other postal product revenues for budgeting and reporting purposes, including reporting to the PRC; (2) how capital outlays and related depreciation costs for each e-commerce initiative and discontinued initiatives are to be reported; and (3) how costs for e-commerce products and services that are under development (e.g., in a pilot or testing phase) are to be reported. Currently, USPS does not have clear and comprehensive policies and procedures that would address how all of the direct and indirect revenues and costs, including those mentioned above, associated with its e- commerce and other new products and services are to be reported. Without comprehensive policies and procedures in this area, inconsistencies in reporting are likely to continue. USPS is attempting to resolve the problems we have identified. The Deputy Postmaster General discussed with us the difficulties USPS has encountered in trying to refine its financial reporting. He stated that USPS intends to be able to provide complete financial reporting on all e- commerce initiatives by the end of calendar year 2001. We also discussed with the Deputy Postmaster General the difficulties involved in developing a consistent approach to attributing all of the appropriate costs, both direct and indirect, to its e-commerce initiatives. According to USPS, its e- commerce products have some particular characteristics that must be addressed when attributing costs, such as when a new product makes use of already existing infrastructure (e.g., computer system). Other challenges include determining how research and development costs should be attributed. Concerns continue to be raised as to whether USPS’ e-commerce initiatives in the aggregate are being cross-subsidized by other postal products and services. Without complete, accurate, and consistent information, USPS will not be in a position to assess progress toward meeting its overall financial performance goal that e-commerce products and services in the aggregate are to cover their incremental costs and thus not be cross-subsidized. Although USPS intends to provide complete financial reporting on its e-commerce activities by the end of calendar year 2001, we remain concerned that USPS may not meet this goal because of recent changes under way in USPS’ management structure and uncertainty about when USPS’ e-commerce program will stabilize. Given the difficulties USPS has had in distinguishing between e-commerce, Internet- related, and its core products and services and, according to USPS officials, the probability that most new products and services are likely to have some Internet-related component, in our opinion, the need for improved financial information extends not just to e-commerce initiatives but to all of its new products and services. For example, revenues and costs for some ongoing Internet-related activities that have been implemented do not have a financial statement (such as revenues and costs relating to Web affiliates with banner ads/links on USPS.com, and other new revenues and corresponding costs generated by USPS.com). Thus, we believe that financial reporting requirements should apply to all new products and services. Many stakeholders are interested in the performance of USPS’ new products and services initiatives. Congress has also repeatedly expressed interest in more information about USPS’ activities aside from its traditional mail products and services. In the Conference Report accompanying the Fiscal Year 1998 Treasury, Postal Service, and General Government Appropriations Act, USPS was requested to report on its nonpostal activities, including an estimate of the net revenue generated. In the Senate Report accompanying the Fiscal Year 1999 Treasury, Postal Service, and General Government Appropriations Act, USPS was requested to report on its commercial activities, including their revenues and costs. More recently, in the Conference Report accompanying the Fiscal Year 2002 Treasury, Postal Service, and General Government Appropriations Act, USPS was requested to provide a report detailing and supporting USPS’ position as to the scope of its existing authority under current law to introduce and provide new products and services. The report also requested information on USPS’ use of such authority to provide new products and services. In view of USPS’ problems in distinguishing between e-commerce, Internet-related, and its core products and services, and USPS’ difficulty in providing complete, accurate, and consistent financial information in this area, Congress could take further action to help ensure better transparency and more reliable information on all of USPS’ new products and services. As we mentioned previously, to develop complete and consistent financial information, USPS needs to have clear and comprehensive policies and procedures for reporting. We also believe that a regular review of USPS’ financial reports in this area is needed to ensure that the information is reliable and complete. The review could include annual USPS information on volume, revenue, and cost information related to its new products and services. Such a review could be conducted by an independent entity, such as an independent auditor or the PRC, in a manner similar to that required for international mail. The results of the review could be reported on an annual basis to Congress. USPS officials told us that they would prefer a review by an independent auditor. We would agree that such a review could ensure that USPS is adhering to its policies and procedures and that information was reported in accordance with generally accepted accounting principles. If an audit by an independent auditor does not result in acceptable financial information on USPS’ new products and services, then PRC may be another alternative for reviewing USPS’ financial information in this area. To date, performance of the e-commerce initiatives has reportedly fallen short of USPS’ expectations. USPS officials said that this was because the initiatives were relatively new, with most being less than a year old, and that the business plans were overly aggressive. In September 2000 we reported that, in some cases, business plans had been presented for approval after e-commerce initiatives had been implemented. In addition, we found that business plans had not been updated regularly to reflect changing market conditions, thereby resulting in unrealistic performance expectations. Without more timely and complete business planning, USPS management will not be able to create a more realistic baseline against which to measure and monitor the performance of each e-commerce initiative and thus be able to determine whether a specific initiative should be modified or discontinued. USPS has recognized that it needs to improve in this area. USPS has begun updating and revising business plans and developing mechanisms to more regularly monitor and report on the performance of e-commerce initiatives. Further, in September 2001, the Postmaster General said that he would be taking a close look at USPS’ e- commerce activities and that USPS will retain those that support growth of its core products, as well as others that are profitable. Although USPS does not yet have complete revenue and cost information on its original e- commerce initiatives, none of the e-commerce initiatives for which financial information was provided to us in seven financial statements for the 3rd quarter of fiscal year 2001 were profitable. In developing its fiscal year 2001 performance expectation for the overall e-commerce program, USPS management used available business plans, including one that had been prepared in 1996. According to USPS officials, the goal for expected e-commerce revenue in fiscal year 2001 was $104 million. At the end of the first three-quarters of the fiscal year, according to the financial statements provided to us, e-commerce initiatives had generated less than 1 percent in actual revenues toward the planned annual revenue goal of $104 million. During our review, we noted that information in USPS’ e-commerce business plans had not been regularly updated to reflect changing market conditions. For example, although acknowledging in the 1996 business plan that NetPost Mailing Online’s use of new technology made it difficult to estimate its market share and size, USPS did not update that plan until March 2001, after it was implemented in September 2000, over 5 years later. Expected performance in the updated plan had been revised to reflect anticipated changes in the adoption rates and revised implementation dates for this initiative, information that should have been provided in a more timely manner to USPS management so that decisions could have been based on more meaningful data. Some of the updated business plans provided to us included revised forecasts of expected performance, based in part on USPS’ actual experience with its e- commerce initiatives. Business planning is very important because, as we recently testified, electronic government initiatives should be supported by a well-developed business case that evaluates the expected returns against the costs. The business case provides the forum for the evaluation of the project’s costs, benefits, and integration with the agency performance and results strategy. Conditions affecting performance goals can change significantly during the course of a year. For example, the March 2000 ePayments business plan, which includes eBillPay, was updated a year later in February 2001. The February business plan reflected substantially revised performance expectations based on lowered forecasts by market analysts of consumer adoption of electronic bill payment as well as USPS’ actual experience in offering this initiative. Revenue, cost, and operating contribution expectations for fiscal year 2001 had been decreased by about 96 percent, 66 percent, and 33 percent, respectively, when compared to the expectations in the March 2000 business plan. Without more regular updating, management may not be able to gauge an initiative’s progress toward performance goals and thus determine whether set goals are realistic. USPS officials also told us that they recognize the need to more regularly monitor the performance of e-commerce and Internet-related initiatives. In addition to updating business plans every 6 months, USPS officials told us in July 2001 that USPS was developing a performance report to track all new products and services, including e-commerce initiatives, which it reportedly implemented in September 2001. The performance indicators in the performance report are to be taken from the business plans for each initiative, according to USPS officials. USPS management would then be able to use these reports, or scorecards, to assess a particular product’s viability or as a factor in their decisionmaking. In addition to monitoring an initiative’s performance, it may be necessary to discontinue an initiative should it continue to perform below expectations. USPS also reportedly implemented a reporting tool in September 2001 that includes information on its new revenue-generating business activities. Among other things, the report is to identify those initiatives whose contribution, after a specified implementation period, falls below their expected contribution. After being given a certain amount of time for corrective actions, such initiatives may be discontinued. In May 2000, after the initiatives had been in place about a year, a USPS official noted that the “bubble burst and there was a market downturn” referring to the recent economic slowdown. Business plans prepared in fiscal years 2000 and 2001 that were provided to us projected that the Postal Store and NetPost Cardstore would be profitable by the end of fiscal year 2001, while the remainder of the initiatives would become profitable between fiscal year 2002 and fiscal year 2005. In our 1998 report on new products and services, we acknowledged that it might not be reasonable to expect all new products to become profitable in their early years because new products generally take several years to become established and recover their start-up costs. However, throughout this time, management needs to be provided with timely and accurate information on each initiative’s performance so that decisions can be made concerning whether the initiative is progressing as planned or needs to be either modified or discontinued. With respect to privacy protections provided to customers of e-commerce and other Internet-related activities, USPS has stated that its customers are afforded greater protection than those of private-sector providers, chiefly because of the requirements in the combination of three laws—the Privacy Act of 1974, the Electronic Communications Privacy Act (ECPA), and the Postal Reorganization Act. Also, USPS recently stated that its voluntary compliance with other federal privacy laws and guidance to which USPS is not subject provides additional protection. Selected private-sector e-commerce providers we contacted generally disagreed with USPS’ contention that its customers are afforded greater privacy protection, stating that private-sector e-commerce providers, while not subject to the Privacy Act and the Postal Reorganization Act, are subject to ECPA and several other federal privacy-related laws and regulations, as well as applicable state laws that do not apply to USPS. In comparing the privacy protections USPS reports to offer its customers with those privacy protections private-sector providers report to offer to their customers of e-commerce products and services, we noted that different federal privacy laws apply to USPS than apply to private-sector providers. For example, the Privacy Act and the Postal Reorganization Act do not apply to the private sector, but other federal laws, such as the FTC Act, may apply to the private sector but not to USPS. In addition to the requirements in federal privacy laws, and in response to privacy concerns, both USPS and private-sector providers told us that they were voluntarily engaging in additional self-regulatory privacy practices to safeguard customers’ personal information. We did not review actual privacy practices of USPS or selected private-sector providers; therefore, we could not assess either their voluntary privacy practices or whether they were complying with all applicable privacy laws. In comparing the privacy protections that USPS reports that it provides to its e-commerce customers with those that private-sector providers report that they provide to their customers, we noted that different federal privacy laws apply to USPS than to private-sector providers. Although the Privacy Act and the Postal Reorganization Act do not apply to private- sector providers, the ECPA and other applicable federal privacy laws do. The Privacy Act is a comprehensive privacy statute that provides certain safeguards to protect individuals’ personal privacy. The Privacy Act limits the collection, maintenance, use, and dissemination of personal information by federal agencies, including USPS, and grants individuals access to information about themselves. Under the Privacy Act, USPS, its contractors, and other federal agencies are generally prohibited from disclosing to third parties personal information maintained on individuals (not businesses) without their consent. In addition, while under the Privacy Act, USPS may be authorized to disclose personal information to other government agencies under certain circumstances, the ECPA further restricts any such disclosure. Under the ECPA, USPS may only disclose stored electronic communications to a governmental entity possessing a search warrant, or certain subpoenas. In addition, while the Privacy Act generally prohibits the sale or rental of an individual’s name and address by a federal agency, the Postal Reorganization Act restriction on USPS goes further. It provides that no officer or employee of USPS shall make available to the public by any means or for any purpose any mailing or other list of names or addresses of postal patrons or other persons, except for census purposes or as otherwise specifically provided by law. The Privacy Act allows individuals the right to sue federal agencies for violations of the statute and provides for damages. In addition, the Privacy Act provides criminal penalties and fines for willful, wrongful disclosure of information and willful failure to meet the notice requirements of the act. Depending upon the particular e-commerce initiative, information collected by USPS from customers may include the following: name and address, fax and telephone numbers, e-mail address, social security number, and credit card information. On September 26, 2001, USPS implemented MoversGuide.com, an e- commerce initiative that allows electronic change of address for postal patrons via the Internet. Customer change-of-address information provided through MoversGuide.com will be incorporated into USPS’ National Change of Address Program (NCOA). Through NCOA, USPS collects and disseminates change-of-address information reported by postal customers to qualified private firms licensed by USPS to provide address correction services. In July 1999 we reported that, in our view, the use of NCOA-linked data to create or maintain new movers lists by USPS licensees, who are viewed under the Privacy Act as if they were USPS employees, would not be consistent with limitations imposed by the Privacy Act. USPS disagreed and told us that the Privacy Act does not restrict USPS licensees or their customers’ use of NCOA-linked data to create or maintain new movers lists. We also reported that USPS restricts its licensees from using NCOA-linked data to create or maintain new movers lists through its licensing agreements as a “good business practice” not because USPS considers it to be required by law. While the Privacy Act places restrictions on the collection, maintenance, use, and dissemination of personal information collected by federal agencies, it does have its limitations. For example, the Privacy Act only applies to personal information maintained in an agency’s “system of records.” The Privacy Act defines a system of records as any group of records under the control of an agency from which information is retrieved by (not collected or maintained by) the name of an individual or by some identifying number, symbol, or other identifying particular assigned to the individual. In addition, the Privacy Act only applies to information about individuals, not businesses. Furthermore, the act contains 12 exceptions to its general prohibition on the disclosure of personal information. For example, the act authorizes an agency to disclose a record for a routine use, for law enforcement purposes, pursuant to an order of a court of competent jurisdiction, or to either House of Congress. Under the Postal Reorganization Act, as previously stated, USPS employees and officers are prohibited from disclosing to the public lists of names or addresses of postal patrons or other persons. In addition, the Postal Reorganization Act exempts USPS from mandatory Freedom of Information Act (FOIA) disclosure for the name or address, past and present, of any postal patron and for information of a commercial nature that would not be disclosed under good business practice. USPS told us that although it is subject to FOIA requests for information, USPS would not release information collected from e-commerce customers. USPS said that FOIA does not compel disclosure that is otherwise prohibited by law. In this regard, USPS told us that “in our opinion, it would not be good business practice to disclose private information obtained in the provision of electronic services.” No comprehensive law comparable to the Privacy Act regulates the private sector’s collection, maintenance, and dissemination of personal information. Rather, the federal government’s policy, from the onset of the Internet, has been to allow the private sector to regulate itself to the greatest extent possible. However, Congress has regulated the private sector’s collection and dissemination of personal information on a sector- by-sector basis when it has found it necessary to do so. In addition, some private-sector e-commerce providers may also be subject to the enforcement provisions of the FTC Act, which prohibits unfair and deceptive practices in and affecting commerce. FTC has successfully used the FTC Act against private-sector e-commerce providers who misrepresented, in a privacy notice, how they were using personal information collected over the Internet. However, the FTC Act can only be used in this manner if a private-sector company actually posts a privacy notice—which is not always required by law. Private-sector providers could be subject to the FTC Act and a variety of federal laws that protect the privacy of personal information on a sector- by-sector basis, such as the Gramm-Leach-Bliley Act, the Children’s Online Privacy Protection Act (COPPA), and the ECPA, which prohibits disclosure of stored electronic communications to a governmental entity without a search warrant or certain subpoenas. However, it does not appear that USPS is subject to the FTC Act, the Gramm-Leach-Bliley Act,or COPPA. (See table 1 for a description of these laws.) According to UPS, one of the selected private-sector e-commerce providers we contacted, private-sector providers, while not subject to the Privacy Act, are subject to several other federal privacy-related laws as well as state laws and regulations, in addition to ECPA, that do not apply to USPS. According to UPS, these legal requirements may impose economic consequences for noncompliance, while the Privacy Act and ECPA do not impose such consequences upon USPS, in the absence of intentional violations of these statutes. Financial institutions, some of which provide electronic bill payment and presentment services in competition with USPS, would be subject to the privacy provisions of the Gramm-Leach-Bliley Act. Among other things, the Gramm-Leach-Bliley Act, enacted in November 1999, generally prohibits financial institutions from disclosing nonpublic personal information to nonaffiliated third parties without providing customers the opportunity to decline such disclosures. It also generally prohibits financial institutions from disclosing account numbers to nonaffiliated third parties for use in marketing, and requires financial institutions to give notice to their customers of their privacy policies, including their policies regarding the sharing of information with affiliates and nonaffiliated third parties. Regulations implementing these privacy protections were promulgated and became effective on November 12, 2000. Authority to enforce these privacy protections is provided to a number of federal financial regulators, state insurance authorities, and FTC, based on already existing jurisdiction over the covered financial institutions. According to the American Bankers Association (ABA), which represents financial institutions, the financial services industry, based on Gramm-Leach-Bliley and other applicable statutes, provides vastly more privacy protection than any other industry or government agency. ABA noted that “the volume of statutes, the examination of compliance with those laws by the banking agencies, and the clear commitment by the industry to assist customers in understanding these standards makes this evident.” In addition, private-sector providers of e-commerce products and services directed at children are subject to the provisions of COPPA. COPPA requires the operator of a commercial Web site or online service targeted at children under the age of 13 to provide clear notice of information collection and use practices; to obtain verifiable parental consent prior to collecting, using, and disseminating personal information from and about children under age 13; and to provide parents access to their children’s personal information and the option to prevent its further use. On October 20, 1999, FTC issued a final rule to implement COPPA. COPPA authorizes FTC to bring enforcement actions and impose civil penalties for violations of the rule in the same manner as for its other rules. Table 1 focuses on how selected federal privacy laws may apply to USPS and some private-sector providers of e-commerce products and services. In some cases, USPS business partners may also be subject to these laws. In other cases, the laws may apply to some, but not necessarily all, private- sector e-commerce providers. When comparing the privacy protections offered by USPS and private sector providers of e-commerce products and services, we found that the legal requirements may vary depending upon the particular type of e- commerce provider, product, or service. These differences are of particular interest with regard to the potential disclosure of personal information to third parties. For example: Regarding personal information collected in connection with eBillPay and competing electronic bill payment programs, both USPS and financial institutions in the private sector are generally required by federal law to provide notice to their customers of the uses to which personal information may be put. The requirements to provide such notice are included in the Privacy Act for USPS, and the Gramm-Leach-Bliley Act for the private-sector providers. In addition, both USPS and private-sector providers of electronic bill payment services are generally required under the Privacy Act and the Gramm-Leach-Bliley Act, respectively, to provide their customers with a choice as to whether personal information will be disclosed to third parties. The laws provide for disclosure under certain circumstances. Exceptions to this general rule concerning the provision of choice exist for both USPS and private sector providers. For example, with respect to USPS, the combined effect of the ECPA and the Privacy Act would authorize disclosure of personal information to third parties without obtaining the prior consent of the individual for (1) a “routine use” of the information, (2) for law enforcement purposes pursuant to a search warrant, (3) pursuant to certain court subpoenas, and (4) to either House of Congress. In addition, under the Postal Reorganization Act, USPS is generally prohibited from disclosing lists of names or addresses to the public. Currently, under the routine uses for its eBillPay service, USPS provides personal information to its business partner, CheckFree, and to the Credit Reporting Agency in the provision of its eBillPay service. Under the Gramm-Leach-Bliley Act, financial institutions in the private sector, some of which provide bill payment and presentment services, are generally prohibited from disclosing account numbers to nonaffiliated third parties for use in marketing. However, financial institutions are authorized to disclose personal information, without providing its customers the opportunity to decline, or “opt out” of the disclosure, to third parties that perform services for or on behalf of the financial institution if confidentiality of the information is provided for by contract. Regarding personal information collected in connection with the sale of merchandise through an e-commerce program, USPS would still generally be required under the Privacy Act to provide notice to its customers of the uses to which personal information may be put and to provide a choice before it is disclosed. The same exceptions, mentioned in the above example, to this general rule would apply. On the other hand, a private- sector company selling merchandise through an e-commerce program would generally not be required by federal law to provide notice to its customers of the uses to which personal information may be put or to provide a choice before it has disclosed such information. However, if the e-commerce program targeted children under the age of 13, the provider would be subject to the provisions of COPPA. In addition, if certain private-sector companies voluntarily provided notice that disclosure of personal information to third parties would be restricted, FTC could bring an enforcement action against the company for failure to follow those restrictions. In response to concerns that have been raised by advocacy groups and others about the privacy of customer information collected on the Internet, various providers of e-commerce services in the public and private sectors began to develop and adopt various business practices to protect the privacy of customer information. In particular, consumers appear concerned about the extent to which some Web site operators collect consumer information and share that information with third parties without the consumer’s knowledge. Surveys have shown that some potential e-commerce customers avoid using these products and services because of fear that their personal information will be misused. Both USPS and selected private-sector providers, including associations that represent such providers, have reported that they use many of these voluntary privacy business practices. A variety of tools and methods have been developed by both the public and private sectors to develop, assess, and monitor their privacy practices. For example, privacy policy generators, offered by such groups as the Direct Marketing Association (DMA), Microsoft, and TRUSTe, have been used to create draft privacy policies for private-sector providers. In addition, privacy risk assessment tools, such as the Internal Revenue Service’s privacy impact assessment, have been used to evaluate the privacy of customer information. Finally, some private-sector providers have used privacy seal programs and independent audits to develop, assess, and monitor their privacy practices. Privacy seal programs, such as those administered by TRUSTe, BBBOnline, and CPA Webtrust are independent, third-party enforcement programs that provide a way to monitor company practices and enforce privacy policies. A number of private-sector providers have also had independent entities, such as accounting firms, conduct independent audits to determine whether they are following their stated privacy policies. USPS notes it is also subject to independent audits by us and the USPS’ Office of Inspector General (OIG). After discussions with key stakeholders, such as FTC staff and OMB officials and selected private-sector providers, we compiled a list of voluntary privacy business practices that the private and public sectors have developed to protect customers’ information. While we recognize that there are numerous private-sector e-commerce providers, we contacted the providers included in table 2 because they offered e- commerce products and services similar to those offered by USPS. These providers include ABA, whose members include community, regional and money-centered banks and holding companies as well as savings associations, trust companies, and savings banks; DMA, whose members include users and suppliers in the direct, database, and interactive marketing field; and UPS, a leading delivery and logistics company. We recognize that this list is not complete as self-regulatory practices are continually being developed. We sent this list to USPS and the selected private-sector providers and asked whether they used these practices. We did not verify whether USPS or the selected private-sector providers we contacted actually adhered to their privacy policies or followed the privacy practices they said they used. We did not assess these practices to determine their effectiveness, or address the security aspects of the protection of customers’ data. Table 2 describes some of the privacy business practices that USPS and the selected private-sector providers of e-commerce products and services reported that they used. As shown in table 2, USPS and all of the selected private-sector providers we contacted reported that they have privacy policies posted on their Web sites that state how customers’ information will be collected, safeguarded, and used. They also reported that they incorporate standard privacy clauses in contracts with e-commerce suppliers, contractors, and affiliates. USPS has reported that its contractors, such as its business partner in offering USPS eBillPay, are bound by contract to the same disclosure requirements that apply to USPS. USPS and the selected private-sector providers stated that they either have a chief privacy officer or an officer who performs the functions of a chief privacy officer. USPS stated that it adhered to all, and some of the selected providers reported that they adhere to most, of the FTC’s fair information principles (notice, choice, access, and security). The selected private-sector providers reported that they provide training to employees regarding the protection of customers’ personal information and the organizations’ privacy policies and practices. USPS officials stated that they plan to implement P3P (a technological solution that is intended to enable individuals to control their personal information and make decisions based on their individual privacy needs) this fiscal year, and initiate a training program in the future. Regarding processes, USPS’ Chief Privacy Officer stated that USPS has established, among other things, an internal cross-functional advisory board, and a privacy assessment tool to ensure privacy compliance and set security requirements in product development. Regarding voluntary adherence to federal laws and regulations, USPS’ Chief Privacy Officer told us that USPS generally voluntarily follows the requirements of the Gramm-Leach-Bliley Act, COPPA, FTC guidance related to privacy issues, and OMB’s privacy memorandums. Further, the Deputy Postmaster General stated in February 2001 that although USPS does not consider itself subject to OMB guidance, it has decided to voluntarily comply with the following two OMB Memorandums related to privacy matters. First, OMB Memorandum M-99-18, issued in June 1999, requires federal agencies to post clear privacy policies on their principal Web sites; to any other known, major entry points to their Web sites; and to any other entry points to their Web sites where the agency collects substantial personal information from the public. The memorandum also requires such policies to inform Web site visitors what information the agency collects about individuals, why it is collected, and how it is used, and requires the policies to be clearly labeled and easily accessed when someone visits the site. Second, OMB Memorandum M-00-13, issued on June 22, 2000, details OMB’s requirements related to cookies. It established a new policy concerning cookies by stating that cookies should not be used at federal Web sites, or by contractors when operating Web sites on behalf of agencies, unless clear and conspicuous notice is given and the following conditions are met: (1) there is a compelling need to gather the data on the site, (2) the agency takes appropriate and publicly disclosed privacy safeguards for handling information derived from cookies, and (3) the head of the agency has personally approved the use of cookies. In addition, the memorandum states that it is federal policy that all federal Web sites and contractors when operating on behalf of agencies shall comply with the standards set forth in COPPA with respect to the collection of personal information on-line at Web sites directed at children. In October 2000, we found that USPS used persistent cookies,which USPS fully disclosed in its privacy policy. With respect to private- sector e-commerce providers, some may disclose the extent and purpose of their use of cookies while others may not. Although USPS has actions under way to respond to the recommendations in our previous report, it has not yet fully addressed them. Over the past year, USPS has continued to struggle with the management and performance of its e-commerce program. Implementation of USPS’ e- commerce initiatives has continued in a fragmented and inconsistent manner. USPS has had difficulty both identifying and classifying its Internet-related initiatives, which include e-commerce initiatives. Further, it does not have reliable financial information for all of its e-commerce and Internet-related initiatives. USPS is attempting to resolve the deficiencies we identified and has recently reorganized its management structure for its e-commerce program. We believe that efforts to establish better transparency and accountability for performance results are steps in the right direction. USPS has aggressively taken a number of steps to implement a privacy program. Although the selected private-sector providers we contacted and USPS are subject to different privacy-related laws, both have reportedly developed privacy policies and practices that exceed those required by federal law. Given the myriad federal and state privacy laws applicable in this area as well as the numerous private-sector providers with varying privacy practices, we did not attempt to determine which privacy practices might afford customers greater privacy protection. Concerns continue to be raised in Congress about whether USPS’ e- commerce initiatives in the aggregate are being cross-subsidized by other postal products and services. In responding to our previous report, USPS told us that in providing e-commerce products and services, it would ensure that in the aggregate, the revenues generated by such products and services would cover their direct and indirect costs as well as make a contribution to overhead. To date, although USPS does not yet have complete revenue and cost information on its original e-commerce initiatives, based on the financial information that was provided to us, none of the e-commerce initiatives were profitable. Without complete and reliable financial information on its e-commerce initiatives, USPS is hindered when assessing its progress toward meeting its e-commerce performance goals or determining whether and when those initiatives that are not meeting their goals should be modified or discontinued. Although USPS intends to provide complete financial reporting on its e- commerce activities by the end of calendar year 2001, we remain concerned about its ability to meet this goal because of recent changes under way in USPS’ management structure and uncertainty about when USPS’ e-commerce program will stabilize. Given the difficulties USPS has had in distinguishing between e-commerce, Internet-related, and its core products and services and, according to USPS officials, the probability that most new products and services are likely to have some Internet- related component, we believe that the need for improved financial information extends not just to e-commerce initiatives but to all new products and services. Further, we are concerned that currently USPS does not have clear and comprehensive policies and procedures that would address how all of the direct and indirect costs associated with its e-commerce and other new products and services are to be reported. Without comprehensive policies and procedures in this area, inconsistencies in reporting are likely to continue. Accordingly, we believe that the Postmaster General should take steps to develop reliable and consistent financial information for all of its new products and services. If these steps do not result in better transparency of and accountability for USPS’ new products and services, Congress may want to consider requiring USPS to have an annual review by the PRC on the performance of its new products and services, including its e- commerce activities, and PRC to submit a report to Congress annually on the results of this review. To ensure that USPS develops reliable and consistent financial information for all of its new products and services, we recommend that the Postmaster General develop a comprehensive set of policies and procedures for capturing, attributing, and reporting revenues and expenses associated with its new products and services and that are consistent with PRC’s cost attribution policies; provide an annual report to the Senate Committee on Governmental Affairs, House Committee on Government Reform, and PRC showing its revenues and expenses for new products and services individually and in aggregate that has been audited by an independent entity for the purpose of determining that the report was prepared in accordance with the Service’s policies and procedures and generally accepted accounting principles; and provide the audited report for fiscal year 2001 by May 1, 2002, and by May 1 for each subsequent year. In view of congressional interest in USPS’ new products and services and the difficulty USPS has had in providing reliable information on its Internet-related activities, if the steps taken by USPS do not prove effective, Congress may wish to consider requiring USPS to report annually to PRC on the performance of its new products and services, including its e-commerce activities, and having PRC evaluate the quality of the data and submit a report annually to Congress on the results of this review. The information provided by USPS could correspond to that currently provided to PRC and Congress for the volumes, revenues, and costs of its international mail products and services. USPS provided comments on a draft of this report in a letter from the Deputy Postmaster General dated December 4, 2001. These comments are summarized below and included as appendix III. We also incorporated technical comments provided by USPS, FTC, and UPS officials into the report where appropriate as well as oral comments provided by PRC’s Director of Rates, Analysis and Planning on the Matter for Congressional Consideration. USPS said that the draft report pointed out some areas in which it had done a good job and other areas that it said we believed it had considerable work to do. USPS acknowledged that it while it had made progress in responding to our earlier recommendations, it had not made all of the progress we would have liked. With respect to its privacy protections, USPS said that it appreciated our evaluation. It said that in this area of evolving law, regulation, and good business practice, it was confident that it was an industry leader. Through the protections it provides, USPS said, that its customers have strong assurance that their privacy is respected and protected. As we noted in our report, in contrast to its fragmented approach to e-commerce programmatic activities, USPS has created a focused privacy program headed by a Chief Privacy Officer. USPS reportedly has developed privacy policies and practices for its e- commerce customers that exceed those required by federal law, and is also voluntarily engaging in additional self-regulatory privacy practices to safeguard customers’ personal information. USPS said that it was continuing to implement several organizational and process changes that would result in a better and more sharply focused approach to developing and launching not only e-commerce initiatives but also other new products and services. Further, USPS said that in the restructuring of a number of headquarters functions by the Postmaster General in early September, marketing was one of the areas in which significant changes had been made. All units responsible for developing and rolling out new products and services, including e-commerce, have now been combined into one department to increase management oversight, program discipline, and financial control over the initiatives. We believe that such steps, if properly implemented, should assist USPS management in resolving the fragmented approach to management that we observed during our review. It appears to us that this fragmented approach was due, in part, to many business units having responsibility for e-commerce initiatives. However, since USPS is still in the process of implementing organizational changes, it may take some time before the results of this reorganization are apparent. USPS said that it was no longer struggling with a definition for e- commerce. It now defines its e-commerce initiatives as “those products or services that require the use of the Internet for the customer to do business with us and whose primary objective is to generate new revenue.” USPS said that the reason for the emphasis on new revenue was that by expanding its product base, it could develop additional revenue streams to help its “bottom line.” USPS also said that it recognized that some of its new products and services might either use the Internet or generate new revenue, but only those that met both tests would be defined as e-commerce. However, USPS noted that initiatives defined as “non-e- commerce” would not receive any less management scrutiny. Applying this definition, USPS stated that it currently has 5 e-commerce initiatives: ePayments, PosteCS, NetPost Certified, NetPost Mailing Online/NetPost Cardstore, and Secure Electronic Delivery Services/Electronic Postmark. While we believe that it is important for USPS to have a good definition for e-commerce, it appears to us that USPS faces considerable challenges in consistently applying its revised definition and in categorizing its new products and services that involve use of the Internet in a manner in which its various stakeholders would concur. For example, USPS’ revised list of e-commerce products and services did not include revenue-generating advertisements and links to advertisers placed on USPS’ Web site. It is unclear to us why these advertisements would not fit USPS’ definition since they require use of the Internet and are likely there primarily to raise revenue. Our recommendations that USPS develop policies and procedures for reporting revenues and expenses and provide financial reports on all of its new products and services are aimed in part at addressing the challenge that USPS has faced, and continues to face, in consistently applying an e-commerce definition. With respect to the recommendations contained in the draft report, USPS agreed with our first recommendation that it provide a comprehensive set of policies and procedures for capturing, attributing, and reporting revenues and expenses associated with its new products and services. It noted that these would be consistent with cost attribution policies as required in the Postal Reorganization Act and sound business practices for new product introduction and costing. We believe that providing such policies and procedures would be a step in the right direction if properly implemented. It is important that such polices and procedures ensure that USPS tracks and reports consistent information on all of its new products and services and that they are consistent with PRC cost attribution policies. In response to our recommendations concerning annual reporting, USPS said that it would continue its practice of program-specific profit and loss statements, and that these reports would be available to appropriate Senate and House Committees, GAO, and the PRC. USPS noted that these reports would cover those products and services not subject to PRC jurisdiction for pricing, for which a process is already in place to examine their costs and revenues. USPS said that since its financial statements are audited on an annual basis by an independent certified public accounting firm, it planned to have the profit and loss statements reviewed by the accounting firm at the same time for adherence with its reporting policies and generally accepted accounting principles. USPS said that the statements would be submitted by May 1 of each year to the Senate Committee on Governmental Affairs, the House Committee on Government Reform, and to the PRC. In preparing these statements, it is important that USPS be able to track revenues and expenses of all of its new products and services individually as well as in the aggregate so that it can develop complete and consistent program information and ensure that there is no cross-subsidization. Without an aggregate report, USPS and others will have difficulty determining whether USPS is recovering its overall costs. We plan to discuss our views on reporting new products and services financial data with USPS officials as they develop their approach to implementing our recommendations over the next few months. USPS offered no comments on the Matter for Congressional Consideration in this report. In oral comments, the PRC Director of Rates, Analysis and Planning said that if Congress elects to require USPS to report annually to PRC on the performance of all of its new products and services, then certain aspects of USPS reporting on international products and services would be a good model to follow. He noted that PRC had a formal proceeding with the input of interested parties to establish reporting policies and procedures in the international area. He also said that PRC’s review provides assurance that the data in this area conform to its reporting policies and procedures. PRC has made recommendations for improving the quality of USPS financial data in the international area. In its most recent report, PRC noted that USPS had made improvements that enhanced the reliability of PRC conclusions regarding the potential for cross-subsidization of international mail. We are sending copies of this report to the Chairman, Subcommittee on International Security, Proliferation, and Federal Services, Senate Committee on Governmental Affairs; the Chairman and Ranking Minority Member, Senate Committee on Governmental Affairs; the Chairman and Ranking Minority Member, House Committee on Government Reform; Mr. John E. Potter, Postmaster General/Chief Executive Officer; Mr. George Omas, Chairman, Postal Rate Commission; and other interested parties. We will also make copies available to others on request. Staff acknowledgments are included in appendix IV. If you have any questions about this report, please contact me on (202) 512-8387 or at [email protected]. For this report, our objectives were to (1) determine what actions USPS has taken to respond to the recommendations in our September report relating to its e-commerce activities; (2) update the status and performance of USPS’ e-commerce initiatives; and (3) compare federal privacy laws, regulations, and policies that apply to USPS in the e- commerce area to those that apply to private-sector providers and discuss voluntary privacy protections provided by USPS and selected private- sector providers. To determine actions taken by USPS to respond to our recommendations, we attempted to obtain an updated definition of what USPS considered to be an e-commerce initiative and a listing of e-commerce initiatives, which were also to correspond to USPS’ updated definition. We asked for a description of each initiative, along with available supporting documentation. During our review, USPS was in the process of defining, identifying, and classifying its Internet-related initiatives, which include e- commerce initiatives, as well as updating its definition of e-commerce. E- commerce initiatives are just one subset of USPS’ new products and services, which may include other Internet-related initiatives as well as retail and advertising initiatives. USPS provided us with information on initiatives that were implemented, piloted, or planned as of September 2001, but did not finalize its definition of e-commerce initiatives or its listing of Internet-related initiatives, which were to include e-commerce initiatives, until December 2001. We obtained additional information on USPS e-commerce initiatives from the Postal Rate Commission (PRC) and other public sources, such as the USPS Internet site. To update the status and performance of USPS e-commerce initiatives, we obtained documentation from USPS on its goals and strategies, expected performance, and results through the third quarter of fiscal year 2001, relating to its e-commerce initiatives. The documentation included, for example, available performance measures, targets, and expected performance and results; documentation of processes applicable to USPS e-commerce initiatives and the approval of specific initiatives under those processes; e-commerce business plans, minutes of the eBusiness Opportunity Board and relevant meetings of the Board of Governors; and available financial data. We interviewed USPS officials responsible for USPS e-commerce initiatives, including the Deputy Postmaster General, the Vice President for e-Commerce, the Vice President for Corporate Business Development, and other e-commerce program officials. We also interviewed officials responsible for compiling financial data. In all cases, we obtained, when possible, documentation to corroborate oral statements. To obtain information on financial results for the e-commerce program, we obtained information from USPS on revenues and expenses generated by its e-commerce initiatives through the third quarter of fiscal year 2001, although some did not have reported revenues because they had not been implemented by that time. However, these data were not provided for all of the e-commerce and other Internet-related initiatives included on lists that USPS provided to us in August 2001. We did not review or independently audit the overall integrity of USPS’ data, but we examined it for consistency, clarity, and completeness. To compare federal privacy laws, regulations, and policies that apply to USPS in the e-commerce area to those that apply to private-sector providers, we built on information already compiled in our previous report on USPS e-commerce activities as well as in other GAO reports on Internet privacy. We interviewed USPS officials, including USPS’ Chief Privacy Officer, as well as OMB officials and FTC staff. We reviewed documents and other information obtained from USPS and selected private-sector providers. We reviewed the material obtained for internal consistency and completeness, but we did not verify the information provided by USPS or the selected private-sector providers. We also reviewed USPS information as well as information on some of its partners and affiliates that was available on their respective Internet sites. We also reviewed reports and studies on Internet privacy prepared by FTC and the Congressional Research Service, among others. We researched and analyzed selected federal privacy laws including the Privacy Act, the Postal Reorganization Act of 1970, the Electronic Communications Privacy Act, the Gramm- Leach-Bliley Act, and the Children’s Online Privacy Protection Act. To provide information on voluntary privacy policies and protections provided by USPS and private-sector providers of e-commerce products and services, we obtained written information from USPS and selected private-sector providers. While we recognize that there are numerous private-sector e-commerce providers, we selected the United Parcel Service (UPS), the Direct Marketing Association (DMA), and the American Bankers Association (ABA) because they, or their members, offered e- commerce products and services similar to those offered by USPS. For example, they or their members offered or used e-commerce services such as electronic bill payment and presentment services, online shipping services, and direct mail marketing. ABA members include community, regional, and money-center banks and holding companies as well as savings associations, trust companies, and savings banks. According to ABA, most community banks are members and substantially all large banks are members of ABA. The DMA’s members, users and suppliers in the direct, database, and interactive marketing field, may provide similar services to those of USPS or be customers of USPS’ e-commerce services. DMA has more than 4,700 member organizations, commercial as well as not-for-profit, from the United States and over 53 nations on 6 continents. UPS is a leading delivery and logistics company. We did not review actual privacy practices of USPS or selected private- sector providers; therefore, we did not assess either their voluntary privacy practices or whether they were complying with all applicable privacy laws. Given the myriad federal and state privacy laws applicable in this area, as well as the numerous private-sector providers with varying privacy practices, we did not attempt to determine which privacy practices might afford customers greater privacy protection. We conducted our review at USPS headquarters in Washington, D.C., between January 2001 and October 2001 in accordance with generally accepted government auditing standards. Status Implemented 4/2000. Provides integrated ePayment solutions: eBillPay allows consumers to pay bills, businesses to send bills, consumers to pay each other, and consumers to receive financial statements. eBillPay was implemented 4/2000, and the other enhancements were implemented 9/2001. MoversNet was implemented summer 1996. MoversGuide.com was implemented 9/2001. Implemented 12/2000. Implemented 1/2001. Implemented 9/2000. Implemented 5/2000. MoversNet includes three products and services: the hard copy publications—Movers Guide and Welcome Kit—and the Internet application called MoversNet.com. Currently MoversNet.com allows downloading a form for customers to submit changes of physical addresses and is accessible via the USPS Web site and via direct link. It is offered through a strategic alliance with a private company. MoversGuide.com, an enhanced version of MoversNet, allows change of address orders to be accepted electronically and securely via the Internet, with proper identity validation. Allows customers to send greeting cards via a Web interface. Customers can choose from a menu of existing cards for multiple business and personal occasions. Allows secure electronic exchange of data and documents. The program is supported by digital certificates and electronic postmarks issued by USPS. The service is currently in use with government agencies. Allows mailers to electronically transmit their documents, correspondence, newsletters, and other First-Class Mail and Standard-A mail (primarily advertising mail), along with mailing lists, to USPS. Electronic files would then be securely distributed to printing contractors who print documents, insert them into addressed envelopes, sort the mail pieces, and transport the mailing to post offices for processing and delivery. An electronic courier service, it provides a secure, private, Internet- based document delivery system. USPS has joined with Canada Post and LaPoste of France to provide this service globally. The Postal Store, formerly StampsOnline, allows postal customers to purchase stamps, philatelic products, phone cards, and other USPS merchandise via the Internet. Postal Store replaced Stamps Online in 11/2000. These e-commerce initiatives, with the exception of NetPost Cardstore, were included in our September 2000 report. As of December 4, 2001, USPS no longer considered MoversGuide.com or the Postal Store as e-commerce initiatives. Teresa Anderson, Hazel J. Bailey, Joshua Bartzen, Kenneth E. John, Jill Sayre, and Albert Schmidt made key contributions to this report. Electronic Government: Challenges Must Be Addressed With Effective Leadership and Management (GAO-01-959T, July 11, 2001) Internet Privacy: Implementation of Federal Guidance for Agency Use of “Cookies” (GAO-01-424, Apr. 27, 2001) Bank Regulators’ Evaluation of Electronic Signature Systems (GAO-01- 129R, Nov. 8, 2000) Internet Privacy: Federal Agencies Use of Cookies (GAO-01-147R, Oct. 20, 2000) Internet Privacy: Comparison of Federal Agency Practices With FTC’s Fair Information Principles (GAO-01-113T, Oct. 11, 2000) Internet Privacy: Comparison of Federal Agency Practices With FTC’s Fair Information Principles (GAO/AIMD-00-296R, Sept. 11, 2000) Internet Privacy: Agencies’ Efforts to Implement OMB’s Privacy Policy (GAO/GGD-00-191, Sept. 5, 2000) U.S. Postal Service: Postal Activities and Laws Related to Electronic Commerce (GAO/GGD-00-188, Sept. 7, 2000) U.S. Postal Service: Electronic Commerce Activities and Legal Matters (GAO/T-GGD-00-195, Sept. 7, 2000) U.S. Postal Service: Status of Efforts to Protect Privacy of Address Changes (GAO/GGD-99-102, July 30, 1999) U.S. Postal Service: Development and Inventory of New Products (GGD- 99-15, Nov. 24, 1998) U.S. Postal Service: Unresolved Issues in the International Mail Market (GAO/GGD-96-51, Mar. 11, 1996). | Management of the U.S. Postal Service's (USPS) e-commerce program has been fragmented, and implementation of e-commerce initiatives has varied at different business units. Overall, USPS' performance in this area has fallen short of expectations. Last year, the Postmaster General announced a sweeping management restructuring that changed both the reporting structure and program managers. USPS also revised its procedures for approving and implementing new Internet initiatives, including e-commerce. However, concerns persist about whether USPS' e-commerce initiatives are being cross-subsidized by other postal products and services. USPS managers contend that e-commerce products and services must cover their incremental costs. GAO found that this goal has not been met and it is unclear when it might be achieved. Without accurate, complete, and consistent financial information, USPS cannot assess its progress toward its financial performance goals for e-commerce. USPS also lacks clear and comprehensive policies and procedures for reporting direct and indirect revenues and costs for e-commerce and other new products and services. As a result, reporting inconsistencies are likely to continue. In contrast, USPS has reportedly developed privacy policies and practices for its e-commerce customers that exceed those required by federal law. |
Category I special nuclear materials are present at the three design laboratories—the Los Alamos National Laboratory in Los Alamos, New Mexico; the Lawrence Livermore National Laboratory in Livermore, California; and the Sandia National Laboratory in Albuquerque, New Mexico—and two production sites—the Pantex Plant in Amarillo, Texas, and the Y-12 Plant in Oak Ridge, Tennessee, operated by NNSA. Special nuclear material is also present at former production sites, including the Savannah River Site in Savannah River, South Carolina, and the Hanford Site in Richland, Washington. These former sites are now being cleaned up by DOE’s Office of Environmental Management (EM). Furthermore, NNSA’s Office of Secure Transportation transports these materials among the sites and between the sites and DOD bases. Contractors operate each site for DOE. NNSA and EM have field offices collocated with each site. In fiscal year 2004, NNSA and EM expect to spend nearly $900 million on physical security at their sites. Physical security combines security equipment, personnel, and procedures to protect facilities, information, documents, or material against theft, sabotage, diversion, or other criminal acts. In addition to NNSA and EM, DOE has other important security organizations. DOE’s Office of Security develops and promulgates orders and policies, such as the DBT, to guide the department’s safeguards and security programs. DOE’s Office of Independent Oversight and Performance Assurance supports the department by, among other things, independently evaluating the effectiveness of contractors’ performance in safeguards and security. It also performs follow-up reviews to ensure that contractors have taken effective corrective actions and appropriately addressed weaknesses in safeguards and security. Under a recent reorganization, these two offices were incorporated into the new Office of Security and Safety Performance Assurance. Each office, however, retains its individual missions, functions, structure, and relationship to the other. The risks associated with Category I special nuclear materials vary but include the nuclear detonation of a weapon or test device at or near design yield, the creation of improvised nuclear devices capable of producing a nuclear yield, theft for use in an illegal nuclear weapon, and the potential for sabotage in the form of radioactive dispersal. Because of these risks, DOE has long employed risk-based security practices. The key component of DOE’s well-established, risk-based security practices is the DBT, a classified document that identifies the characteristics of the potential threats to DOE assets. The DBT has been traditionally based on a classified, multiagency intelligence community assessment of potential terrorist threats, known as the Postulated Threat. The DBT considers a variety of threats in addition to the terrorist threat. Other adversaries considered in the DBT include criminals, psychotics, disgruntled employees, violent activists, and spies. The DBT also considers the threat posed by insiders, those individuals who have authorized, unescorted access to any part of DOE facilities and programs. Insiders may operate alone or may assist an adversary group. Insiders are routinely considered to provide assistance to the terrorist groups found in the DBT. The threat from terrorist groups is generally the most demanding threat contained in the DBT. DOE counters the terrorist threat specified in the DBT with a multifaceted protective system. While specific measures vary from site to site, all protective systems at DOE’s most sensitive sites employ a defense-in- depth concept that includes sensors, physical barriers, hardened facilities and vaults, and heavily armed paramilitary protective forces equipped with such items as automatic weapons, night vision equipment, body armor, and chemical protective gear. Depending on the material, protective systems at DOE Category I special nuclear material sites are designed to accomplish the following objectives in response to the terrorist threat: Denial of access. For some potential terrorist objectives, such as the creation of an improvised nuclear device, DOE may employ a protection strategy that requires the engagement and neutralization of adversaries before they can acquire hands-on access to the assets. Denial of task. For nuclear weapons or nuclear test devices that terrorists might seek to steal, DOE requires the prevention and/or neutralization of the adversaries before they can complete a specific task, such as stealing such devices. Containment with recapture. Where the theft of nuclear material (instead of a nuclear weapon) is the likely terrorist objective, DOE requires that adversaries not be allowed to escape the facility and that DOE protective forces recapture the material as soon as possible. This objective requires the use of specially trained and well-equipped special response teams. The effectiveness of the protective system is formally and regularly examined through vulnerability assessments. A vulnerability assessment is a systematic evaluation process in which qualitative and quantitative techniques are applied to detect vulnerabilities and arrive at effective protection of specific assets, such as special nuclear material. To conduct such assessments, DOE uses, among other things, subject matter experts, such as U.S. Special Forces; computer modeling to simulate attacks; and force-on-force performance testing, in which the site’s protective forces undergo simulated attacks by a group of mock terrorists. The results of these assessments are documented at each site in a classified document known as the Site Safeguards and Security Plan. In addition to identifying known vulnerabilities, risks, and protection strategies for the site, the Site Safeguards and Security Plan formally acknowledges how much risk the contractor and DOE are willing to accept. Specifically, for more than a decade, DOE has employed a risk management approach that seeks to direct resources to its most critical assets—in this case Category I special nuclear material—and mitigate the risks to these assets to an acceptable level. Levels of risk—high, medium, and low—are assigned classified numerical values and are derived from a mathematical equation that compares a terrorist group’s capabilities with the overall effectiveness of the crucial elements of the site’s protective forces and systems. Historically, DOE has striven to keep its most critical assets at a low risk level and may insist on immediate compensatory measures should a significant vulnerability develop that increases risk above the low risk level. Compensatory measures could include such things as deploying additional protective forces or curtailing operations until the asset can be better protected. In response to a September 2000 DOE Inspector General’s report recommending that DOE establish a policy on what actions are required once high or moderate risk is identified, in September 2003, DOE’s Office of Security issued a policy clarification stating that identified high risks at facilities must be formally reported to the Secretary of Energy or Deputy Secretary within 24 hours. In addition, under this policy clarification, identified high and moderate risks require corrective actions and regular reporting. Through a variety of complementary measures, DOE ensures that its safeguards and security policies are being complied with and are performing as intended. Contractors perform regular self-assessments and are encouraged to uncover any problems themselves. DOE Orders also require field offices to comprehensively survey contractors’ operations for safeguards and security every year. DOE’s Office of Independent Oversight and Performance Assurance provides yet another check through its comprehensive inspection program. All deficiencies identified during surveys and inspections require the contractors to take corrective action. In the immediate aftermath of September 11, 2001, DOE officials realized that the then current DBT, issued in April 1999 and based on a 1998 intelligence community assessment, was obsolete. The September 11, 2001, terrorist attacks suggested larger groups of terrorists, larger vehicle bombs, and broader terrorist aspirations to cause mass casualties and panic than were envisioned in the 1999 DOE DBT. However, formally recognizing these new threats by updating the DBT was difficult and took 21 months because of delays in issuing the Postulated Threat, debates over the size of the future threat and the cost to meet it, and the DOE policy process. As mentioned previously, DOE’s new DBT is based on a study known as the Postulated Threat, which was developed by the U.S. intelligence community. The intelligence community originally planned to complete the Postulated Threat by April 2002; however, the document was not completed and officially released until January 2003, about 9 months behind the original schedule. According to DOE and DOD officials, this delay resulted from other demands placed on the intelligence community after September 11, 2001, as well as from sharp debates among the organizations developing the Postulated Threat over the size and capabilities of future terrorist threats and the resources needed to meet these threats. While waiting for the new Postulated Threat, DOE developed several drafts of its new DBT. During this process, debates, similar to those that occurred during the development of the Postulated Threat, emerged in DOE. Like the participants responsible for developing the Postulated Threat, during the development of the DBT, DOE officials debated the size of the future terrorist threat and the costs to meet it. DOE officials at all levels told us that concern over resources played a large role in developing the 2003 DBT, with some officials calling the DBT the “funding basis threat,” or the maximum threat the department could afford. This tension between threat size and resources is not a new development. According to a DOE analysis of the development of prior DBTs, political and budgetary pressures and the apparent desire to reduce the requirements for the size of protective forces appear to have played a significant role in determining the terrorist group numbers contained in prior DBTs. Finally, DOE developed the DBT using DOE’s policy process, which emphasizes developing consensus through a review and comment process by program offices, such as EM and NNSA. However, many DOE and contractor officials found that the policy process for developing the new DBT was laborious and not timely, especially given the more dangerous threat environment that has existed since September 11, 2001. As a result, during the time it took DOE to develop the new DBT, its sites were only required to defend against the terrorist group defined in the 1999 DBT, which, in the aftermath of September 11, 2001, DOE officials realized was obsolete. While the May 2003 DBT identifies a larger terrorist group than did the previous DBT, the threat identified in the new DBT, in most cases, is less than the terrorist threat identified in the intelligence community’s Postulated Threat. The Postulated Threat estimated that the force attacking a nuclear weapons site would probably be a relatively small group of terrorists, although it was possible that an adversary might use a greater number of terrorists if that was the only way to attain an important strategic goal. In contrast to the Postulated Threat, DOE is preparing to defend against a significantly smaller group of terrorists attacking many of its facilities. Specifically, only for its sites and operations that handle nuclear weapons is DOE currently preparing to defend against an attacking force that approximates the lower range of the threat identified in the Postulated Threat. For its other Category I special nuclear material sites, all of which fall under the Postulated Threat’s definition of a nuclear weapons site, DOE is requiring preparations to defend against a terrorist force significantly smaller than was identified in the Postulated Threat. DOE calls this a graded threat approach. Some of these other sites, however, may have improvised nuclear device concerns that, if successfully exploited by terrorists, could result in a nuclear detonation. Nevertheless, under the graded threat approach, DOE requires these sites only to be prepared to defend against a smaller force of terrorists than was identified by the Postulated Threat. Officials in DOE’s Office of Independent Oversight and Performance Assurance disagreed with this approach and noted that sites with improvised nuclear device concerns should be held to the same requirements as facilities that possess nuclear weapons and test devices since the potential worst-case consequence at both types of facilities would be the same—a nuclear detonation. Other DOE officials and an official in DOD’s Office of the Assistant Secretary of Defense for Command, Control, Communications, and Intelligence disagreed with the overall graded threat approach, believing that the threat should not be embedded in the DBT by adjusting the number of terrorists that might attack a particular target. DOE Office of Security officials cited three reasons for why the department departed from the Postulated Threat’s assessment of the potential size of terrorist forces. First, these officials stated that they believed that the Postulated Threat only applied to sites that handled completed nuclear weapons and test devices. However, both the 2003 Postulated Threat, as well as the preceding 1998 Postulated Threat, state that the threat applies to nuclear weapons and special nuclear material without making any distinction between them. Second, DOE Office of Security officials believed that the higher threat levels contained in the 2003 Postulated Threat represented the worst potential worldwide terrorist case over a 10-year period. These officials noted that while some U.S. assets, such as military bases, are located in parts of the world where terrorist groups receive some support from local governments and societies thereby allowing for an expanded range of capabilities, DOE facilities are located within the United States, where terrorists would have a more difficult time operating. Furthermore, DOE Office of Security officials stated that the DBT focuses on a nearer-term threat of 5 years. As such, DOE Office of Security officials said that they chose to focus on what their subject matter experts believed was the maximum, credible, near-term threat to their facilities. However, while the 1998 Postulated Threat made a distinction between the size of terrorist threats abroad and those within the United States, the 2003 Postulated Threat, reflecting the potential implications of the September 2001 terrorist attacks, did not make this distinction. Finally, DOE Office of Security officials stated that the Postulated Threat document represented a reference guide instead of a policy document that had to be rigidly followed. The Postulated Threat does acknowledge that it should not be used as the sole consideration to dictate specific security requirements and that decisions regarding security risks should be made and managed by decision makers in policy offices. However, DOE has traditionally based its DBT on the Postulated Threat. For example, the prior DBT, issued in 1999, adopted exactly the same terrorist threat size as was identified by the 1998 Postulated Threat. Finally, the department’s criteria for determining the severity of radiological, chemical, and biological sabotage may be insufficient. For example, the criterion used for protection against radiological sabotage is based on acute radiation dosages received by individuals. However, this criterion may not fully capture or characterize the damage that a major radiological dispersal at a DOE site might cause. For example, according to a March 2002 DOE response to a January 23, 2002, letter from Representative Edward J. Markey, a worst-case analysis at one DOE site showed that while a radiological dispersal would not pose immediate, acute health problems for the general public, the public could experience measurable increases in cancer mortality over a period of decades after such an event. Moreover, releases at the site could also have environmental consequences requiring hundreds of millions to billions of dollars to clean up. Contamination could also affect habitability for tens of miles from the site, possibly affecting hundreds of thousands of residents for many years. Likewise, the same response showed that a similar event at a NNSA site could result in a dispersal of plutonium that could contaminate several hundred square miles and ultimately cause thousands of cancer deaths. For chemical sabotage standards, the 2003 DBT requires sites to protect to industry standards. However, we reported March 2003 year that such standards currently do not exist. Specifically, we found that no federal laws explicitly require chemical facilities to assess vulnerabilities or take security actions to safeguard their facilities against a terrorist attack. Finally, the protection criteria for biological sabotage are based on laboratory safety standards developed by the U.S. Centers for Disease Control and not physical security standards. In response to our concerns, DOE recently agreed to reexamine some of the key aspects and assumptions of the May 2003 DBT. DOE expects to complete this review by June 30, 2004. While DOE issued the final DBT in May 2003, it has only recently resolved a number of significant issues that may affect the ability of its sites to fully meet the threat contained in the new DBT in a timely fashion and is still addressing other issues. Fully resolving all of these issues may take several years, and the total cost of meeting the new threats is currently unknown. Because some sites will be unable to effectively counter the higher threat contained in the new DBT for up to several years, these sites should be considered to be at higher risk under the new DBT than they were under the old DBT. In order to undertake the necessary range of vulnerability assessments to accurately evaluate their level of risk under the new DBT and implement necessary protective measures, DOE recognized that it had to complete a number of key activities. DOE only recently completed three of these key activities. First, in February 2004, DOE issued its revised Adversary Capabilities List, which is a classified companion document to the DBT, that lists the potential weaponry, tactics, and capabilities of the terrorist group described in the DBT. This document has been amended to include, among other things, heavier weaponry and other capabilities that are potentially available to terrorists who might attack DOE facilities. DOE is continuing to review relevant intelligence information for possible incorporation into future revisions of the Adversary Capabilities List. Second, DOE also only recently provided additional DBT implementation guidance. In a July 2003 report, DOE’s Office of Independent Oversight and Performance Assurance noted that DOE sites had found initial DBT implementation guidance confusing. For example, when the Deputy Secretary of Energy issued the new DBT in May 2003, the cover memo said the new DBT was effective immediately but that much of the DBT would be implemented in fiscal years 2005 and 2006. According to a 2003 report by the Office of Independent Oversight and Performance Assurance, many DOE sites interpreted this implementation period to mean that they should, through fiscal year 2006, only be measured against the previous, less demanding 1999 DBT. In response to this confusion, the Deputy Secretary issued further guidance in September 2003 that called for the following, among other things: DOE’s Office of Security to issue more specific guidance by October 22, 2003, regarding DBT implementation expectations, schedules, and requirements. DOE issued this guidance January 30, 2004. Quarterly reports showing sites’ incremental progress in meeting the new DBT for ongoing activities. The first series of quarterly progress reports may be issued in July 2004. Immediate compliance with the new DBT for new and reactivated operations. A third important DBT-related issue was just completed in early April 2004. A special team created in the 2003 DBT, composed of weapons designers and security specialists, finalized its report on each site’s improvised nuclear device vulnerabilities. The results of this report were briefed to senior DOE officials in March 2004 and the Deputy Secretary of Energy issued guidance, based on this report, to DOE sites in early April 2004. As a result, some sites may be required under the 2003 DBT to shift to enhanced protection strategies, which could be very costly. This special team’s report may most affect EM sites because their improvised nuclear device potential had not previously been explored. Fourth, as mentioned earlier, DOE recently agreed to reexamine some of the key aspects and assumptions of the new DBT. DOE expects to complete this review by June 30, 2004. If DOE’s reexamination results in a revised DBT that contains increases in terrorist threat levels or changed assumptions regarding the threats it faces, DOE sites could need additional security funding. Finally, DOE’s Office of Security has not completed all of the activities associated with the new vulnerability assessment methodology it has been developing for over a year. DOE’s Office of Security believes this methodology, which uses a new mathematical equation for determining levels of risk, will result in a more sensitive and accurate portrayal of each site’s defenses-in-depth and the effectiveness of sites’ protective systems (i.e., physical security systems and protective forces) when compared with the new DBT. DOE’s Office of Security decided to develop this new equation because its old mathematical equation had been challenged on technical grounds and did not give sites credit for the full range of their defenses-in-depth. While DOE’s Office of Security completed this equation in December 2002, officials from this office believe it will probably not be completely implemented at the sites for at least another year for two reasons. First, site personnel who implement this methodology will require additional training to ensure they are employing it properly. DOE’s Office of Security conducted initial training in December 2003, as well as a prototype course in February 2004, and has developed a nine-course vulnerability assessment certification program. Second, sites will have to collect additional data to support the broader evaluation of their protective systems against the new DBT. Collecting these data will require additional computer modeling and force-on-force performance testing. Because of the slow resolution of some of these issues, DOE has not developed any official long-range cost estimates or developed any integrated, long-range implementation plans for the May 2003 DBT. Specifically, neither the fiscal year 2003 nor 2004 budgets contained any provisions for DBT implementation costs. However, during this period, DOE did receive additional safeguards and security funding through budget reprogramming and supplemental appropriations. DOE is using most of these additional funds to cover the higher operational costs associated with the increased security condition (SECON) measures. DOE has gathered initial DBT implementation budget data and has requested additional DBT implementation funding in the fiscal year 2005 budget: $90 million for NNSA, $18 million for the Secure Transportation Asset within the Office of Secure Transportation, and $26 million for EM. However, DOE officials believe the budget data collected so far has been of generally poor quality because most sites have not yet completed the necessary vulnerability assessments to determine their resource requirements. Consequently, the fiscal year 2006 budget may be the first budget to begin to accurately reflect the safeguards and security costs of meeting the requirements of the new DBT. Reflecting these various delays and uncertainties, in September 2003, the Deputy Secretary changed the deadline for DOE program offices, such as EM and NNSA, to submit DBT implementation plans from the original target of October 2003 to the end of January 2004. NNSA and EM approved these plans in February 2004. DOE’s Office of Security has reviewed these plans and is planning to provide implementation assistance to sites that request it. DOE officials have described these plans as being ambitious in terms of the amount of work that has to be done within a relatively short time frame and dependent on continued increases in safeguards and security funding, primarily for additional protective force personnel. However, some plans may be based on assumptions that are no longer valid. Revising these plans could require additional resources, as well as add time to the DBT implementation process. A DOE Office of Budget official told us that current DBT implementation cost estimates do not include items such as closing unneeded facilities, transporting and consolidating materials, completing line item construction projects, and other important activities that are outside of the responsibility of the safeguards and security program. For example, EM’s Security Director told us that for EM to fully comply with the DBT requirements in fiscal year 2006 at one of its sites, it will have to close and de-inventory two facilities, consolidate excess materials into remaining special nuclear materials move consolidated Category I special nuclear material, which NNSA’s Office of Secure Transportation will transport, to another site. Likewise, the EM Security Director told us that to meet the DBT requirements at another site, EM will have to accelerate the closure of one facility and transfer special nuclear material to another facility on the site. The costs to close these facilities and to move materials within a site are borne by the EM program budget and not by the EM safeguards and security budget. Similarly, the costs to transport the material between sites are borne by NNSA’s Office of Secure Transportation budget and not by EM’s safeguards and security budget. A DOE Office of Budget official told us that a comprehensive, department-wide approach to budgeting for DBT implementation that includes such important program activities as described above is needed; however, such an approach does not currently exist. The department plans to complete DBT implementation by the end of fiscal year 2006. However, most sites estimate that it will take 2 to 5 years, if they receive adequate funding, to fully meet the requirements of the new DBT. During this time, sites will have to conduct vulnerability assessments, undertake performance testing, and develop Site Safeguards and Security Plans. Consequently, full DBT implementation could occur anywhere from fiscal year 2005 to fiscal year 2008. Some sites may be able to move more quickly and meet the department’s deadline of the end of fiscal year 2006. Because some sites will be unable to effectively counter the threat contained in the new DBT for a period of up to several years, these sites should be considered to be at higher risk under the new DBT than they were under the old DBT. For example, the Office of Independent Oversight and Performance Assurance has concluded in recent inspections that at least two DOE sites face fundamental and not easily resolved security problems that will make meeting the requirements of the new DBT difficult. For other DOE sites, their level of risk under the new DBT remains largely unknown until they can conduct the necessary vulnerability assessments. In closing, while DOE struggled to develop its new DBT, the DBT that DOE ultimately developed is substantially more demanding than the previous one. Because the new DBT is more demanding and because DOE wants to implement it by end of fiscal year 2006—a period of about 29 months—DOE must press forward with a series of additional actions to ensure that it is fully prepared to provide a timely and cost effective defense of its most sensitive facilities. First, because the September 11, 2001, terrorist attacks suggested larger groups of terrorists with broader aspirations for causing mass casualties and panic, we believe that the DBT development process that was used requires reexamination. While DOE may point to delays in the development of the Postulated Threat as the primary reason for the almost 2 years it took to develop a new DBT, DOE was also working on the DBT itself for most of that time. We believe the difficulty associated with developing a consensus using DOE’s traditional policy-making process was a key factor in the time it took to develop a new DBT. During this extended period, DOE’s sites were only being defended against what was widely recognized as an obsolete terrorist threat level. Second, we are concerned about two aspects of the resulting DBT. We are not persuaded that there is sufficient difference, in its ability to achieve the objective of causing mass casualties or creating public panic, between the detonation of an improvised nuclear device and the detonation of a nuclear weapon or test device at or near design yield that warrants setting the threat level at a lower number of terrorists. Furthermore, while we applaud DOE for adding additional requirements to the DBT such as protection strategies to guard against radiological, chemical, and biological sabotage, we believe that DOE needs to reevaluate its criteria for terrorist acts of sabotage, especially in the chemical area, to make it more defensible from a physical security perspective. We are encouraged that the Department has agreed to reexamine the May 2003 DBT. Finally, because some sites will be unable to effectively counter the threat contained in the new DBT for a period of up to several years, these sites should be considered to be at higher risk under the new DBT than they were under the old DBT. As a result, DOE needs to take a series of actions to mitigate these risks to an acceptable level as quickly as possible. To accomplish this, it is important for DOE to go about the hard business of a comprehensive department-wide approach to implementing needed changes in its protective strategy. Because the consequences of a successful terrorist attack on a DOE site could be so devastating, we believe it is important for DOE to better inform Congress about what sites are at high risk and what progress is being made to reduce these risks to acceptable levels. Mr. Chairman, this concludes our prepared statement. We would be happy to respond to any questions that you or Members of the Subcommittee may have. For further information on this testimony, please contact Robin M. Nazzaro at (202) 512-3841. James Noel and Jonathan Gill also made key contributions to this testimony. This is a work of the U.S. government and is not subject to copyright protection in the United States. It may be reproduced and distributed in its entirety without further permission from GAO. However, because this work may contain copyrighted images or other material, permission from the copyright holder may be necessary if you wish to reproduce this material separately. | A successful terrorist attack on Department of Energy (DOE) sites containing nuclear weapons or the material used in nuclear weapons could have devastating consequences for the site and its surrounding communities. Because of these risks, DOE needs an effective safeguards and security program. A key component of an effective program is the design basis threat (DBT), a classified document that identifies, among other things, the potential size and capabilities of terrorist forces. The terrorist attacks of September 11, 2001, rendered the then-current DBT obsolete, resulting in DOE issuing a new version in May 2003. GAO (1) identified why DOE took almost 2 years to develop a new DBT, (2) analyzed the higher threat in the new DBT, and (3) identified remaining issues that need to be resolved in order for DOE to meet the threat contained in the new DBT. DOE took a series of actions in response to the terrorist attacks of September 11, 2001. While each of these has been important, in and of themselves, they are not sufficient to ensure that all of DOE's sites are adequately prepared to defend themselves against the higher terrorist threat present in the post September 11, 2001 world. Specifically, GAO found that DOE took almost 2 years to develop a new DBT because of (1) delays in developing an intelligence community assessment--known as the Postulated Threat--of the terrorist threat to nuclear weapon facilities, (2) DOE's lengthy comment and review process for developing policy, and (3) sharp debates within DOE and other government organizations over the size and capabilities of future terrorist threats and the availability of resources to meet these threats. While the May 2003 DBT identifies a larger terrorist threat than did the previous DBT, the threat identified in the new DBT, in most cases, is less than the threat identified in the intelligence community's Postulated Threat, on which the DBT has been traditionally based. The new DBT identifies new possible terrorist acts such as radiological, chemical, or biological sabotage. However, the criteria that DOE has selected for determining when facilities may need to be protected against these forms of sabotage may not be sufficient. For example, for chemical sabotage, the 2003 DBT requires sites to protect to "industry standards;" however, such standards currently do not exist. In response to these concerns, DOE has recently agreed to reexamine some of the key aspects and assumptions of the May 2003 DBT. DOE has been slow to resolve a number of significant issues, such as issuing additional DBT implementation guidance, developing DBT implementation plans, and developing budgets to support these plans, that may affect the ability of its sites to fully meet the threat contained in the new DBT in a timely fashion. Consequently, DOE's deadline to meet the requirements of the new DBT by the end of fiscal year 2006 is probably not realistic for some sites. |
For each fiscal year, the District is required under P.L. 103-373 to develop and submit to Congress a statement of measurable and objective performance goals for all significant activities of the District government. After each fiscal year, the District is to report on its performance. The District’s performance report is to include: a statement of the actual level of performance achieved compared to each of the goals stated in the performance accountability plan for the year, the title of the District of Columbia management employee most directly responsible for the achievement of each goal and the title of the employee’s immediate supervisor or superior, and a statement of the status of any court orders applicable to the District of Columbia government and the steps taken by the government to comply with such orders. Last year, on two occasions, we highlighted the challenges faced and progress made by the District in implementing a sound performance management system. In April 2000, we reported that the District’s first performance report, covering fiscal year 1999, lacked some of the required information. Specifically, the performance report did not contain (1) performance data for most of its goals, (2) the titles of managers and their supervisors responsible for each of the goals, and (3) information on any of the court orders applicable to the District government during fiscal year 1999. Also, it did not cover all significant District activities. In October 2000, we testified before the Subcommittee on Oversight of Government Management, Restructuring and the District of Columbia, Senate Committee on Governmental Affairs, that the District had made progress in defining clear goals and desired outcomes through its strategic planning efforts. However, we also said that there were still opportunities to more fully integrate various aspects of its planning process and ensure that performance information was sufficiently credible for decision- making and accountability. Our objectives were to ascertain the extent to which the District’s fiscal year 2000 report was useful for understanding the District’s performance in fiscal year 2000 and the degree to which it complies with its statutory reporting requirements. To determine if the performance assessment itself could provide a useful characterization of the District’s fiscal year 2000 performance, we conducted a process evaluation. This included identifying the components of the process used to develop goals and measures, the agencies included, when the goals were revised, and whether the final goals were developed in a timely manner to allow valid performance assessment during fiscal year 2000. To determine if the report complied with reporting requirements, we compared the report contents to the legislatively mandated requirements. To acquire additional information and verify our findings, we interviewed a key District official responsible for coordinating the performance assessment. We conducted our work from March through May 2001 at the Office of the Mayor of the District of Columbia in accordance with generally accepted government auditing standards. We did not verify the accuracy or reliability of the performance data included in the District’s report. We provided a draft of this report to the Deputy Mayor/City Administrator of the District of Columbia for review and comment. Comments are reflected in the agency comments section of this report. In accordance with requirements established in P.L. 103-373, we consulted with a representative for the Director of the Office of Management and Budget concerning our review. The District’s performance report reflects a performance management process that led to goals continually changing throughout fiscal year 2000 as the District worked to improve the process. The performance plan (initial goals) for fiscal year 2000 was submitted to Congress in June 1999 along with the District’s budget. The District subsequently implemented what became an iterative approach for developing new goals and revising existing goals for about 20 “critical” agencies. That is, in addition to establishing initial performance goals, the District developed (1) agency strategic plans, (2) performance contracts, and (3) a Mayor’s Scorecard for each of the critical agencies. The performance goals generated as part of these efforts were developed during the period March 1999 through March 2000. These initiatives led to the development of the set of goals that the District considered as its final fiscal year 2000 goals for each of the critical agencies. For example, the Department of Health extensively revised its initial five goals. After going through various planning exercises, the department eliminated three of the initial goals, combined the remaining two goals under one broader final goal, and added seven completely new final goals. The initial goals of the noncritical agencies changed during the fiscal year, but without going through the same process as that for the critical agencies. The District official responsible for coordinating the fiscal year 2000 performance assessment estimated that between 30 to 40 percent of the noncritical agencies’ goals were revised over the fiscal year 2000 performance assessment period. Although, some goals were finalized earlier, the set of final fiscal year 2000 goals for all agencies, whose performance was assessed, were submitted to Congress along with the District’s fiscal year 2001 budget in June 2000. One result of this process to redefine goals was that 54 percent of the initial goals were not used as final goals. For example, the Department of Motor Vehicles’ goal to seek out regular feedback on the level and quality of service was not used as a final fiscal year 2000 goal. Although the department developed several final goals related to improving customer service, such as wait times for vehicle registration, it did not continue the goal to obtain feedback directly from its customers. No explanation was provided in the report to explain why the goal was dropped or whether it had been achieved. Many of the remaining 46 percent of the original goals were significantly revised by the time the District issued its report, making it difficult to determine the degree to which the original goals were achieved. District officials have indicated they plan to use an approach similar to fiscal year 2000’s for determining performance goals and measures in succeeding years. That is, they plan to define each fiscal year’s goals and measures during the fiscal year in which performance is being assessed. They expect that performance goals and measures will not stabilize into a consistent set until fiscal year 2003. The District’s changing goals are reflected in its the fiscal year 2000 Performance Accountability Report, which provides information for three sets of performance goals. It provides information regarding the disposition of initial fiscal year 2000 goals. That is, the report indicates which goals made it into the final set used to assess fiscal year 2000 performance and which of the remaining initial goals, which were not considered by the District to be part of its final fiscal year 2000 goals, were nevertheless achieved. The second set of performance goals that are addressed in the report are those developed for the Mayor’s Scorecard. The goals in the Mayor’s Scorecard were developed to address priorities set by residents at the District’s Citizen Summit and the Neighborhood Action Forum. The last set of goals addressed in the report are the District’s final goals, which were included with the District’s fiscal year 2001 budget submittal to Congress in June 2000. The lack of information on the extensive revisions that the District made to its performance goals, measures, and plans, limit the usefulness of the subsequent performance report for purposes of oversight, transparency, accountability, and decision-making. Our review of federal agencies’ efforts to implement GPRA have shown that while it can be beneficial to periodically reassess and revise goals, it is also important that annual performance plans and reports provide clear information about the reasons for these changes when they occur. This information helps provide assurance that changes were intended to improve performance management rather than obfuscate weak performance; that is, that the changes were from developmental bias. Consistent with our findings, OMB’s guidance to federal agencies on the submission of GPRA plans and reports states that goals should be periodically modified as necessary to reflect (1) changes in programs, (2) agency capability to collect and report information, and (3) the importance and usefulness of any goal. All three of these factors are valid reasons to change goals. However, the District’s performance report does not indicate if any of these or other factors were a basis for the extensive revisions made to goals during fiscal year 2000. In addition, the report does not discuss steps taken to ensure that reported performance data were complete, that is, represented the entire fiscal year. For example, the Department of Parks and Recreation added a new goal to improve the safety, cleanliness, and accessibility of its facilities. However, it is not clear whether data on the District’s efforts to address safety findings (within 48 hours) was collected for the entire fiscal year. According to an official responsible for coordinating the performance assessment, the District cannot ensure that the reported data represented the entire year’s performance for any of the agencies; the official indicated one would have to go back and check with each individual agency to determine whether they were complete. The concerns we raise are consistent with problems identified by the District Office of the Inspector General in a report published in March 2001. The Inspector General conducted a review to, in part, verify the data supporting the reported achievements regarding the fiscal year 2000 performance contracts and the Mayor’s Scorecard goals. One of the Inspector General’s conclusions was that agencies did not maintain records and other supporting documentation for the accomplishments they reported and that the Office of the City Administrator did not provide sufficient guidance to address that problem. In response to the Inspector General’s finding, the Office of the City Administrator said it recognized the need for standard procedures, and it plans to issue performance review guidelines by the end of the summer 2001. Finally, regarding initial goals that were not carried over to the final set used to assess fiscal year 2000 performance, many are identified in the performance report as having been achieved. However, none of these goals had performance data provided for them. Therefore, the specific performance level at which these goals were met cannot be determined, that is, whether successful performance was marginal or otherwise. For example, the District had a goal of improving the response time for all legal services provided by the Office of the Corporation Counsel. The District’s report indicates that the goal was achieved, but because no data were provided, it is impossible to know precisely how and to what extent the agency improved its response time. The District’s performance report does not cover all significant District activities as required; thus, the performance report does not provide a comprehensive snapshot of the District government’s performance. For example, the report does not cover the performance of the District’s public schools, which account for more than 15 percent of the District’s budget. More important, the schools are responsible for a core local government function—providing primary education. The District’s performance report acknowledges this critical gap in coverage and says that subsequent reports beginning with the fiscal year 2001 report will more fully meet the statutory requirements. The District’s fiscal year 2000 Performance Accountability Report improved in two areas of compliance compared to last year’s report. First, the report provides the titles of program managers and their supervisors. The performance report is to include the title of the District of Columbia management employee most directly responsible for the achievement of each goal and the title of the employee’s immediate supervisor or superior. The District’s performance report provides the information for the final goals and goals contained in the Mayor’s Scorecard. This is an improvement over last year’s report, which contained no such information. Second, the performance report also includes information concerning court orders assigned to the government of the District of Columbia during the year and the steps taken by the government to comply with such orders. Specifically, the District’s performance report provides the status for each of the 12 court orders by describing and identifying whether or not they were in effect in fiscal year 2000 and fiscal year 2001. For example, in the case of Joy Evans v. DC, the court required the District to improve the habilitation, care, and treatment for mentally handicapped residents. The report indicates that this court order was in effect in fiscal year 2000 and will continue to be in effect in fiscal year 2001. The report also provides information on the actions taken to comply with the orders. For example, in the case of Twelve John Does v. DC, the report clearly identifies the actions taken to address issues at the District’s Central Detention Facility. The report states that cell doors are being repaired, ventilation systems are being replaced, environmental matters are being corrected, and additional staff are being added to address security needs. In addition, the report states that the facility is scheduled to close on or before December 31, 2001. The information provided by the District on court orders is an improvement over last year when, due to an oversight in compiling its fiscal year 1999 performance report, the District failed to report on any of the applicable court orders. The District’s fiscal year 2000 performance report is an improvement over the previous year’s in that it meets some of the statutory requirements that the previous report did not. However, the extensive changes that the District made to its fiscal year 2000 performance goals during the fiscal year undermine the usefulness of the resulting report because the District did not include critical information needed by Congress and other stakeholders. Such information, identifying how, when, and why specific goals were altered and the decision-making and accountability implications of those changes, is important to Congress and others so that they can have confidence in the validity and completeness of the reported performance data. In addition, the report does not cover all significant activities of the District government. Sustained progress is needed to address the critical performance and other management challenges that the District faces. The District recognizes the shortcomings with its performance management efforts and has stated a commitment to addressing them. The effective implementation of the various initiatives underway in the District is vital to the success of the District’s efforts to create a more focused, results- oriented approach to management and decision-making—an approach that is based on clear goals, sound performance and cost information, and a budget process that uses this information in allocating resources. To further strengthen the District’s performance management process and provide more useful information to its citizens and Congress, we recommend that the Mayor of the District of Columbia: Accelerate efforts to settle upon a set of results-oriented goals that are more consistently reflected in its various planning, reporting, and accountability efforts. Provide specific information in its performance reports for each goal that changed, including a description of how, when, and why the change occurred. In addition, the District should identify the impact of the change on the performance assessment itself, including data collection and measurement for the reporting period. Include in each year’s accountability report the performance of all significant activities of the District. On May 31, 2001, we received e-mail comments on our draft report on behalf of the Deputy Mayor/City Administrator. He stated that overall, he concurred with our findings, appreciated the context in which they were presented, and acknowledged that additional work is needed to make the District’s performance management system serve the needs of its citizens and Congress. The Deputy Mayor acknowledged that the extent of changes and the lack of discussion in the performance report about why specific goals were changed hinder comparison of the District’s performance against its initial goals. In addition, he said that using the goals that resulted from the development of agency strategic plans was more representative of the District’s performance during fiscal year 2000 than the initial goals. We agree with both of these points. Our central point, however, was that given the timing and extent of goal revision, and the absence of a discussion about those changes, the usefulness of the report for understanding performance as measured against the final goals, is limited. The Deputy Mayor said that the information we reported on the timing of the final set of agency goals appears to exaggerate the amount of time that agency goals were in a state of flux—leading to the impression that all of the District’s goals were changing until June 2000. We report that goals for the critical agencies were finalized by March 2000 and that goals for other (noncritical) agencies were revised at other times; the District could not specify when these goals were finalized. It could only suggest that 30 to 40 percent of these agencies’ goals were revised. However, we revised our report to reflect that although some goals were finalized earlier, they were not submitted to Congress until June 2000. In response to our recommendation that the District accelerate efforts to settle upon a consistent set of goals, the Deputy Mayor said that the District anticipates consolidating its goals during the fiscal year 2003 planning, budgeting, and reporting cycle. He further stated that goals for fiscal years 2001 and 2002 are likely to change as the District updates its agency-specific and citywide strategic plans in the summer of 2001. As we note in this report, it can be beneficial to periodically reassess and revise goals. However, it is critical that the District makes every effort to accelerate the process of settling upon its final goals early in a fiscal year to ensure that the performance assessment and report are meaningful. The Deputy Mayor concurs with our recommendation that specific information should be provided in the District’s performance reports for each goal that changed. The Deputy Mayor also concurs with our recommendation to include in each year’s accountability report the performance of all significant activities of the District. He said that the District will seek to expand the coverage of its fiscal year 2001 report to more fully comply with its mandated reporting requirements. He also stated that although the District cannot compel independent agencies not under the authority of the Mayor (including the D.C. Public Schools) to report on performance, it plans to work with them in developing performance information. We are sending copies of this report to the Mayor of the District of Columbia. Copies will be made available to others upon request. Key contributors to this report were Kathy Cunningham, Chad Holmes, Boris Kachura, and Bill Reinsberg. 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Web site: http://www.gao.gov/fraudnet/fraudnet.htm e-mail: [email protected] 1-800-424-5454 (automated answering system) | The District of Columbia's fiscal year 2000 performance report is an improvement in that it meets some of the statutory requirements that the previous year's report did not. However, the extensive changes that the District made to its fiscal year 2000 performance goals during the fiscal year undermine the report's usefulness because the District did not include critical information needed by Congress and other stakeholders. Such information, identifying how, when, and why specific goals were altered and the decision-making and accountability implications of those changes, is important to Congress and others so that they can have confidence in the validity and completeness of the reported performance data. Also, the report does not cover all significant activities of the District government. Sustained progress is needed to address the critical performance and other management challenges that the District faces. The District recognizes the shortcomings with its performance management efforts and has stated a commitment to addressing them. The effective implementation of the various initiatives underway in the District is vital to the success of the District's efforts to create a more focused, results-oriented approach to management and decision-making--an approach that is based on clear goals, sound performance and cost information, and a budget process that uses this information in allocating resources. |
The purpose of the TAA for Firms program is to help trade-impacted, economically distressed U.S. manufacturing, production, and service firms make adjustments that may enable them to remain competitive in the global economy. The program delivers technical assistance to firms by developing business recovery plans and providing matching funds to implement the projects in the plans. EDA uses its appropriation for the TAA for Firms program to fund 11 TAA Centers, signing a cooperative agreement with each center. The centers provide assistance to U.S. manufacturing, production, and service firms in all 50 states, the District of Columbia, and the Commonwealth of Puerto Rico. Each TAA Center uses the funding that EDA allocates under the cooperative agreement to cover its administrative and operational costs and works directly with firms in its geographic region to provide assistance on a cost-share basis. None of the program funds go directly to firms; instead, funds go to third- party consultants to implement firms’ projects. The centers cover geographic regions of varying size, composed of one to eight states. A TAA Center may be affiliated with a university, private firm, or nonprofit organization; however, as shown in figure 1, nonprofit organizations currently manage four centers, while the other seven centers are affiliated with universities. Staff at the TAA Centers generally target their outreach to small and medium-sized firms in the manufacturing, agricultural, and service sectors.firms, including the following: They use a variety of outreach methods to identify potential analyzing industry databases; conducting cold calls and providing information via websites, e-mail, and mail; presenting at seminars and meetings hosted by banking consortia, business and trade associations, and members of Congress; collaborating with state and local entities, including local departments of commerce and agriculture, economic and small business development centers, and chambers of commerce; targeting firms with workers who qualify for the TAA for Workers program or firms involved with International Trade Commission antidumping lawsuits; and acting on referrals from program consultants and current and former clients. Once a firm connects with a TAA Center, staff may use various methods to determine whether firms are financially able to participate in the program. Some centers review preliminary financial documentation in an effort to help ensure that firms are eligible for assistance and committed to participating in the program. One center developed a series of eligibility questions on its website, so that firms can determine whether they are eligible for the program before applying for assistance. The TAA for Firms program process has three phases—petition for certification, recovery planning, and business recovery plan implementation—requiring collaboration among firms, TAA Centers, and EDA. Figure 2 presents a flowchart summary of the process. A firm seeking TAA program benefits must submit a petition to EDA to receive certification of its eligibility to participate in the program. TAA Center staff collect documentation from a firm to demonstrate in the petition each of the following: 1. A significant number or proportion of the firm’s workers have been or are threatened to be totally or partially separated. 2. Total sales and/or production or sales and/or production of a product that represents at least 25 percent of the firm’s total have decreased absolutely during the 12-month period preceding the most recent 12- month period; or total sales and/or production, or that of a product that represents at least 25 percent of the firm’s total, have decreased during the most recent 12-month period compared with the preceding 12-, 24-, or 36-month period. 3. Increases in imports of articles or services comparable to, or directly competitive with, the firm’s articles or services contributed importantly to worker separations (or threat thereof) and the declines in sales or production. Firms must generally demonstrate that import impact has occurred, using a combination of import data or statements from their customers to certify that imports were a factor in the decreased purchase of the firm’s products. Once EDA approves the petition and certifies the firm, the firm and TAA Center staff have 2 years to develop a business recovery plan and submit it to EDA for approval. Center staff work closely with the firm’s management to identify the firm’s strengths and weaknesses and develop a customized plan designed to stimulate its recovery and growth. EDA requires standard information in each business recovery plan, such as a description of the firm’s competitive problems, prospects for recovery, and specific technical assistance projects. However the length, level of detail, and amount of information provided in the plans vary across the TAA Centers. EDA officials review and approve the plans on the basis of whether they meet regulatory requirements and supply the necessary supporting documents. A firm that requests $30,000 or less in total assistance to implement an approved business plan must pay at least 25 percent of the cost of the assistance. Firms that request more than $30,000 in total assistance, up to $75,000, must pay 50 percent of the total cost. TAA Centers proposed four types of projects in firms’ business recovery plans (see fig. 3). To assist a firm in implementing the projects in its business recovery plan, TAA Center staff work with firm management to identify and competitively select third-party consultants with the specific expertise needed. In some instances, center staff said that they collaborate with consultants from Commerce’s Manufacturing Extension Partnership program to implement projects in the TAA firms’ business recovery plans. (Please see app. II for a discussion of the similarities, differences, and interactions among the TAA for Firms, Manufacturing Extension Partnership, and other Commerce programs.) In addition to mandating that we report on the TAA for Firms program, the TGAAA mandated that we report on the other TAA programs. In July 2012, we issued our report on the TAA for Farmers program. Our reports on the TAA for Workers and Communities programs are forthcoming. The 2009 legislative changes to the TAA for Firms program resulted in reduced firm certification processing times, new performance reporting, and increased firm participation. However, EDA officials and TAA Center staff said that the lapse of these legislative changes from February 2011 to October 2011 and the uncertainty regarding program funding contributed to a decrease in firm participation in fiscal year 2011. The TGAAA marked the first major change in the TAA for Firms program since 1986 (see table 1). The 2009 legislation included changes to the program, such as eligibility for service sector firms and more flexible certification requirements. However, TGAAA provided that the provisions that expanded eligibility would expire and that on January 1, 2011 the TAA for Firms program be administered as if the expanded provisions had not been enacted. As authorization of the program was about to expire on January 1, 2011, Congress passed the Omnibus Trade Act of 2010 to extend the program through February 2012. However, this legislation did not reinstitute the TGAAA changes, which resulted in a lapse of the TGAAA changes from February 2011 until October 2011. In October 2011, the TAA Extension Act of 2011 reinstituted many of the TGAAA’s changes, including service sector firm eligibility and the more flexible certification requirements. Four changes mandated by the 2009 legislation contributed to improvements in program operations and increased participation: Creation of director’s and other full-time positions. The creation of a director’s position and other full-time positions for the program resulted in reduced certification processing times for petitions. Prior to the 2009 legislation, the TAA for Firms program was administered by rotating staff members and interns. TAA Center staff said that this resulted in inconsistent review of petitions. Center staff reported that with the full-time professional staff now available, reviews are dependable. In addition, EDA stated in its 2011 annual report that its staff reduced the average processing time for petitions to 21 days—a 48 percent reduction from fiscal year 2010 and a faster turnaround than the 40 days required by the TGAAA. New annual reporting on performance measures. The TGAAA required EDA to gather information on performance measures and submit annual reports to Congress. EDA has submitted three annual reports to Congress on these performance measures as a result of the legislation. Inclusion of service sector firms. According to our analysis of EDA data, the inclusion of service sector firms allowed EDA to certify 26 firms not previously eligible for assistance in fiscal years 2009 through 2011. Examples of service sector firms assisted by some TAA Centers include architectural engineering firms, telecommunications firms, and software development firms. Expansion of the “look-back” period from 12 months to 12, 24, or 36 months. Our analysis of EDA data shows that 32 additional firms participated in the program in fiscal years 2009 through 2011 as a result of the expanded the look-back period. Prior to the legislative changes, firms were allowed to compare sales and production data in the most recent 12 months only with data from the immediately preceding 12-month period. Staff at the TAA Centers told us that it was difficult to certify some firms with the 12-month look-back period, because that amount of time was often not adequate to demonstrate declines in sales and production. Center staff said that the expanded look-back period was particularly helpful during the recent recession, because it enabled more firms to demonstrate the requisite declines. Although these legislative changes generally improved the program and increased participation, TAA Center staff noted some challenges in assisting service sector firms. For example, some service sector firms had difficulty establishing import impact along with requisite declines in sales and production. Because service sector firms do not have industry- specific codes that allow TAA Center staff to analyze import data, EDA allowed the use of certification letters from firm customers to demonstrate import impact in lieu of import data. However, many of the firms’ customers did not want to certify in writing that they were outsourcing services, according to center staff. As a result, staff said that some service sector firms could not provide sufficient evidence of import impact. In addition, some Center staff expressed concern that they did not have sufficient funding to serve both manufacturing and service sector firms. From fiscal year 2008 through fiscal year 2010, EDA certified and approved an increased number of petitions and business recovery plans (see fig. 4). In addition, with a few exceptions, the TAA Centers generally submitted an increased number of petitions and business recovery plans during this period. According to center staff, the economic downturn contributed to the increase in firms applying for and receiving assistance from the TAA for Firms program from fiscal year 2008 through fiscal year 2010, because more firms could demonstrate a decline in sales and employment. Additionally, EDA officials and TAA Center staff stated that the 2009 legislative changes increased interest in, and demand for, the program by prospective firms. For example, EDA officials and TAA Center staff said the news of the increased funding authorization generated many inquiries from firms, and one TAA Center official noted that the large increase in authorized funding in the TGAAA led to the expectation that the program would be able to service a greater number of firms. EDA officials also stated that demand for the program increased because more firms were eligible under the expanded look-back period. In total, EDA certified 878 petitions and approved 761 business recovery plans for fiscal years 2008 through 2011. Because TAA Centers use a variety of methods prior to completing a petition to determine if a firm is financially able to participate in the program, center staff told us that EDA approved almost all of the finalized petitions they received. In addition, center staff said that EDA rarely rejected submitted business recovery plans, owing to the firms’ in-depth diagnostics and detailed business recovery plans. Figure 4 also shows that EDA certified fewer petitions and approved fewer recovery plans in fiscal year 2011 than in fiscal year 2010. Certified petitions decreased from 330 in fiscal year 2010 to 149 in fiscal year 2011, and approved business recovery plans decreased from 264 in fiscal year 2010 to 183 in fiscal year 2011. EDA officials and TAA Center staff attributed the decline to three factors: Lapse of TGAAA changes. EDA officials and TAA Center staff reported that the lapse of the legislative changes from February to October 2011 meant that service sector firms were no longer eligible to receive assistance. Center staff also said that the lapse in the TGAAA provisions disrupted the certification and approval process for several service sector firms and excluded them from participating. In addition, center staff stated that without the option to use the expanded look-back period, some petitioning firms that would have been eligible before the lapse could not show the requisite declines in sales or production during this time. Program uncertainty. The President’s fiscal year 2012 budget proposed to eliminate the TAA for Firms program. EDA reported that the uncertainty regarding the program’s future funding caused the TAA Centers to focus on existing clients instead of identifying new firms. One center stated in its 2010 annual report that the possibility that the program might be cancelled required the center to reserve sufficient funds to cover closeout costs rather than bring new firms into the program. Other center staff confirmed that uncertainty about the program affected outreach efforts and budgeting, because of concerns that the program would be eliminated. Improvement in the economy. Some TAA Center staff said that fewer firms were eligible to participate in the program because the economy’s improvement from fiscal year 2010 to fiscal year 2011 prevented some firms from demonstrating a decrease in employment, sales, and production. EDA collects data on 16 measures reported in its annual report to Congress and in Commerce’s performance and accountability report, but we found that these performance measures, and EDA’s use of them, do not adequately focus on program outcomes. In addition, EDA’s lack of centralized, comprehensive, and reliable data on participating firms limits its ability to improve program management and program outcomes. However, we found the program may have had positive outcomes that are not captured in EDA’s performance measures and data collection. Our data analysis showed that participation in the program was positively associated with an increase in sales, and our survey respondents reported satisfaction with the assistance they received from the program. As TGAAA requires, EDA currently collects data on 14 performance measures to include in its annual report on the TAA for Firms program, as well as two measures to include in Commerce’s annual performance and accountability report. However, we found that these measures are largely output measures rather than measures of program outcomes. We define performance measurement as the systematic ongoing monitoring and reporting of program accomplishments, particularly progress toward preestablished goals or standards. Performance measures may address inputs: program staffing and resources; outputs: the type or level of program activities conducted or the direct products or services delivered by a program; or outcomes: the results of those products and services. Outcome-oriented goals and performance measures assess the results of a program, compared with its intended purpose, and are important for ensuring accountability. We characterize most of EDA’s performance measures as output measures, since they measure goods and services delivered by a program—for example, the number of firms certified as eligible for the program or the number of business plans approved by EDA. We characterize only three of the measures— measures 10, 15, and 16—as outcome measures, as shown in table 2. Outcome measure 10—sales, employment, and productivity of each firm on completion of the program and in each of the 2 years after completion—is closely tied to the program’s intended purpose of helping firms adjust to international trade competition. However, in its 2011 Annual Report on the TAA for Firms program, the primary analysis that EDA offers for its data on performance measures notes how the program’s participants fared relative to the nationwide average for all manufacturing firms. Specifically, employment for participating firms decreased less for TAA for Firms participants than for firms nationwide (a 1.9 percent decrease for program participants, compared with a 4.5 percent decrease nationwide, according to Bureau of Labor Statistics data). Likewise, productivity for TAA for Firms participants increased by less than 1 percent, whereas average productivity increased by 10 percent nationwide since 2009. However, comparing performance data for trade-impacted firms with data for the nationwide manufacturing industry is not sufficient for determining whether the program is effective in helping firms. TAA for Firms recipients are in distress, having already been certified as adversely impacted by international trade. These firms demonstrated lost sales and employees to qualify for the program and cannot be expected to perform at the same level as the national average, which includes firms not impacted by trade competition. Nevertheless, EDA has not attempted to isolate the impact of the program’s assistance on firms from other influences. In November 2009, we reported that using program evaluation methods to rule out plausible alternative explanations for outcomes that may be influenced by a variety of external factors, such as changes in the economy, can help strengthen evaluations. In June 2010, EDA outlined plans for an objective evaluation of the effectiveness and efficiency of the program and individual TAA Centers. However, the evaluation was not implemented because of a lack of funding for it, according to the program’s director. Several TAA Center officials noted that data from the performance measures do not adequately show the effect that the program has on its participants, and they further commented that they do not find these measures particularly useful for improving program management. For example, a representative from one TAA Center said that an important measure of success is firm survival, which determines the number of jobs that are saved or created, but firm survival is not measured in the annual performance metrics. A representative of another TAA Center noted that a weakness in measuring sales, employment and productivity 2 years after program completion is that the nature of the business cycle is such that sales and production must increase to the point where orders cannot be filled before the firm believes it is justified in hiring new staff. As a result, there is a time lag between increased sales and production and increased employment that might not be reflected in the 2-year data. EDA acknowledges that the program’s performance measures should be improved and has made improving the measures a goal and taken steps toward it. According to the director of the program, EDA has entered into a partnership with economists from the George Washington University and the University of North Carolina-Chapel Hill to improve the performance metrics for all EDA programs under the Government Performance and Results Act. Planned activities include the creation of a new logic model that will map out inputs, outputs, and outcomes for EDA’s programs. The economists will also assist EDA in creating more expansive performance metrics for all programs, including TAA for Firms. EDA anticipates that this project will be completed by fall of 2014. Although EDA and the TAA Centers independently collect data on participating firms and program operations that may be useful for evaluating the TAA for Firms program, gaps in centralized, comprehensive, and reliable program data limit EDA’s ability to analyze program trends and inform decisions to improve results. The issues with EDA’s data that we identified fall into four clear but interconnected categories: Gaps in centralized data. According to EDA officials, the agency maintains a database of information from petitions, such as firm location, sales or production, employment, and the basis for eligibility. EDA staff also maintain a separate database of information from firms’ approved business recovery plans, including the total dollar amount of assistance and types of projects approved. However, TAA Center staff do not have access to EDA’s databases and maintain their own independent program data and information. We found that EDA does not maintain the necessary data, such as whether the firm is a public or private firm or a multiplant firm, to conduct a quantitative analysis of the effects of TAA for Firms assistance on participating firms, but that the TAA Centers collected the time-series data required to perform an economic analysis. Although we were able to conduct an analysis of the program’s impact on firms, doing so required us to compile more complete and comprehensive firm-level data that the centers had collected for other purposes. For example, in the absence of centralized program data, we utilized the firm-level data cited in the conference report on Commerce appropriations compiled by the centers for fiscal year 2012, including firms’ current and prior sales and employment and the fiscal years in which firms completed projects in their approved business recovery plans.commented that the program would benefit from having a complete data set on firms to respond to future data requests from stakeholders and analyze the effectiveness of the program; however, the data EDA currently has accessible are not sufficient for such an analysis. EDA makes multiple data requests of TAA Centers. EDA frequently makes multiple requests to the TAA Centers for program data when preparing required reports, and center staff noted that they are often asked to provide or validate program data and information they have already reported, including the data for the program’s annual reports. Staff at several centers that we visited stated that they were able to comply with repeated requests for data, but they cited concerns about the use of limited staff time to prepare reports of data they had previously reported. Data requests require verification but can still result in inaccuracies. In addition, EDA relies on each of the TAA Centers to validate its data. However, when we compared EDA’s data with data provided by the centers, we identified errors in EDA’s data. For example, we found that EDA’s certification data did not include 30 of the 32 firms that were certified on the basis of the expanded look-back period in fiscal years 2009 to 2011. EDA officials also could not ensure the reliability of data on petition and business recovery plan approvals prior to fiscal year 2008, because EDA had not validated these data with each of the centers. Lack of guidance results in dissimilar information across TAA Centers. EDA has not developed guidance on the format and types of program data that TAA Centers should collect, which has contributed to a lack of comparable data on program activities across the centers. Though TAA Centers have begun to track expenses by specific program activities—such as outreach, petition development, and business recovery plan development and implementation—EDA has not clarified how the centers are to record these activities, according to EDA officials. As a result, Commerce’s Office of Inspector General reported that TAA Centers do not appear to be consistent in how each records and allocates costs among program activities. Many of the centers conduct customer satisfaction surveys, but each has its own set of questions and method of administering the survey. Without consistent information, EDA cannot monitor activities across TAA Centers or conduct a comparative program analysis. EDA officials noted that they had been working toward establishing a centralized database, accessible online, in which TAA Centers and EDA could enter and verify program information. According to officials, this effort is currently on hold pending Commerce’s response to guidance from the Office of Management and Budget (OMB) on the establishment of shared information technology services for federal agencies. Further, EDA headquarters experienced a computer virus during our review, which demonstrated the value of the centers’ systems for obtaining and reporting historical data. However, without centralized comprehensive and accurate data on program operations, EDA is hindered in its ability to effectively evaluate the program, such as by determining the effects of program assistance on firms. Given the weaknesses we found in EDA’s performance measures and data collection, and because few other studies have examined the effectiveness of the program, we undertook further analysis to determine the impact of the TAA for Firms program. We found that participation in the program was associated with increased sales, although other factors, such as a firm having multiple plants, had a stronger effect on performance. We used a regression analysis to determine the sales performance of firms that participated in the TAA for Firms program from 1998 through 2011, both before and after program participation, while controlling for other variables, such as the size of the firms and conditions in the economy. By comparing firm sales before and after participation in the program, rather than comparing firms in the program with firms that did not receive assistance, we were able to examine whether participation in the TAA for Firms program was associated with positive outcomes for firms that actually received assistance under the program. We collected data from the TAA Centers on firms’ sales and employment 2 years prior to having a business recovery plan approved and 2 to 3 years after, along with industry information. Our data included about 570 firms in more than 250 5- and 6-digit North American Industry Classification System (NAICS) industries that had experienced a decrease in either sales or employment owing to import penetration. About 85 percent of the firms in our analysis were small to medium sized. About one-third had fewer than 25 employees, and about two-thirds had fewer than 50 employees; only about 5 percent had more than 300 employees. We also created overall industry and macroeconomic variables using Bureau of Labor Statistics and Census data, to isolate the effect of the program on firm sales while accounting for other factors in the general economy. We found that some firm- and market-related factors had a stronger and more significant effect on firm sales than did participation in the TAA for Firms program, such as whether the firm was a multiplant firm, and whether it was a publicly or privately held firm. With regard to the effect of program participation on sales, we determined the following: There is a small positive and statistically significant relationship between program participation and sales. Overall, we estimate that the effect of participation in the program was an increase in firm sales, ranging from 5 to 6 percent on average, if all other factors are held constant. This translated into an average increase of about $280,000 to $350,000. The effect was greater for the firms with 300 or fewer employees that accounted for 95 percent of the firms in our sample. Using productivity (firm sales divided by employment) as one outcome variable, we also found that the effect of the program on productivity was about a 4 percent increase. As imports rose, sales declined for TAA for Firms clients. Our analysis shows that import penetration was highly statistically significant and most likely had a very negative effect on firm sales. According to our estimates, for every 1 percentage point increase in the industry import penetration ratio, sales of firms included in our analysis decreased by about 16 percent on average. Our analysis also shows that import penetration increased from an average of 34 percent in 2000 to 39 percent in 2011 for industries associated with the firms in our study. TAA for Firms participation combined with market growth increased firm performance. We found a statistically significant and positive effect of industry market growth on firm sales after firms participated in the program.the percentage change in firm sales increased as market growth increased. For firms in relatively high-growth industries, such as certain types of metal manufacturing, plastic pipe manufacturing, and flooring industries, the combination of participation in the program and industry growth affected sales more positively, with such firms experiencing a 6 to 10 percent increase in sales. This result suggests that firms that participated in the TAA for Firms program during the 1998 through 2011 period were better able to take advantage of growth in their markets or to translate overall market growth into firm sales, compared to before participating in the program. For low- growth markets, the effect was not as positive. Specifically, firms selling products in the lowest-growth (or negative-growth) markets— the bottom percentile of our sample’s industry growth ranges—still experienced declines in sales ranging from -0.5 percent to -2.8 percent. Since our analysis captured marginal effects, this may simply mean that the negative factors weighing on the firm outweigh the positives, including the effects of program participation. Our survey of TAA for Firms participants also showed that the program had a positive effect. We conducted a survey of 163 firms that had a recovery plan approved in fiscal year 2009 to obtain their views about their experience with the program; we received responses from 117 of the 163 firms, with a final response rate of 72 percent. The survey included questions about the TAA Center, the consultants who carried out the projects included in the business recovery plans, and the outcomes of the firm’s participation in the program. More than 90 percent of responding firms reported that they were either very or generally satisfied with the services they received from the TAA Center and the consultants who performed work for them (see fig. 5). Over 80 percent reported that the program helped them to identify projects and business process improvements, and 62 percent said that the program helped them to identify management weaknesses. In terms of outcomes, survey results indicate that responding firms believed the program was particularly helpful in improving marketing and sales (84 percent); helping them to stay in business (82 percent); helping to improve profitability (73 percent); helping them to retain employees (71 percent); and helping them to hire new employees (57 percent). In narrative responses to our survey’s open-ended questions, 22 firm representatives said that the program helped their business to grow or improve. In addition, 30 respondents wrote positive comments about the TAA Centers’ attentiveness to their needs and the ease of working with the centers. Only 34 percent of respondents wrote that the program helped their firm with export sales, although we heard in interviews with staff at several TAA Centers that they encourage small firms to increase exports. One survey respondent noted, “TAA Centers should undertake a program which would encourage small businesses to export. In my experience most small businesses do not export because they believe (incorrectly) that exporting is difficult.” Our survey respondents also suggested that the program could be improved by increasing the availability of funding, and allowing funds to be used for capital improvements. (For the complete results of our survey, please see GAO’s e-supplement, GAO-12-935SP.) During the course of our work, representatives of firms and the TAA Centers identified the following specific ways that the program had helped firms. In California, a metal parts manufacturer was certified in 2007 because of increased competition from Taiwan and China. The firm faced a 15 percent decline in employment over a 2-year period before certification. The TAA Center helped improve the firm’s manufacturing technology, enabling it to produce more high-end products, increase production efficiency, and lower costs. The Center also helped the firm to develop a marketing strategy and website upgrade to improve the firm’s name recognition. This assistance helped the firm increase its sales by about 8 percent, and productivity has more than doubled. Over the past 2 years, the firm reported that it has hired two additional employees. In North Carolina, a TAA Center assisted a manufacturer of sheet metal roofs and artisan works with financial consulting and a website upgrade. The company reportedly hired an additional three employees since it began working with the TAA Center and was able to employ more crews than it could previously. The owner said that his company might have had to lay off half its staff without the TAA Center’s help. In New York, a TAA Center helped a teak furniture manufacturer that sold its products through catalogues. The firm was impacted by competition from imports. The TAA Center encouraged the firm to rebrand itself in order to penetrate higher-end markets through a higher-quality catalogue and targeted advertising. As a result, the firm reportedly doubled sales and hired 16 new staff. In Massachusetts, a TAA Center helped an environmental management firm that faced growing competition from international trade. The TAA Center provided $10,000 for an improved website, which, according to the president of the company, resulted in a 10 to 15 percent increase in sales in the first year. EDA allocated funding to the 11 TAA Centers for cooperative agreement years 2008 to 2011 using a funding allocation formula that comprises a set of weighted factors; however, the formula does not take into account the potential number of firms in need of the program and differences in costs across the centers. According to beneficiary equity—a key standard for designing and evaluating funding formulas—funds should be distributed to regions according to the needs of their respective populations and should take into account the costs of providing program services, so that each service area can provide the same level of services to firms in need. However, TAA Centers varied considerably in their costs and use of the allocation they received. Though EDA deobligates and reallocates any unspent funds, it uses its allocation funding formula to do so, thus perpetuating the deficiency of failing to consider variable needs and costs in allocating its funds. The TAA for Firms authorizing legislation does not specify how EDA should allocate funding to the TAA Centers. In September 2003, EDA developed, in consultation with the centers, a funding allocation formula that it uses to allocate grant funds to each center. EDA intended that the funding allocation formula would develop consistency in the yearly allocation process and provide TAA Centers with sufficient funds to operate a productive program. EDA recognized that such consistency in funding allocations was necessary, in part because of the complexity of the program and the provision of the centers’ professional business advice to assist in the firms’ recovery planning and projects. EDA’s funding formula divides two-thirds of allocated funding equally among the 11 centers according to base funding and two fixed factors: Geographic size: The TAA Center’s service region in square miles Number of firms: The service region’s share of the nation’s firms in the agricultural, mining, and manufacturing sectors The funding formula divides the remaining one-third of allocated funding among the TAA Centers according to three variable factors: Approved business recovery plans: The center’s share of the total number of business recovery plans approved by EDA within the past 2 fiscal years Employees in approved recovery plans: The center’s share of the total number of employees in the business recovery plans approved in the last 2 fiscal years Firms achieving expected results: The center’s share of the total number of firms that reported achieving anticipated outcomes from actions the firms took as a result of the program assistance they received during the past fiscal yearOnce it had determined the funding formula factors and measures for each, EDA weighted the factors to determine how it would distribute annual funding to the 11 TAA Centers. The pie chart in figure 6 shows how the funding formula weighs each of the different factors. The bar chart in figure 6 shows the resulting allocation to each center based on each of the factors for cooperative agreement year 2011. For a discussion of the data used to produce the allocation and of the resulting allocation, see appendix IV. The TAA for Firms funding formula places an emphasis on an equal distribution of program funding across the centers, as it allocates about two-thirds of program funding using base funding and relatively fixed factors (see fig. 6). As a result, TAA Centers’ share of total program funding has remained relatively equal and constant over cooperative agreement years. For example, during the cooperative agreement years 2008 to 2010, each center’s portion of total funding ranged from 7.2 percent to 10.2 percent. Between the 3-year cooperative agreement period of 2008 to 2010 and the 1-year cooperative agreement period of 2011, the change in TAA Centers’ share of total program funding ranged from 0.2 percent to 1.6 percent. EDA included the formula’s three remaining factors to account for differences in TAA Centers’ performance. EDA included each center’s share of the total number of firms that reported achieving anticipated outcomes from actions they took as a result of the assistance they received during the past fiscal year and the total number of business recovery plans approved within the past 2 fiscal years. To offset the potential of those factors to motivate centers to increase their individual funding levels by targeting a large number of very small firms, EDA also included as a final factor each center’s share of the total number of employees in the business recovery plans approved in the past 2 fiscal years. EDA’s TAA for Firms funding formula does not include a direct measure of the number of firms potentially in need of the program based on the program’s key objective of providing technical assistance to firms that have lost sales and employment because of increased competition from imports. As a result, the formula falls short of a key criterion that we previously established for the evaluation of allocation formula approaches. Under the beneficiary equity standard, a funding allocation formula should include a factor that distributes funding to each service area according to the respective target population needing assistance so that each service area can provide the same level of services to the population in need. To meet this equity standard, the formula should use reliable and appropriate measures of need in each state or region. Consequently, TAA Centers that may have a greater number of distressed firms because of import competition potentially receive similar amounts of funding as centers serving a much smaller number of trade- impacted firms. For example, there are wide differences in the numbers of certified petitions and approved business recovery plans among the centers. In addition, staff at some centers stated that they undertake outreach efforts to identify firms. Staff at other centers stated that they identify client firms without conducting much outreach, and still others have so many current clients that they do not seek new ones. However, the program lacks information to determine whether it is achieving equity for trade-impacted firms across TAA Centers’ service regions. EDA’s allocation of funding also does not take into account variations in TAA Centers’ costs of providing firms assistance. To meet the beneficiary equity standard, a formula should account for differences in the cost of providing services in each region, so that each firm may receive the same level of assistance. The centers provide EDA with information on programmatic costs by cost categories. However, we found that TAA Centers’ direct and indirect operating costs varied considerably during the cooperative agreement years 2008 to 2010 (see fig. 7). For example, during that time period, centers’ costs for personnel salaries and fringe benefits ranged from approximately $877,000 to $2.1 million, and centers’ costs for travel and for equipment and supplies ranged from $52,000 to $260,000. In addition, indirect cost rates are set according to OMB guidelines and vary depending on whether the TAA Center is affiliated with a university or an independent nonprofit organization. For university-affiliated centers, indirect costs tend to be higher than those of nonprofit-affiliated centers. The indirect costs for the university-affiliated centers ranged from 12.9 percent of total costs to 30.3 percent of total awarded funds, or about $473,000 to $958,000, for cooperative agreement years 2008 through 2010. For nonprofit-affiliated centers, the indirect costs ranged from 5.5 percent to 14.1 percent of total awarded funds, or about $251,000 to $662,000, for cooperative agreement years 2008 through 2010 (see fig. 8). The direct and indirect costs of operating the centers to provide assistance to firms affect the amount of program funding that centers have available for direct assistance to firms. During cooperative agreement years 2008 through 2010, the share of program funding for third-party consultants implementing projects in firms’ approved business recovery plans varied widely across the centers, ranging from 21.2 percent of total expenditures or $670,000 for the Western Center to 73.7 percent or $3.4 million for the New England Center. In part because of the variation in the direct and indirect costs of operating the centers to provide assistance to firms, marked differences exist in the centers’ backlogs of approved but unfunded assistance to firms. The TAA for Firms program’s total backlog of unfunded assistance approved from cooperative agreement year 2008 to April 2012 exceeds $24 million for a total of 796 firms, but this backlog ranged from $1 million for 27 firms assisted by the Western Center to $3.9 million for 133 firms assisted by the New England Center (see table 3). EDA’s approach to allocating funding resulted in differences in the centers’ use of the allocations they received. Five centers spent their entire funding allocation by the conclusion of the 3-year cooperative agreement period 2008 through 2010, while six centers did not. The total proportion of unspent funds among the six centers ranged from 1.3 percent to 9.8 percent. In addition, some centers that spent their full allocation had a backlog of unfunded assistance for projects approved since fiscal year 2008, totaling more than $3.4 million as of April 2012. At the same time, some centers that had unspent funds had smaller backlogs totaling less than $1.2 million. Although EDA deobligates any unspent funds and reallocates these funds for the following cooperative agreement period, it uses its allocation funding formula to do so, thus perpetuating the deficiency of not including centers’ variable needs and costs in allocating funds among them. To meet the beneficiary equity standard, a funding allocation formula should use reliable and appropriate measures of the cost of providing services in each region. Because EDA’s funding formula does not take into account variations in TAA Centers’ costs of providing assistance to firms, EDA cannot ensure that trade-impacted firms in different service areas receive the same opportunities for assistance through the centers. The available evidence we analyzed suggests wide variation in the number of firms that the centers are able to assist and the amount of funding that they may provide to implement approved business recovery plans, raising questions about whether limited program funding is being used effectively. EDA officials have begun discussions with TAA Center staff to revise the program’s funding allocation formula. In February 2012, EDA convened a conference of center directors that included a discussion of potential changes to the formula. According to EDA officials, these discussions are still in the early stages and there have been no specific proposals of the factors and weights that might be included in a revised formula. The director of the TAA for Firms program stated that EDA’s current effort to improve performance measures for all of its programs may identify measures that could be used in a revised funding formula. Although EDA officials stated that they recognize the importance of including a factor in the formula that would account for potential program need, they have not identified data that would enable them to measure and account for differences in the numbers of trade-impacted firms across the centers’ service regions. The agency is considering using Commerce’s Census Bureau databases to explore the possible use of available data in a revised funding allocation formula. It is unlikely that any new formula would be finalized before July 2014, according to EDA officials. Directors at two TAA Centers we visited stated that they have undertaken efforts to reduce their centers’ operational costs in an effort to provide additional funding to implement firms’ projects. One center director noted that the center’s management initiated cost-reduction efforts, even though EDA’s funding formula does not provide incentives to reduce such costs. Several center directors further noted that, since the centers’ operational costs are relatively fixed, any reduction in costs results in an increased amount and proportion of funding to assist firms. The data we analyzed support this inference. For example, although funding for the program remained at $15.8 million in fiscal years 2009 and 2010, the centers helped 114 more firms petition for certification and gained EDA approval for 93 more business recovery plans in fiscal year 2010 than in fiscal year 2009. In addition, for cooperative agreement years 2009 and 2010, the centers increased the total portion of awarded funding for consultants by about 12 percent while reducing costs in other categories. In revising EDA’s funding allocation formula, the agency and the TAA Centers will likely need to consider how to strike a balance among several key factors—need, costs of providing services, and available resources. Revising EDA’s funding formula presents challenges and risks, which will require flexibility in implementing any allocation under a new formula. For example, center directors stated that a revised formula should be carefully designed to avoid unintended incentives and should encourage centers to reduce indirect costs and maximize the funding available to assist firms. In addition, because revising the formula will likely result in decreased funding for some centers and increased funding for others, any change to the funding formula should include a transition period so that funding recipients have time to adjust, as our prior work has shown. An abrupt reduction in funding levels could disrupt a center’s ability to provide assistance to firms. Flexibility in transitioning to a new funding formula would allow centers greater predictability and stability to develop long-range plans and meet their current commitments. The United States has arguably gained much from its engagement in the global economy and its active pursuit of trade liberalization. Lowering trade barriers such as tariffs offers benefits to consumers and creates new opportunities for American exporters abroad. Yet these long-term, widely disbursed gains are also accompanied by adjustment costs borne directly and in a more concentrated manner by import-competing firms and their workers. Over the past decade, the pace of trade liberalization has been vigorous, as has been the growth in U.S. imports. Although funding for Commerce’s TAA for Firms program, at less than $16 million, is small relative to the $1.3 trillion rise in imports over the past decade, our economic analysis and survey results show that the program has delivered positive results for participating manufacturing and services firms. We found that these firms receive individual attention from TAA Center professionals located in their regions, practical help in developing business recovery plans, and federal matching funds to pursue projects designed to address competitive weaknesses and capitalize on strengths. Many participating firms that were negatively impacted by trade have recorded gains in sales and productivity since starting the program. Our analysis of more than 500 firms’ financial data and other firm and economic factors shows that this sales growth is positively associated with participation in the TAA for Firms program. The changes to the TAA for Firms program that Congress enacted in the TGAAA in 2009 gave EDA and TAA Center officials more flexibility in certifying firms, strengthened professional management of the program, and improved transparency regarding the program’s performance. However, enhanced accountability can be accomplished only through better measures of how the program is helping firms adjust to import competition. EDA collects performance data, but few of its performance measures are outcome oriented. EDA also has several interrelated weaknesses in its collection of data that make needed reporting burdensome and unreliable at times. Better and more readily retrievable data would give EDA and Congress a more comprehensive and complete picture of program activities and enable more meaningful and ongoing analysis of impact. Given its small budget relative to the demonstrated need for trade adjustment assistance—as suggested by the substantial backlog of approved but unfunded projects—EDA can do more to ensure that its allocations reflect firms’ and regions’ varied needs for assistance and TAA Centers’ varied costs in providing this assistance. EDA can also encourage more efficient program administration by making the cost of services a criterion in its funding formula and by incentivizing TAA Centers’ cost-containment efforts, so that more funds are available to serve firms. EDA has recognized many of these weaknesses and has made initial efforts to address them. Given the current pursuit of further trade liberalization, following through with these improvements to the TAA for Firms program is essential to ensure that the program uses its budget in the most efficient manner possible. We recommend that the Secretary of Commerce take the following three actions: 1. To ensure that the performance measures used to evaluate the TAA for Firms program demonstrate program results and to help ensure that EDA can comprehensively evaluate the effectiveness of the program, broaden the program’s evaluation approach, for instance, by developing additional quantifiable outcome-oriented performance goals and measures for key program areas and conducting further analysis of the data to isolate the impact of the TAA for Firms program from other influences, such as economic trends. 2. To improve the data available to manage and evaluate the TAA for develop a data system to consistently collect, maintain, and analyze sufficiently reliable and up-to-date data on program operations and participant firms. 3. To ensure that EDA’s allocation of funding to TAA Centers reflects varied program needs and costs, revise the program’s funding formula by reevaluating the factors and weights it uses to allocate funding under its cooperative agreements, and include measures of need, such as the number of import-impacted firms in each center’s service region and the center’s costs in providing assistance to firms. We provided a draft of this report to the Department of Commerce for comment. We received written comments from Commerce, which are reprinted in appendix V. Commerce concurred with our findings and recommendations and provided additional information and observations on implementing our recommendations. For example, Commerce stated that EDA intends to focus on developing improved performance measurement and accountability. In addition, Commerce noted that EDA intends to take steps to improve its data collection and examine the funding allocation formula used to distribute program funds to the TAA Centers in collaboration with the centers and Congressional stakeholders. Commerce expects to complete these efforts by 2014. We also received technical comments from Commerce, which we incorporated as appropriate. We are sending copies of this report to the appropriate congressional committees, the Department of Commerce, and other interested parties. In addition, the report is available at no charge on the GAO website at http://www.gao.gov. If you or your staff have any questions about this report, please contact me at (202) 512-4101 or [email protected]. Contact points for our Offices of Congressional Relations and Public Affairs may be found on the last page of this report. GAO staff who made key contributions to this report are listed in appendix VI. The Trade and Globalization Adjustment Assistance Act of 2009 (TGAAA), part of the American Recovery and Reinvestment Act of 2009, mandated that we report on the operation and effectiveness of the Trade Adjustment Assistance (TAA) for Firms program. We examined (1) the results of the legislative changes on program operations and participation, (2) the performance measures and data that EDA uses to evaluate the program and what these tell us about the program’s effectiveness, and (3) how program funding is allocated and spent. To determine the results of the legislative changes on the program’s operations, we reviewed relevant program legislation and regulations as well as agency documentation and data on the number and type of firms participating in the TAA for Firms program. We reviewed program regulations and agency guidance outlining the operational and administrative changes to implement the amendments under the TGAAA. We collected from the Department of Commerce’s (Commerce) Economic Development Administration (EDA) and the 11 TAA Centers’ data on certifications and approved adjustment plans from fiscal years 2008 to 2011. We analyzed these data and the data reported in the TAA for Firms annual reports for fiscal years 2009 through 2011 to determine the types of services firms received and how the legislative changes impacted program participation. We assessed the reliability of the data by checking for accuracy and completeness. We determined that the data were sufficiently reliable for the purposes of reporting the number of submitted and approved petitions and approved business recovery plans. We interviewed EDA officials, including the TAA for Firms program Director, Chief Counsel, and certifying officials, to determine the effects of the legislative changes on the program. We also conducted a site visit or teleconference with each of the 11 TAA Centers, interviewing staff, representatives of participant firms, and consultants to understand procedures for identifying and assisting eligible trade-impacted firms and to obtain their opinions and observations on the legislative changes’ effects on the program. We conducted site visits to eight TAA Centers—in Ann Arbor, Michigan; Atlanta, Georgia; Blue Bell, Pennsylvania; Boulder, Colorado; Chicago, Illinois; Los Angeles, California; North Billerica, Massachusetts; and Seattle, Washington. We conducted teleconferences with the remaining three centers—in Binghamton, New York; Blue Springs, Missouri; and San Antonio, Texas. We selected our site visit locations to achieve geographic diversity and a mix of nonprofit and university-affiliated centers, as well as a range of industries, numbers of submitted and approved petitions, and numbers of business recovery plans. To determine how the TAA for Firms program relates to other economic development programs that assist manufacturers, including Commerce’s Manufacturing and Extension Partnership (MEP) program, we interviewed TAA Center staff, MEP consultants, and officials at Commerce headquarters. We also reviewed documentation of program objectives, eligibility requirements, and services provided. We assessed EDA’s performance measures and data for the program. We analyzed the two performance measures reported for the TAA for Firms program in the agency’s performance and accountability reports as well as the 14 measures specified by TGAAA and included in the TAA for Firms annual reports. Using criteria from prior GAO work, we assessed the extent to which the program’s performance measures reflect the characteristics of effective performance measures. We reviewed other reports about the program: one conducted by the Urban Institute in November 1998 and our prior report on the program. To examine how program data are collected and used to manage the program, we interviewed EDA officials and TAA Center staff and reviewed EDA and TAA Center program data and reports. We interviewed EDA officials responsible for collecting and reporting program data, as well as TAA Center staff, to determine the procedures for collecting, validating, and reporting data on program operations. We also reviewed data and documents, including quarterly and annual reports from EDA and the centers, to understand the types of program data collected and the purposes for which the data are used. To estimate the impact that the TAA for Firms program assistance has had on firm performance, we collected data on a group of participant firms with business recovery plans approved in fiscal years 2009 through 2011 and data on general economic indicators, and we conducted a regression analysis with these data to assess the effects of the assistance on this group of participating firms, controlling for firm, industry, and economywide factors. From each of the 11 TAA Centers, we obtained financial data on firms that had an approved business recovery plan and had completed at least one project in their approved recovery plan in fiscal years 2009, 2010, and 2011. We assessed the reliability of the data we received from the centers by testing the data for obvious errors and completeness. In addition, we interviewed and received written responses from staff at the centers who had knowledge of the data, to obtain information on the procedures for collecting and verifying the data reported. The centers drew their responses to our data collection instrument primarily from the petition and business recovery plan approval data they collect from firms. In doing so, they used the data that they had previously compiled for a conference report on Commerce appropriations for fiscal year 2012. This helped ensure the accuracy, completeness, and consistency of the data. We found the data sufficiently reliable for the purposes of our analysis. For our dependent variable or outcome variable, we used data on yearly firm sales during this period as a proxy for firm performance. We combined these data with data on industry-wide and firm-specific variables that determine performance, such as firm-specific financial data, growth rates, firm size, age, and other qualitative firm and industry indicators. To control for factors in the general economy, we incorporated macroeconomic variables in our analysis, including the Census Bureau’s regional unemployment rates and a yearly time trend. In addition, to estimate the effects of trade on firm performance, we calculated and incorporated an international trade variable—the import penetration ratio for each firm’s industry. Our regression model determined whether participation in the TAA for Firms program had a statistically significant effect on firm performance after the firm received assistance under the program. Because the data we collected did not include any information about firms that did not participate in the program, this analysis allows us to make inferences from the regression estimates only for the firms that participated in the program during this time period. We present more complete information about the data and methodology of the analysis in appendix III. To report the views of certified firms on program operations and on the quality and impact of program services, we interviewed firm representatives and consultants during our site visits to TAA Centers. We also conducted a survey of firms that had a business recovery plan approved by the Trade Adjustment Assistance for Firms program in fiscal year 2009. We selected this population to ensure that those surveyed had received assistance from one of the TAA Centers and had some experience with implementing a recovery plan. Our research at the beginning of our review indicated that it would be feasible to survey these firms within our time frame and achieve an acceptable response rate. We conducted formal pretests with representatives of three firms and considered comments from EDA officials to ensure that our questions were appropriate and could be understood by respondents. Our survey covered the following topics:how the firms learned of the program, the types of assistance the firms received from the TAA Centers, the level of the firms’ satisfaction with the assistance, and the impact of the assistance on the firms. We administered our survey between March 2012 and April 2012. We surveyed the 163 firms for which we obtained contact information, of the 171 firms that had a business recovery plan approved in fiscal year 2009. We received responses from 117 of the 163 firms, with a final response rate of 72 percent. However, because we did not randomly select the firms we surveyed, the survey results do not permit us to draw conclusions about all firms participating in the TAA for Firms program. We conducted an analysis of our survey results to identify potential sources of nonresponse bias by comparing respondents to nonrespondents on three key characteristics: total sales, number of employees, and total amount of technical assistance approved. This analysis did not indicate any large differences between respondents and nonrespondents for these three characteristics, and we determined that the survey results for the 117 respondents were sufficiently reliable to present in our report. The survey and a more complete tabulation of the results can be viewed online at GAO-12-935SP. To examine the funding formula EDA uses to allocate program funds and to examine how funds were spent, we reviewed EDA’s 2003 spending plan, which defines the factors included in the formula as well as the data used to measure each of the factors. In addition, we analyzed EDA’s available spending plans covering cooperative agreement years 2009 through 2011 to assess the measures used to allocate program funding to the TAA Centers during each of those cooperative agreement years. We used equity standards from social science research for evaluating and designing funding allocation formulas to assess the TAA for Firms formula. To determine the amount of funding allocated to each of the 11 centers, as well as the centers’ direct and indirect costs, we analyzed EDA’s budget data for cooperative agreement years 2008 through 2011. We also analyzed centers’ data on the amount of approved, unfunded assistance for cooperative agreement years from fiscal year 2008 to April 2012, and the number of firms affected. We reviewed published work of the Commerce Office of Inspector General’s assessment of the administrative costs of the centers. We conducted this performance audit from July 2011 to September 2012 in accordance with generally accepted government auditing standards. Those standards require that we plan and perform the audit to obtain sufficient, appropriate evidence to provide a reasonable basis for our findings and conclusions based on our audit objectives. We believe the evidence obtained provides a reasonable basis for our findings and conclusions based on our audit objectives. The MEP program, like the TAA for Firms program, is a Commerce- administered program aimed at helping manufacturers. The MEP program was established in 1988 and is administered by Commerce’s National Institute of Standards and Technology (NIST) to enhance productivity and technological performance and to strengthen the global competitiveness of small and medium-sized U.S. manufacturers, helping them create and retain jobs. Under this program, NIST has established relationships with 60 nonfederal organizations, called MEP centers, located throughout the United States and Puerto Rico. NIST enters into annual cooperative agreements with each of the 60 MEP centers, whereby NIST provides federal funding to the centers subject to the MEP centers’ providing matching funds from state and local entities and meeting performance measures. These centers provide services to small and medium-sized manufacturers to help them develop new customers, expand into new markets, and create new products. MEP centers focus on helping manufacturers in five key areas––technology acceleration, supplier development, sustainability, workforce, and continuous improvement. Specifically, MEP centers enter into contracts with firms to deliver technical assistance to improve their manufacturing processes and productivity, expand capacity, adopt new technologies, utilize best management practices, and accelerate company growth. Table 1 provides a comparative overview of the TAA for Firms and MEP programs. As shown in table 4, trade-impacted firms can qualify for either program, although the eligibility requirements for each program differ. For example, the TAA for Firms program requires applicants to complete a certification process that demonstrates trade impact on the firm’s employment, sales, and production. In contrast, the MEP program does not require applicant firms to go through a certification process. Firms must only demonstrate they are a manufacturer under industry-specific codes, according to MEP officials. Officials from the TAA for Firms program said that in some instances, trade-impacted firms may choose to participate in the MEP program rather than the TAA for Firms program because they can receive faster assistance. In addition, officials confirmed that participant firms in the TAA for Firms program have subsequently participated in the MEP program for additional services, and vice versa. However, officials from both programs did not have data to determine the extent to which this has occurred. Although trade-impacted firms can qualify for both programs, and some trade-impacted firms have received assistance from both programs, TAA for Firms and MEP program officials said that the programs are more complementary than duplicative in nature. For example, the programs collaborate at the state, regional, and national levels to provide services to manufacturing firms. At the state and regional levels, MEP consultants often bid on and win contracts to implement projects in the TAA participant firms’ business recovery plans, according to TAA Center and MEP staff. Staff from both programs also said that MEP consultants sometimes refer firms to the TAA for Firms program and that TAA for Firms officials sometimes refer firms to the MEP program. At the national level, EDA officials informally consult with MEP officials at NIST on best practices and opportunities for collaboration. For example, EDA staff said that they have spoken at MEP conferences to educate consultants about the TAA for Firms program. In addition to administering the TAA for Firms program, EDA administers the Economic Adjustment Assistance (EAA) program through six regional offices. The EAA program’s purpose is to help economically distressed communities by supporting a wide range of construction and other assistance using flexible tools to address pressing economic recovery issues. TAA Center officials said they had little interaction with EAA officials or the EDA regional offices because the EAA program assists communities rather than firms. We examined the impact of the TAA for Firms program on participant firms’ performance and effectiveness using statistical analysis. For this analysis, we obtained a sample of financial data on firms from the 11 TAA Centers that had an approved business recovery plan and were certified from 1998 through 2010. We used regression analysis to assess whether there was a statistically significant relationship between firm performance and participation in the TAA for Firms program, controlling for other firm- specific, industry-specific, macroeconomic, and trade factors. Using firm sales and firm productivity as proxies for firm performance, we found a positive and statistically significant relationship between participation in the TAA for Firms program and the performance of the firms in our sample. Using different model specifications, we estimated that the firms participating in the TAA for Firms program experienced yearly increases in sales of 5 to 6 percent, all else held constant. Our results also suggest that participation in the TAA for Firms program was associated with increased firm productivity, measured by the ratio of yearly sales to employment, of about 4 percent per year, all else held constant. Moreover, we observed higher performance when participating firms were in growing markets, which may suggest that participation allowed them to leverage the market expansion. The aim of our analysis was to evaluate the policy impact of the TAA for Firms on firms participating in the program. Typically, we do not observe the counterfactual state—how firms that participated would have performed had they not participated—and we do not observe outcomes associated with a control group of firms that did not participate. A control group would require identifying a group of firms that is as much like the firms in our sample as possible but did not participate in the program. However, selecting a group that was affected by import penetration similarly to the actual participant group would be quite difficult. Moreover, using a control group has weaknesses. For example, macroeconomic and other trends could affect the two sets of firms differently. Given these data challenges, we measured the average effect of TAA for Firms participation on the firms in our sample. We made inferences from our regression estimates only for this sample. While this approach allowed us to focus on the firms that actually participated, it cannot determine whether these firms might have improved in the absence of the program. It is possible that participating firms have some unobservable or unmeasured characteristic—such as superior management—relative to firms that did not participate. In such circumstances, participation in the program might be incidental to improved performance. Overall, our data set included 579 firms, or panels, and 2,711 observations. We used a panel of cross-sectional, time-series data that included values for variables across a number of years for a group of firms. To obtain data on performance of the various firms in the program, we sent a data collection instrument to TAA Centers, requesting data on firms that had completed at least one project in their business recovery plan in 2009, 2010, or 2011. Our data collection instrument requested data on sales and employment 2 years prior to entry into the program, in the certification year, and 2 to 3 years after entry into the program as well as other quantitative and qualitative data for each firm. The panel of data had unequal time periods, as firms in our sample entered and exited the program at different times. For example, two firms that completed a project in 2009 might have entered into the program in different years. In addition, the data were nonsequential in time and included gaps. For instance, EDA did not collect data on sales and employment for every year and explained that some of the data could not be obtained or was missing. Although some regression methods can accommodate unbalanced panels, others cannot, and this placed certain constraints on our regression methods. The time periods of the panels for each firm averaged 4 years, with a minimum of 2 years and a maximum of 6 years. This is reportedly a common pattern in collection of data on countries, states, or firms and is more the norm than the exception. For example, data for some time periods in panels cannot be collected because of lack of resources or funding. See Baltagi, Badi H., Economic Analysis of Panel Data, 2nd ed. (West Sussex, England: John Wiley & Sons, Ltd., 2003). And, we define the independent or control variables as: Emp = yearly employment for firm (proxy for size of firm) Emp2 = yearly employment squared for firm Age = age of firm Age2 = age squared of firm Growth = yearly growth in industry value of shipments for each industry Growth_lg1 = yearly growth in industry value of shipments, lagged one year TAAF Policy = trade adjustment assistance indicator = 0 before certification and 1 thereafter PolGrwth = interactive variable: TAAF Policy * growth Nmulti = indicator variable for multiplant firm; 1 if multiplant firm, 0 otherwise Nprodmkt = categorical variable indicating which level of the product market the firm sells to such as raw, intermediate, and final/consumer Ngeomkt = categorical variable indicating which geographic market the firm sells to, such as local, regional, domestic, international, or some combination of these markets Npubpriv = indicator variable for whether the firm is public or private; public = 1, private = 0 TPR = industry-level import penetration ratio for each 5 and 6-digit NAICS code Unemp = yearly regional unemployment rate (BLS Census Region) Year = year trend variable (1998 through 2011) A summary of the panel data showing the variables used, including the means, standard deviations, minimums and maximums, is shown in table 5. For our main dependent variable, we used the natural log of firm sales to proxy firm performance. We transformed the sales variable into natural logarithms, because the distribution of firm sales was highly skewed to smaller sales amounts. When transformed into natural logarithms, the sales data exhibited more of a normal distribution, making it more useful for regression analysis and reducing the effects of outliers. Our policy variable is represented in the model as an indicator variable denoted by 0 prior to a firm’s certification by a TAA Center and 1 after certification. Using this variable, we tested whether the policy variable going from 0 to 1 brought about a statistically significant increase in the log of sales over time for these firms. When a firm changes from nonparticipation to participation, sales would change by some percent. We also created an interactive term—polgrwth—which is the policy variable times the growth variable. This allows detection of whether changes in market growth over the period, in combination with the TAA for Firms policy, had a further effect on firm sales. For our independent variables, we used firm-specific financial and qualitative variables, which we transformed into indicator variables. Our firm-specific variables included employment and firm age. In the data collection instrument we sent to TAA Centers, we asked for qualitative data such as reach of the geographic market, level of the product market, whether the firm was public or private, and whether it was part of a multiplant firm. These variables represent market structure characteristics such as size, product differentiation, and economies of scale of the firm. We also created variables that were market- or industry-specific, such as growth and lagged growth. For this, we used Census of Manufacturing, Annual Survey of Manufactures value of shipments data on a yearly basis from 1998 to 2010, at the five- and six-digit North American Industry Classification System (NAICS) level. According to “Frequently Asked Questions” on the NAICS website at url: http://www.census.gov/eos/www/naics/faqs/faqs in answer to the question, “What is the NAICS structure and how many digits are in a NAICS code?” The NAICS is a two- through six-digit hierarchical classification system, offering five levels of detail. Each digit in the code is part of a series of progressively narrower categories, and the more digits in the code signify greater classification detail. The first two digits designate the economic sector, the third digit designates the subsector, the fourth digit designates the industry group, the fifth digit designates the NAICS industry, and the sixth digit designates the national industry. The five-digit NAICS code is the level at which there is comparability in code and definitions for most of the NAICS sectors across the three countries participating in NAICS (the United States, Canada, and Mexico). The six-digit level allows for the United States, Canada, and Mexico each to have country-specific detail. A complete and valid NAICS code contains six digits. We also created an international trade variable at the six-digit NAICS industry level for import penetration, using International Trade Commission (ITC) import and export data from its online Tariff and Trade Data Web and the Census Annual Survey of Manufacturers’ value of shipments data. We calculated this variable as follows: Imports / (Value of Shipments + Imports – Exports). This ratio measures imports as a proportion of apparent domestic consumption and is often used in the trade literature as a proxy for import penetration. We found that trade data were missing in the ITC database for some of the unique NAICS industries represented in our firm sample from the TAA Centers. Specifically, although there are about 579 firms in our sample overall, when matched with the trade data the sample size reduces to about 472 firms. Including this variable yields a smaller data set and somewhat different regression results. Table 6 below presents the regression analysis results, for three model specifications, with 1) the dependent variable as the log of firm sales; 2) the dependent variable as the log of firm sales including the import 3) the dependent variable as the log of productivity (sales divided by employment). The table also shows the regression coefficients and Z-value of the three regression equations. We estimated the model specifications using the feasible generalized least squares (FGLS) estimator because of autocorrelation or correlation in the error terms over time in the data. We used the FGLS model, xtgls in Stata, a panel data regression technique that can correct for serial correlation. We tested for the presence of autocorrelation using the xtserial command in Stata and found that we could not reject the presence of serial correlation in the data. Also, in this type of model, the autocorrelation coefficient may be different across panels, since the dependent variables are likely to be autocorrelated within a panel or firm. Therefore, this estimator allowed us to specify a model that corrected for panel-specific autocorrelation. The FGLS model structure can also accommodate unbalanced panel data with missing observations as we have in our sample of data and other non-time-varying variables of interest. Use of the technique improved model fit, and our primary variables of interest, including the TAA for Firms policy variable, were significant and had the expected signs. FGLS estimators are appropriate when one or more of the assumptions of homoskedasticity and noncorrelation of regression errors fails. Model 1, which uses log of sales as the dependent or outcome variable, without the import penetration ratio, used 2,572 observations and 572 panels in the regression. Model 2, which included the import penetration ratio explanatory variable, reduced the sample to 2,086 observations and 466 panels or firms. Model 3 included productivity as the outcome variable, defined as the log of firm sales divided by firm employment, along with the other control and macroeconomic variables in the other two specifications; it contained the full sample of observations. The coefficients and Z values for the TAA for Firms policy variable are consistent across the 3 model specifications. In addition, the Wald Chi- squared test for model significance showed that all model specifications were statistically significant overall. The TAA for Firms policy indicator variable, which is 0 prior to participation in the TAA for Firms program and 1 thereafter, is positively and significantly related to log of firm sales in our model specifications at the 1 and 5 percent levels. This implies an average of a 5 percent to 6 percent increase in sales when the firm participates in the program, with all else constant. However, these model coefficients are relatively small (0.046 to 0.057 for the sales models) in comparison with other variables such as the multiplant firm variable, the public/private ownership of the firm, and the lagged growth variable. Further, the TAA for Firms policy variable is also positively related and statistically significant at the 5 percent level in our productivity specification. This result translates into about a 4 percent increase in the level of productivity, on average, for participation in the program for firms in our sample, all else remaining constant. The interactive variable—growth—with the TAA for Firms policy variable is also positively and significantly related to the log of firm sales in Model 1. The model suggests that participation in the TAA for Firms program had an effect on sales that was greater in industries that were experiencing growth than in those that were not. As Mueller and Rogers point out, there is more room for expansion by fringe firms in the market when there is greater growth in market demand. Mueller, Willard F. and Richard T. Rogers, “Changes in Market Concentration of Manufacturing Industries, 1947-1977,” University of Wisconsin, Madison, and the U.S. Department of Agriculture, March 1983. The Economic Development Administration’s (EDA) funding allocation formula includes five factors to allocate funding to each of the 11 TAA Centers, in addition to base funding divided equally across all of the centers. Table 7 shows the data that EDA used to measure each of these five factors to allocate $15.4 million among the centers for the 1-year 2011 cooperative agreement period. The table shows for each factor the data by center as well as each center’s share of the total. For example, the Great Lakes Center accounted for 3.8 percent of geographic size, 9.7 percent of the total number of firms, 11.7 percent of the total number of employees in the program’s approved business recovery plans, and 8.1 percent of the total number of firms that achieved expected results. Table 8 shows the resulting allocation to each of the centers for cooperative agreement year 2011. In addition to the contact named above, Kim Frankena (Assistant Director), Christina Bruff, David Dayton, Leah DeWolf, David Dornisch, Barbara El Osta, Etana Finkler, Bradley Hunt, Ernie Jackson, Erin Preston, Kelly Rubin, and Andrew Stavisky made key contributions to this report. | Over the past decade, U.S. imports of goods and services have almost doubled, reaching $2.7 trillion in 2011. Although trade expansion can enhance economic welfare, many firms and workers experience difficulties adjusting to import competition. The TAA for Firms program assists tradeimpacted, economically distressed U.S. firms in making adjustments that may enable them to remain competitive in the global economy. The Department of Commerce's EDA administers the $15.8 million program through 11 TAA Centers throughout the United States. In 2009, the Trade and Globalization Adjustment Assistance Act, as part of American Recovery and Reinvestment Act, amended the TAA for Firms program and mandated that GAO review its operation and effectiveness. GAO examined (1) the results of the legislative changes on program operations and participation, (2) the performance measures and data EDA uses to evaluate the program and what these tell us about the program's effectiveness, and (3) how program funding is allocated and spent. GAO reviewed pertinent legislation, program documentation, and data; conducted an economic analysis and a survey of participant firms; and met with EDA officials, representatives of the 11 TAA Centers, and others. Changes to the Trade Adjustment Assistance (TAA) for Firms program mandated by the Trade and Globalization Adjustment Assistance Act led to program improvements and increased participation, but participation declined when the legislative changes lapsed and the program faced funding uncertainty. The changes resulted in reduced time to certify firms, new performance reporting, and increased participation. For example, officials told GAO that creating a director position and other full-time positions for the program reduced time to certify firms. In fulfilling new reporting requirements, the Economic Development Administration (EDA) collected information on performance measures and issued three annual reports. Also, EDA certified 26 services firms not previously eligible, as well as 32 additional firms based on more flexible certification requirements to demonstrate trade impacts. Although EDA increased the number of certified petitions and approved business recovery plans from fiscal years 2008 through 2010, the lapse in the legislative changes from February to October 2011 and uncertainty about program funding contributed to a decline in certified petitions and approved plans in fiscal year 2011. EDA's performance measures and data collection for the TAA for Firms program provide limited information about the program's outcomes, although GAO's economic analysis found that participation in the program is statistically associated with an increase in firm sales. EDA collects data to report on 16 measures to gauge the program's performance, such as the number of firms that inquired about the program and the number of petitions filed, but most of these measures do not assess program outcomes. EDA is exploring better ways to assess the effect of their efforts on firms. In addition, EDA does not systematically maintain data collected by the TAA Centers on the firms they assist, resulting in gaps in centralized data that EDA could use to evaluate the program and meet reporting requirements. However, GAO's analysis of data collected from the centers showed that the program was associated with increased sales and productivity for manufacturing firms, although some factors were more strongly correlated with improved performance than was participation in the TAA for Firms program. GAO's survey of and interviews with firms participating in the program found that many firms reported satisfaction with the program's impacts. Notably, 73 percent reported that the program helped them with profitability; 71 percent that it helped them retain employees; and 57 percent that it helped them hire new employees. To allocate funding to the TAA Centers, EDA uses a formula of weighted factors, such as each center's share of approved business recovery plans. However, the formula does not factor in differences in program need and costs in centers' service regions, even though centers varied in their use of program funds. For example, the formula does not take into account potential need for the program based on its objective of assisting firms that have lost sales and employment due to import competition. The formula also does not take into account the considerable differences in the costs of operating the centers to assist firms. As a result, some centers had spent their entire allocation by the conclusion of the most recent grant period, while other centers had not. Although EDA de-obligates and reallocates any unspent funds, it uses its allocation funding formula to do so, thus perpetuating the deficiency of failing to consider variable needs and costs. GAO recommends that Commerce establish more effective measures of program outcomes, improve its data collection, and allocate funds in a way that considers program needs and costs. Commerce concurred with GAO's findings and recommendations. |
Combating world hunger and malnutrition is a stated objective of the Food for Peace Act, which authorizes international food assistance for developing countries. The United States has also stated its commitment to the Millennium Development Goal to halve world hunger by 2015, and it supports the Scaling-Up Nutrition (SUN) movement to provide assistance to country-led efforts to address maternal and child malnutrition. To support SUN, the United States and others initiated the 1,000 Days public-private partnership, which aims to improve nutrition for pregnant and lactating mothers and children under 2. Adequate nutrition in this critical period in a child’s life is widely recognized to have the greatest impact on saving lives, developing a child’s cognitive and physical capacity, and mitigating the risk of chronic disease. According to the USAID Policy Framework 2011-2015, USAID plans to ensure that the quality of U.S. government food aid is improved within 3 years to meet the nutritional requirements of vulnerable populations overseas, including by developing new blended products and formulations to support pregnant and lactating mothers and children under 2. We previously reported that, although Title II emergency funding is intended to address short-term food needs, more than half of the funding in fiscal year 2010 was spent on multiyear emergency programs. See GAO-11-491. In 2011, the 14 countries that received U.S. emergency food assistance every year from fiscal years 2006 through 2011 were Afghanistan, Burundi, Central African Republic, Chad, Colombia, Democratic Republic of the Congo, Ethiopia, Kenya, Nepal, Rwanda, Somalia, Sudan, Tanzania, and Uganda. In addition, 23 percent of the emergency food commodities were delivered to 15 countries that received U.S. food assistance for 3 to 5 years from fiscal years 2006 through 2011. Three percent was delivered to four countries that received emergency U.S. food aid for 1 to 2 years. percent.$207 million, which accounted for about 17 percent of total Title II emergency funding. A higher percentage of the total population in Ethiopia suffers from malnutrition than in most other recipient countries, with 51 percent of children under 5 suffering from stunting. Ethiopia, one of the four countries we visited, received about WFP is the largest provider of global food aid and procurement. The countries that received the largest amounts of specialized food products from WFP were Ethiopia, Pakistan, Kenya, Niger, and Somalia. Specialized food products are designed to meet specific nutritional needs of vulnerable groups but are more costly than traditional food products. As a result, within a fixed budget, USAID and its implementing partners must decide whether to provide more nutritious but more costly food to fewer people, or less nutritious and less costly food to more people. In other words, they face a quality-quantity trade-off. Table 1 provides illustrative examples of cost per ration for the three different types of food assistance. See appendix III for a more detailed comparison of cost differences between traditional food products and specialized food products. Targeting in food assistance programs is an iterative process that aims to ensure that food reaches and is consumed by people whose characteristics meet certain eligibility criteria, such as age, gender, income level, asset level, or nutritional status. Figure 3 presents a simplified schematic of the overall targeting process and its key phases— design, implementation and monitoring, and evaluation—and steps within each phase. As key stakeholders in the targeting process, USAID and its implementing partners, including WFP and NGOs, play an important role, as do host governments. In the design phase, implementing partners design food assistance programs and submit proposals to USAID. USAID reviews the proposals and decides whether to fund the programs. Feedback occurs within and across each of the phases—both in host countries and at USAID headquarters—and is crucial to maximizing targeting effectiveness, leading to steps within the process that may not be strictly sequential. For example, during the design phase, USAID and its implementing partners may conduct an assessment of needs to determine the basis for the design of a program; however, as needs may change or be clarified, they may retarget or make adjustments during the monitoring phase to address issues that may arise. USAID and its implementing partners face a range of in-country factors that, to varying degrees, affect their ability to effectively target food assistance to vulnerable groups. These factors include (1) the quality of data used to identify and reach recipients, (2) host government policies, and (3) sharing of rations among recipients and community members. Targeting effectiveness is reduced when data quality is poor, host government policies cause distortions in program design and implementation, and sharing prevents food rations from being consumed by the intended recipients in the intended amounts. USAID and its implementing partners take steps to mitigate such challenges by, for example, employing technology to improve data quality, coordinating closely with government officials to foster better relationships, and educating recipients about proper food usage to reduce sharing. In some cases, host governments have facilitated targeting efforts by, for example, establishing national targeting guidelines that set a common standard, or national statistical offices that assist in collecting data. Nevertheless, ensuring that food assistance reaches intended recipients remains difficult. Poor data quality—lack of timely and accurate information—may affect implementing partners’ ability to effectively identify and reach recipients. For example, in Zimbabwe, USAID and three implementing partners noted that a lack of current and reliable population data made it difficult to determine the overall number and geographic distribution of households that are in need of food assistance.partner told us that because it used inaccurate data on average In Guatemala, an implementing household size to determine the initial ration size, people who were initially identified received more food than they would have received if the data had been accurate. Although the error was later corrected, if the data had been accurate, resources could have been used more optimally to reach people in need. USAID and implementing partners we spoke with stated that sudden natural disasters or conflicts could raise security concerns for implementing partners, hindering their ability to reach the originally targeted recipients. Furthermore, gathering reliable data on transient populations is challenging. For example, USAID and an implementing partner in Ethiopia told us that in some areas of the country, it is difficult to determine the number and location of people in need of food assistance, particularly pastoralists, who move often as a traditional way of life and to cope with drought or natural disasters. As a result, it is difficult for implementing partners to accurately assess the needs in a particular geographic area and design an appropriate food assistance program. In addition, natural disasters or conflicts may raise security concerns, hindering ability to reach targeted recipients. We recently reported that security concerns prevented WFP from conducting field monitoring of food distribution to determine whether the food rations reached the originally targeted recipients in some high-risk areas of Ethiopia, Kenya, and Somalia. For example, WFP noted that it has been unable to access six districts in the Somali region of Ethiopia since May 2011. As a result, WFP’s ability to collect data to ensure that the intended recipients received their food assistance in these high-risk areas is limited. USAID and implementing partners have taken some measures to improve data quality by building capacity through technology, training, and other activities. For example, USAID funds the Famine Early Warning Systems Network (FEWS NET), which is used to monitor and prepare for changes in food assistance needs. FEWS NET monitors and analyzes vulnerability information, using multiple sources such as satellite imagery and field observations. Moreover, some countries, such as Ethiopia, have established national statistical offices that can assist in collecting data for targeting food assistance. In addition, a 2011 report on food assistance stated that implementing partners are working on increasing the speed, accuracy, accessibility, and comparability of information. Implementing partners in two countries we visited told us that they are using mobile devices, such as tablets and phones, to collect recipient and distribution data. The use of technology enables the implementing partners to better identify and track recipients throughout the program and identify needs. In the aforementioned example about excess ration size in a Guatemala program, the implementing partner used tablets to collect information on recipient consumption patterns. In this way, the implementing partner ultimately discovered the ration error and corrected the ration size for each household, freeing up resources to reach more recipients as a result. Also, implementing partners in Guatemala and Sri Lanka indicated that they train their staff and community volunteers on data collection, and work with the host governments to improve the governments’ ability to collect data. In addition, some countries, such as Sri Lanka, have conducted repeated assessments of food assistance needs over several years, which can lead to improvements in the precision of the data collected. Barrett, et al., 67. partner in Guatemala stated that data need to be improved continuously to measure outcomes and impacts of targeting, particularly for programs with a nutritional objective. Host government policies may lead to distortions, hampering targeting effectiveness, but implementing partners have made some efforts to reduce these adverse effects. We previously reported that one of the key challenges to accurately assessing the needs of vulnerable groups was a lack of coordination among key stakeholders—especially with host governments—on assessments of food assistance needs. In addition, some host country governments have been criticized for underestimating actual needs or directing implementing partners to operate only in certain geographic areas, due to political or other reasons. As a result, implementing partners may not be able to reach recipients or locations most in need of food assistance. For example, an implementing partner in Ethiopia reported to USAID that the government of Ethiopia set an artificial quota for the number of people targeted in each household that in some cases did not reflect the actual needs, and severely hampered the partner’s ability to reach vulnerable groups as a result. However, USAID and implementing partner officials in Ethiopia also told us that working with the government’s distorted figures is less challenging now than in the past, due in part to recent efforts of local and regional government officials to improve the validity and documentation of needs assessments as well as better stakeholder coordination. In some instances, however, host government policies may facilitate targeting efforts. For example, the government of Sri Lanka has worked closely with WFP to identify vulnerable groups and has supported efforts to improve both data collection and the analysis of food needs, including by supporting the research organization that partners with WFP in conducting assessments of needs for food assistance. In another example, the government of Ethiopia has published National Targeting Guidelines that are intended to standardize and improve targeting efforts.country operate under a commonly understood set of targeting policies and practices. This document helps all food assistance stakeholders in the To address host government policies that cause distortions, implementing partners undertake efforts to coordinate with stakeholders and verify information on food assistance needs. Implementing partners we spoke with told us they work with each other and with host governments in the initial phase of the targeting process to increase transparency, in an effort to encourage more accurate government estimates of actual needs. For example, in Ethiopia, USAID officials told us that to increase transparency, donors are working with the government to introduce software tools and technology that facilitate access to information and increase public awareness and thereby discourage government authorities from manipulating data on food assistance needs. Moreover, to help facilitate distribution of food assistance to intended recipients in Guatemala, implementing partners stated that it is essential to closely coordinate with government authorities at the beginning of the targeting process to obtain approval for the use of new products and to set up the appropriate distribution channels and protocol. In addition, in Sri Lanka, an implementing partner told us that it plans to use local organizations to conduct independent verification of the potential recipient list, which is largely selected by the government. Doing so would help the implementing partner ensure that only recipients who qualify for food assistance are included on the list, increasing the likelihood that food assistance reaches the intended recipients. Despite these efforts, implementing partners have limited ability to influence host government policies. Sharing within recipient households and among community members may result in food rations being consumed by unintended recipients or in unintended amounts, but implementing partners have taken some measures to reduce sharing. External assessments suggest that sharing of food rations is a widespread and established coping mechanism when insufficient food is available. The 2011 Food Aid Quality Review (FAQR) report and the 2011 WFP guidance on targeted food assistance programs acknowledge that sharing of specialized food products is a concern, and according to a 2011 USAID assessment of a food assistance program in the Somali region of Ethiopia, sharing of food rations is widespread. In addition, in countries we visited, USAID and its implementing partners told us that both CSB and traditional food products are routinely shared within and among households in some communities—a finding we previously reported in 2011. The 2011 USAID assessment also notes that sharing is an established coping mechanism for the recipient community when not everyone in the community receives food rations. When food rations are shared, the intended recipients may not consume the intended food products in the desired amounts, which may reduce targeting effectiveness by limiting nutritional impact, particularly for specialized food products that are intended for vulnerable groups. Implementing partners have made efforts to reduce the likelihood of sharing, especially of specialized food products. Specifically, implementing partners have employed various strategies to teach recipients how to use specialized food products and have monitored recipient food ration consumption. For example, one implementing partner in Guatemala requires pregnant or lactating women to attend education sessions, where they learn about the benefits of the specialized food products and how to properly prepare them, before they can receive rations. Implementing partners in Guatemala also print culturally relevant instructional images on the food packages or the canvas bags given to recipients to carry the rations. The images explain how to prepare the food products and depict the type of person for whom the products are intended—such as a pregnant woman or a child under 2 years of age. One of these implementing partners reported that it had seen an improvement in recipient participation in these education sessions and expected that these sessions would reduce sharing. In addition, implementing partners use community volunteers to monitor effectiveness or consumption of food products. For example, in Guatemala, implementing partners train “mother leaders”—mothers who are also recipients—to provide training to other recipients on how to prepare food and monitor outcomes by, for example, observing improvement in a child’s weight or overall health appearance. In Sri Lanka, another implementing partner uses health volunteers from the recipient community and coordinates with the host government to ensure that specialized food products are consumed by the children through monthly monitoring of their nutritional status at government-run clinics and weighing stations. The health volunteers also follow up with the mothers of these children, who are receiving specialized food products, if they do not bring their children to the monthly checkup. While implementing partners have taken these and other steps to address sharing, evidence of the impact of these steps has yet to be determined. Weaknesses in the design, monitoring, and evaluation phases of USAID’s targeting process hinder targeting effectiveness, although the agency is taking actions to make improvements. In the design phase of the targeting process, USAID does not provide sufficient guidance on whether and how to target specialized food products. Specifically, USAID’s guidance on design for both emergency and development programs is neither up-to-date nor complete, and does not adequately address key benefits and risks that inform decisions on whether to target specialized food products. In both USAID’s monitoring and evaluation phases, weaknesses limit targeting effectiveness and hinder decision making. USAID currently does not require monitoring of key indicators needed to determine the level of targeting effectiveness for either emergency or development programs. Furthermore, its evaluations do not systematically address targeting effectiveness. Without adequate guidance, monitoring, and evaluations, USAID cannot ensure targeting effectiveness in its food assistance programs. USAID is taking some steps to improve both guidance and monitoring. For example, USAID has a contract with Tufts University to develop updated guidance, and the agency is taking steps to improve monitoring by planning to track indicators such as detailed age breakdowns that are key to better understanding targeting effectiveness. However, these steps do not fully address the weaknesses in USAID’s targeting process. We found that USAID’s guidance for targeting is neither up-to-date nor complete for both emergency and development programs, which reduces the ability of implementing partners to make informed decisions in the design phase. USAID currently provides its implementing partners with a range of guidance and tools. Of these, the Commodities Reference Guide is USAID’s official standard reference for food assistance programs and is intended to be used by USAID and implementing partner staff in deciding how to plan, manage, control, evaluate, and use Title II- funded food products. It is available on USAID’s public website and provides information on available food products, including nutritional values, physical properties, and storage and handling guidelines. However, USAID has not updated the Commodities Reference Guide since 2006 and has not included guidance in the Commodities Reference Guide on all of the products currently used in USAID food assistance programs. The 2011 Food Aid Quality Review also noted that the Commodities Reference Guide and other USAID guidance relevant to targeting are neither up-to-date nor complete and recommended, for example, that USAID improve its guidance to enable implementing partners to better determine whether to use certain products for programs. We found that the lack of updated and complete guidance has hindered implementing partners’ ability to make better-informed targeting decisions. One participant at our roundtable, for example, told us that his organization was unable to find all of the products it was using for a program in the outdated Commodities Reference Guide. As a result, it was not able to use these products in its program. Furthermore, USAID has recently deployed some limited quantities of various new specialized products without providing official standard guidance on how to use them. We recommended in 2011 that USAID provide clear guidance on whether and how best to use new specialized food products, including guidance to its implementing partners on targeting strategies to ensure that the products reach their intended recipients. USAID concurred with our recommendation and is taking steps to develop new guidance, but has deployed new specialized food products in the interim. USAID has purchased relatively small quantities of new specialized food products over the past 2 years, including those shown in table 2 below. For example, USAID purchased just over $6.5 million worth of these products in 2011, as compared with $502 million of traditional food products and $42 million of traditional specialized food products purchased through Title II emergency program funding. In addition, USAID is planning to introduce nine new or reformulated products in the final part of 2012 and 2013, including new RUTFs and ready-to-use supplementary foods (RUSFs) (see app. IV). USAID has not issued fully updated or complete guidance for all of these products. However, it has issued some guidance on their use. Moreover, USAID officials told us that they are providing the products only on a limited basis to organizations such as UNICEF that have experience using them in controlled environments, such as clinics, and have issued their own guidance on the use of these products. USAID guidance inadequately addresses key benefits and risks of using specialized food products, according to USAID and implementing partners we spoke with during our field visits and our expert roundtable. This inadequate guidance hinders decision making on whether to use these products. As discussed earlier, the benefit of specialized food products is that, while more costly, they are also more nutritious, or of higher quality, than traditional food products. However, USAID has not quantified or clearly defined the degree of benefit that specialized food products may provide. In 2011, we reported that in recent years, nutritionists have debated the appropriateness of using fortified and blended foods to prevent and treat malnutrition in young children 6 to 24 months old, who have smaller stomachs, making it more difficult for them to eat enough of the product to obtain sufficient nutrients. As a result, the benefits of some traditional specialized food products are not clear. In addition, limited information on new specialized products is available. As we previously reported, USAID and implementing partners do not know how well new specialized food products perform in promoting nutritional health indicators, such as weight gain and growth, particularly in a program setting, or how well they perform in comparison to traditional food products.which these products promote desired outcomes, is still being studied by USAID, WFP, nutritionists, and other researchers. As a result, while USAID is building knowledge about these products, it is not providing sufficient guidance on the benefits of specialized food products to implementing partners. The efficacy of new specialized products, or the extent to USAID also lacks guidance on how to adequately address risks of using specialized food products, according to implementing partners we spoke with during our field visits and our expert roundtable. A key targeting risk is that various factors implementing partners face in-country may reduce targeting effectiveness to such a degree that the additional cost of using specialized food products outweighs the potential benefit. This trade-off becomes more significant with the higher cost of new specialized food products, for which the cost per ration can be more than triple the cost of traditional food products. Poor data quality, host government policies, and sharing may reduce implementing partners’ ability to identify and reach recipients, but USAID’s existing guidance does not adequately inform decisions on whether the reduction in targeting effectiveness is of such a degree that the use of specialized food products is no longer justified. USAID is taking some steps to enhance guidance on whether and how to use new specialized food products, but fully up-to-date and complete guidance will not be completed until at least late 2013. In response to our 2011 recommendation on improved targeting guidance, USAID stated in its official agency response in July 2011 that it would work to address our recommendations through the second Food Aid Quality Review study now under way with Tufts University. This work is expected to include cost-effectiveness analyses on new specialized food products, adding information important to help determine whether and how to use them. In addition, according to USAID documents and officials, USAID is updating and improving the Commodities Reference Guide and other guidance related to targeting, including for new specialized food products. However, this work will not be completed until September 2013 at the earliest, according to USAID officials. USAID also plans to introduce other guidance before September 2013, including updated fact sheets for individual products. According to USAID officials, this interim guidance will be released on an as-needed basis, beginning in October 2012. In addition, USAID has existing guidance that helps inform implementing partners’ decision making, including its Annual Program Statement (APS), Food for Peace Information Bulletins, and some Food and Nutrition Technical Assistance (FANTA) guidance. USAID does not require monitoring of key indicators needed to determine the level of targeting effectiveness, although it is beginning to make improvements in this area. Information on indicators that are consistent with the goals of the program is critical to determining how effectively a program targets food assistance. Targeting effectiveness can be measured by the extent to which food assistance reaches correctly targeted recipients—that is, the percentage of intended recipients that actually receive food assistance in the intended amounts (see fig. 4). Effectively targeted programs reduce the magnitude of these errors. USAID guidance states that monitoring should be used to measure progress toward planned program results. Additionally, FANTA guidance states that monitoring efforts should allow USAID and its implementing partners to assess the extent to which targeted recipients received intended food assistance. According to a USAID official, USAID field staff do consider targeting during their routine monitoring of food assistance programs. In addition, USAID requires its implementing partners to collect some data, such as the number of intended recipients for all food assistance programs, and requires other indicators to be monitored depending on the type of program—emergency or development. However, USAID does not currently require sufficient monitoring of key indicators consistent with program goals that would allow its implementing partners to report on levels of targeting effectiveness. For example, it cannot determine the effectiveness of a program targeting children under 2 because it does not monitor the age of the actual recipients in either emergency or development programs. USAID monitoring is inadequate for both emergency and development programs because it does not monitor key data on recipients that would allow USAID to measure whether food assistance is actually reaching the intended recipients. Specifically, for emergency programs, USAID collects the total number of intended recipients from its implementing partners, but does not collect the total number of actual recipients or indicators such as breakdowns of age and gender for intended or actual recipients. According to USAID, these types of more specific indicators may not be as important for some emergency programs that focus solely on rapid lifesaving. However, these indicators are important for emergency programs that do have specific targeting goals, such as reaching severely malnourished children. For development programs, USAID collects both the total number of intended and actual recipients from its implementing partners, but as with its monitoring of emergency programs, does not collect data on key indicators such as breakdowns of age and gender. Without monitoring full sets of data for both intended and actual recipients, including key indicators consistent with program goals, USAID has limited ability to learn about the magnitude of targeting errors or the degree to which its implementing partners are achieving their program goals. According to USAID and implementing partner officials, it is particularly complex to gather monitoring information on indicators related to targeting effectiveness about actual recipients, due in part to cost and data quality issues. These challenges are heightened for programs using new specialized food products, which are designed to provide nutritional benefits to very specific vulnerable groups, such as malnourished children or pregnant or lactating women. Identifying and selecting recipients for such programs requires using indicators that are more complex than those used for programs designed for the general population. Some of the indicators, such as nutritional status, are costly to measure and prone to errors. For example, implementing partners we spoke with during our fieldwork in Guatemala and Sri Lanka told us that they have difficulty in collecting data for some indicators in other, non-USAID programs using new specialized food products due to resource constraints, lack of technical capacity by some local NGO staff, or problems with unreliable data. USAID is making improvements in monitoring of some nutrition-focused development programs, for example, by planning to require implementing partners to collect data on the age of young children, a common criterion for new specialized food products. However, as mentioned earlier, indicators key to measuring targeting effectiveness are not consistently monitored across all USAID food assistance programs. According to the Standards of Internal Control in the Federal Government, program managers need to compare actual performance to planned results and analyze significant differences. Without reporting targeting effectiveness, USAID cannot compare actual targeting effectiveness to planned results. As a result, USAID may not be able to make fully informed targeting decisions for both ongoing and future food assistance programs. For example, USAID may not be able to track the performance of food assistance programs’ targeting over time or across programs and may therefore miss opportunities to identify improvements to the targeting effectiveness of these programs. USAID’s targeting evaluations are not systematic, in part, because they are not routinely conducted. USAID requires evaluations to be completed for all of its development programs but does not require them for its emergency programs. Instead, emergency programs are required to submit Annual Results Reports, which contain many of the same types of information as evaluations, but for which no baseline assessment is conducted. According to USAID officials, the difference between these requirements is due to the fact that emergency programs are by nature typically in places where there may not be the time or resources available to do a proper baseline assessment. evaluations that discussed targeting effectiveness included information on the magnitude of inclusion or exclusion errors and the level of community satisfaction with targeting. For example, USAID’s evaluation of an emergency program in Zimbabwe discussed inclusion and exclusion error, a key measure of targeting effectiveness, within a section focused exclusively on targeting. Similarly, USAID’s evaluation of an emergency program in Ethiopia mentioned the level of community satisfaction with targeting: almost 90 percent of the respondents to a survey of community members were generally satisfied with the fairness of the program’s targeting. Some evaluations, however, contained only a brief mention of targeting in general, with no mention of targeting effectiveness. For example, an evaluation of a development program in Bolivia mentioned targeting and contained tables showing monitoring indicators for the baseline compared against the final evaluation, but did not explain how the recipients were originally targeted or how the final evaluation results were verified. Other evaluations, such as a 2011 evaluation of a development program in Guatemala, did not discuss targeting or targeting effectiveness at all. USAID policy and guidance call on USAID and its implementing partners to use evaluations as opportunities to learn about past programs to inform decision making for new programs. USAID policy calls for evaluations to “systematically generate knowledge about the magnitude and determinants of program performance, permitting those who design and implement programs…to refine designs and introduce improvements to future efforts.” USAID guidance states that evaluations should assess the extent to which the program is meeting its stated objectives. For example, if a program is providing food assistance to a vulnerable subpopulation, effective targeting is an important program objective. However, USAID’s evaluations of its food assistance programs do not systematically address targeting effectiveness, and as a result, the agency’s ability to assess the extent to which a program is meeting its stated objectives is hindered, and it may miss opportunities for learning lessons that could be useful when designing new programs or improving ongoing ones. The use of specialized food products, especially some of those most recently introduced, offers the promise of providing better nutrition to the most vulnerable. However, the increased cost of these new specialized products means that their use may likely reduce the overall number of recipients receiving food assistance under a fixed program budget—a quality-quantity trade-off. Choosing more costly specialized food products over less costly traditional food products may be the optimal policy option in certain circumstances, including areas with a high percentage of children suffering from hunger and malnutrition. However, the achievement of this policy goal requires effective targeting of food assistance so that food ultimately reaches the intended recipients. If food assistance is not targeted effectively, the program may fail to achieve its nutritional goals while simultaneously feeding fewer people. USAID recognizes the need to update and broaden its guidance on the use of specialized food products, but this revision will not be completed until late 2013 at the earliest. Issuance of improved interim guidance related to food assistance targeting will help USAID and its implementing partners make better-informed decisions about whether and how to deploy the range of food products that are available, particularly new specialized products. Moreover, the monitoring and reporting of key indicators consistent with program objectives are necessary to ensure that specialized food products are, in fact, reaching intended recipients. Improved targeting—which takes an approach that is appropriate to the circumstances and conditions—would better ensure that valuable food resources are put to their most optimal use and that vulnerable groups receive the most effective assistance available to them. To improve USAID’s targeting of specialized food products to vulnerable groups, such as children under 2 and pregnant women, we recommend that the Administrator of USAID take the following two actions: As USAID continues to purchase new specialized food products without updated guidance, it should issue, as appropriate, improved interim guidance to assist implementing partners in deciding whether and how to target specialized food products. When USAID chooses to provide specialized food products to targeted vulnerable groups, it should establish and report program- specific indicators related to each targeted group to allow USAID to assess its programs’ effectiveness in reaching these groups. We provided a draft of this report to USAID, USDA, and State for comment. In its written comments, reproduced in appendix V, USAID concurred with our recommendations. USDA and State provided no written comments. We also provided relevant excerpts of this report to WFP for comment. USAID, USDA, and WFP provided technical comments that were incorporated, as appropriate. USAID strongly agreed with our recommendation on improving interim guidance to help implementing partners decide whether and how to target specialized food products. USAID provided examples of recent and ongoing efforts that are expected to contribute to improved guidance on new specialized food products. For example, USAID expects to publish on its website updated fact sheets on food products provided in its food assistance programs and will prioritize issuing those relating to specialized food products. Although USAID noted that some existing guidance is available for three of the new specialized food products it is introducing, such as CSB+, the agency also acknowledged that it expects to issue its own guidance on all new products and update the Commodities Reference Guide. USAID agreed with our recommendation on establishing and reporting program-specific indicators to allow USAID to assess its programs’ effectiveness in reaching targeted groups. USAID agreed with us on the need to develop new, program-specific indicators to assess the nutrition goals of new specialized food products for its Title II emergency programs and indicated that it would engage with partners on demonstrating impact and results. To that end, USAID indicated that it is in the process of recruiting a nutritionist to ensure that products used match their intended purpose and high-value specialized products are properly targeted. We are sending copies of this report to appropriate congressional committees, the Administrator of USAID, the Secretaries of Agriculture and State, and relevant agency heads. The report is also available at no charge on the GAO website at http://www.gao.gov. If you or your staff have any questions about this report, please contact me at (202) 512-9601 or [email protected]. Contact points for our Offices of Congressional Relations and Public Affairs may be found on the last page of this report. GAO staff who made major contributions to this report are listed in appendix VI. Our objectives were to (1) describe in-country factors that the U.S. Agency for International Development (USAID) and its implementing partners face in targeting vulnerable groups, and (2) examine the extent to which USAID’s targeting process supports effective targeting. To address these objectives, we met with officials at USAID and its implementing partners, including the World Food Program (WFP) and nongovernmental organizations (NGOs). In addition, we met with officials at the U.S. Department of Agriculture (USDA) and the U.S. Department of State. We also spoke with academics, experts, and practitioners associated with research institutes, universities, and NGOs. We examined USAID program documents, including guidance and tools, related to food assistance targeting processes. Furthermore, we conducted fieldwork in four countries—Ethiopia, Guatemala, Sri Lanka, and Zimbabwe—and met with officials from U.S. missions, implementing partners, and relevant host government agencies. We also convened a roundtable of 10 practitioners and experts—including representatives from implementing partners such as NGOs and WFP, academia, and research organizations—to discuss in-country factors that affect the ability of USAID and its partners to target vulnerable groups, as well as the guidance and monitoring and evaluation tools that USAID and its implementing partners use to target food assistance activities (see app. II for the list of participating organizations in our roundtable). To provide context and background, we analyzed data from USAID and WFP to identify trends in U.S. funding for international food assistance and procurement data on the use of traditional and specialized food products. As these data were for background purposes, we did not assess their reliability. In addition, we reviewed data that we reported on in 2011 concerning cost information for specialized food products relative to traditional food products. We then reviewed similar data to obtain updates about the costs and relative length of feeding for these products and interviewed USAID, WFP, and Tufts University about the reliability of the updated data. We used this information to create an analysis comparing the amount of time various commodities could be provided for the cost of other commodities. We found that these updated data were sufficiently reliable for the purposes of this report, in that they demonstrated the order of magnitude of the relative cost of different types of food products used in food assistance programs. Although commodity prices may fluctuate and suggested feeding lengths may vary by program or individual recipient, the data were sufficiently reliable to demonstrate that there are large differences in the cost of feeding, depending on the products used. In addition, we reviewed various literature on the targeting process, as well as USAID guidance and tools to facilitate targeting decisions. To describe in-country factors USAID and its implementing partners face in targeting vulnerable groups, we reviewed literature on targeting and new specialized food products issued by academics, research institutes, implementing partners, USAID contractors, UN organizations involved in humanitarian assistance, and independent international organizations; spoke with in-country officials such as relevant host government officials and implementing partners; and obtained the input of our roundtable participants. To examine the extent to which USAID’s targeting process supports effective targeting, we analyzed responses and information from the general methodologies listed above. To examine the extent to which USAID provides guidance to its implementing partners on targeting, we reviewed existing USAID guidance for targeting and USAID’s contract with Tufts University and spoke with USAID and Tufts University officials about the scope of work for this contract, including the section on updating guidance. We reviewed information from USAID about the product types, costs, and tonnage of new specialized food products purchased since fiscal year 2010. We interviewed USAID about the sources of this information and also compared it to data about these products from other sources of information. These included the requests for applications that USAID provides to its implementing partners for new specialized food products, including ready-to-use therapeutic foods and lipid nutritional supplements; USAID’s commodity price calculator; and relevant legislation authorizing the use of these products. We found that the data were sufficiently reliable for the purposes of this report, in that they showed the magnitude and trends of purchases of new specialized food products with USAID funding in recent years. To examine the extent to which USAID monitors and evaluates targeting effectiveness and other related information, we analyzed monitoring information provided to us by USAID about numbers of planned recipients and actual beneficiaries for Title II food assistance programs since 2009. We reviewed current USAID policies and procedures on monitoring and evaluation. We also reviewed guidance provided by Food and Nutrition Technical Assistance (FANTA), under a cooperative agreement with USAID. This guidance covers aspects of monitoring and evaluation, such as the performance measures to be used for food assistance programs. Through searches of USAID’s website and discussions with cognizant officials, we identified a total of 30 final evaluations of USAID programs going back to 2009. Final evaluations are conducted at the end of a program. However, USAID could not assure us that it had provided all of the evaluations conducted for its development programs, and also noted that it does not require evaluations of its emergency programs. We selected 20 of these final evaluations for review based on the following criteria: we included all 3 final evaluations for the single-year programs, and selected 17 final evaluations for the multi-year programs to ensure that we had coverage by year and geographic region. We reviewed these evaluations to examine the extent to which they had addressed targeting issues. Finally, we reviewed evaluations that WFP conducted of those of its programs that were implemented with USAID funding. We conducted this performance audit from October 2011 to September 2012 in accordance with generally accepted government auditing standards. Those standards require that we plan and perform the audit to obtain sufficient, appropriate evidence to provide a reasonable basis for our findings and conclusions based on our audit objectives. We believe that the evidence obtained provides a reasonable basis for our findings and conclusions based on our audit objectives. Table 3 provides a comparison of cost differences between traditional and selected specialized food products, which include both traditional specialized food products and new specialized food products. For example, to feed a child 6 to 23 months old, a traditional grain-based representative ration costs $0.02 to $0.06 per day, a CSB+ ration, $0.10 to $0.21 per day, and a ready-to-use therapeutic food (RUTF) ration, $0.42 to $0.46 per day. The cost per ration is one aspect of the relative cost of food assistance products; the length of time a product is used in a food assistance program also affects its overall relative cost. Some experts suggest that, although an individual daily ration of a new specialized food product may be relatively expensive, it may ultimately be less costly overall because it may be fed for a shorter period of time based on its suggested length of use. However, we found that some new specialized food products with a relatively shorter suggested length of use may still cost relatively more overall. For example, as shown in the table, although an RUTF’s suggested length of use (42 to 90 days) for a child 6 to 23 months old is shorter than that of a traditional grain-based ration (90 to 120 days), the RUTF may still cost more overall ($17.77 to $41.40) than the grain-based ration ($2.07 to $7.45). Despite their higher overall costs, RUTFs may be the optimal choice in certain circumstances, such as for emergencies in areas with a high percentage of children suffering from severe acute malnutrition. Table 4 illustrates the number of days that traditional food products (grain-based rations) or traditional specialized food products (CSB) can be provided for the cost of providing a new specialized food product based on its suggested length of use. For example, for the cost of providing a nutritional supplementary paste fortified ration for 180 to 545 days, a grain-based ration could be provided for 741 to 3,121 days and a CSB ration could be provided for 183 to 769 days. USAID has thus far deployed a relatively limited quantity of new specialized food products but plans to introduce the following products to address various needs: Ready-to-use supplementary food (RUSF) - Nutritionally dense and highly fortified for management of moderate acute malnutrition. Fortified vegetable oil - Fortified with vitamins A and D. Fortified milled cereals - Reformulated and standardized to improve general rations. CSB++ (WFP Supercereal+) - Formulated by WFP for children 6 to 24 months of age. CSB-14 – Reformulated CSB to be prepared with vegetable oil. In addition to the person named above, Joy Labez (Assistant Director), Carol Bray, Marc Castellano, Ming Chen, Anna Chung, Debbie Chung, Martin De Alteriis, Mark Dowling, Etana Finkler, David Schneider, and Jeremy Sebest made key contributions to this report. Sada Aksartova, Vida Awumey, Teresa Heger, Erin McLaughlin, Michael Maslowski, Julia Ann Roberts, Barbara Shields, and Phillip Thomas also contributed to this report. World Food Program: Stronger Controls Needed in High-Risk Areas. GAO-12-790. Washington, D.C.: September 13, 2012. Farm Bill: Issues to Consider for Reauthorization. GAO-12-338SP. Washington, D.C.: April 24, 2012. International Food Assistance: Funding Development Projects through the Purchase, Shipment, and Sale of U.S. Commodities Is Inefficient and Can Cause Adverse Market Impacts. GAO-11-636. Washington, D.C.: June 23, 2011. International Food Assistance: Better Nutrition and Quality Control Can Further Improve U.S. Food Aid. GAO-11-491. Washington, D.C.: May 12, 2011. International School Feeding: USDA’s Oversight of the McGovern-Dole Food for Education Program Needs Improvement. GAO-11-544. Washington, D.C.: May 19, 2011. International Food Assistance: A U.S. Governmentwide Strategy Could Accelerate Progress toward Global Food Security. GAO-10-212T. Washington, D.C.: October 29, 2009. International Food Assistance: Key Issues for Congressional Oversight. GAO-09-977SP. Washington, D.C.: September 30, 2009. International Food Assistance: USAID Is Taking Actions to Improve Monitoring and Evaluation of Nonemergency Food Aid, but Weaknesses in Planning Could Impede Efforts. GAO-09-980. Washington, D.C.: September 28, 2009. International Food Assistance: Local and Regional Procurement Provides Opportunities to Enhance U.S. Food Aid, but Challenges May Constrain Its Implementation. GAO-09-757T. Washington, D.C.: June 4, 2009. International Food Assistance: Local and Regional Procurement Can Enhance the Efficiency of U.S. Food Aid, but Challenges May Constrain Its Implementation. GAO-09-570. Washington, D.C.: May 29, 2009. International Food Security: Insufficient Efforts by Host Governments and Donors Threaten Progress to Halve Hunger in Sub-Saharan Africa by 2015. GAO-08-680. Washington, D.C.: May 29, 2008. Somalia: Several Challenges Limit U.S. International Stabilization, Humanitarian, and Development Efforts. GAO-08-351. Washington, D.C.: February 19, 2008. Foreign Assistance: Various Challenges Limit the Efficiency and Effectiveness of U.S. Food Aid. GAO-07-905T. Washington, D.C.: May 24, 2007. Foreign Assistance: Various Challenges Impede the Efficiency and Effectiveness of U.S. Food Aid. GAO-07-560. Washington, D.C.: April 13, 2007. Foreign Assistance: U.S. Agencies Face Challenges to Improving the Efficiency and Effectiveness of Food Aid. GAO-07-616T. Washington, D.C.: March 21, 2007. | In fiscal year 2011, USAID spent approximately $1.7 billion on food assistance reaching over 46 million people in 48 countries. USAID targets food assistance so that benefits accrue selectively to only a portion of the overall population, typically the most vulnerable. Effective targeting is important to maximize the impact of limited resources, especially as USAID begins to use more nutritious but more costly specialized food products to address hunger and malnutrition among vulnerable groups. GAO was asked to (1) describe in-country factors that USAID and its implementing partners face in targeting vulnerable groups, and (2) examine the extent to which USAID's targeting process supports effective targeting. GAO analyzed program data and documents; interviewed relevant officials; convened a roundtable of food assistance experts and practitioners; and conducted fieldwork in Ethiopia, Guatemala, Sri Lanka, and Zimbabwe. In-country, the U.S. Agency for International Development (USAID) and its implementing partners face a range of factors that, to varying degrees, affect their ability to target food assistance effectively to vulnerable groups. These factors include (1) the quality of data used to identify and reach recipients, (2) host government policies, and (3) sharing of rations among recipients and community members. Targeting effectiveness is reduced when data quality is poor, host government policies cause distortions in program design and implementation, and sharing prevents food rations from being consumed by the intended recipients in the intended amounts. USAID and its implementing partners try to mitigate such challenges by, for example, employing technology to improve data quality, coordinating closely with government officials to foster better relationships, and educating recipients about proper food usage to reduce sharing. In some cases, host governments have facilitated targeting efforts by, for example, establishing national targeting guidelines that set a common standard, or national statistical offices that assist in collecting data. Nevertheless, ensuring that food assistance reaches intended recipients remains difficult. Weaknesses in the design, monitoring, and evaluation phases of USAID's targeting process hinder targeting effectiveness, although the agency is taking actions to make improvements. In the design phase of the targeting process, USAID does not provide sufficient guidance on whether and how to target specialized food products. Specifically, USAID's guidance on design currently is neither up-to-date nor complete, and does not adequately address key benefits and risks that inform decisions on whether and how to target specialized food products. In USAID's monitoring and evaluation phases, weaknesses limit targeting effectiveness and hinder decision making. USAID currently does not require monitoring of key indicators needed to determine the level of targeting effectiveness. For example, during implementation USAID does not monitor actual recipients in its emergency programs. Furthermore, its evaluations do not systematically address targeting effectiveness. Without adequate guidance, monitoring, and evaluations, USAID cannot ensure targeting effectiveness in its food assistance programs. USAID is taking some steps to improve both guidance and monitoring. For example, USAID is updating guidance and plans to track indicators such as detailed age breakdowns that are key to better understanding targeting effectiveness. However, these steps do not fully address the weaknesses in USAID's targeting process. GAO recommends that the Administrator of USAID improve USAID's targeting of specialized food products to vulnerable groups by (1) issuing, as appropriate, improved interim guidance to assist implementing partners in deciding whether and how to target specialized food products; and (2) establishing and reporting program-specific indicators related to targeted vulnerable groups, to assess effectiveness in reaching such groups. USAID agreed with the recommendations and provided examples of recent efforts to address them. |
In fiscal year 1998, authorized federal funding for drug treatment programs totaled approximately $3.2 billion, with the Department of Health and Human Services (HHS) receiving $1.7 billion. SAMHSA received more than half ($944 million) of HHS’ drug treatment budget. Approximately 80 percent of SAMHSA’s total budget, which includes funding for both drug prevention and treatment, is distributed to states through block grants and formula grant programs. SAMHSA also supports activities that include the administration of NHSDA and STNAP. Since 1972, NHSDA has provided national estimates of the prevalence of drug use in the U.S. civilian noninstitutionalized population aged 12 years and older. NHSDA, administered by OAS, is an ongoing survey of members of households in the United States on their use of illicit drugs, their nonmedical use of prescription drugs, and their use of alcohol and tobacco products. NHSDA is currently the nation’s most comprehensive survey of drug use. It provides annual information on national trends in the use of substances and data that can be used to analyze patterns of substance use, the size and characteristics of substance use among various special populations, and the populations needing treatment. To determine the need for treatment, SAMHSA combines various measures of symptoms, problems, and patterns of use included in the NHSDA questionnaire. This information is intended to approximate clinical criteria for drug dependence and to supplement it with other data that indicate treatment need. SAMHSA calculates the number of persons in need of treatment as those who met at least one of the following criteria in the past year: dependence on any illicit drug; heavy drug use (that is, used heroin at least once, used marijuana daily, or frequent use of some other drug); injection drug use of heroin, cocaine, or stimulants; or received drug abuse treatment. States are also expected to develop estimates of treatment need on a statewide and local basis and report them to CSAT in their block grant applications and through STNAP. Under the 1992 Alcohol, Drug Abuse, and Mental Health Administration Reorganization Act (P.L. 102-321), states are required to use needs assessment data in developing and implementing the plans submitted as part of their block grant applications. Specifically, states are required to develop and report in their block grant applications estimates of treatment need by age, sex, and race or ethnicity for the state as a whole and for each substate planning area. Through STNAP, CSAT provides states with funding and technical assistance to conduct studies to determine the need and demand for substance abuse treatment in relation to the states’ resource availability. The Government Performance and Results Act was enacted in 1993 in part to improve performance measurement by federal agencies. It requires agencies to set goals, measure performance, and report on their accomplishments. The legislation was enacted to increase program effectiveness and public accountability by having federal agencies focus on results and service quality. SAMHSA developed several performance goals as part of HHS’ 1999 Results Act performance plan. These goals include providing estimates of the prevalence of substance abuse in each of the 50 states and the District of Columbia and increasing to 80 percent the proportion of block grant applications that include needs assessment data developed from STNAP. Although OAS relies primarily on NHSDA to make national estimates of drug abuse treatment need for the general population and certain subpopulations, the survey has limitations that can lead to underestimates of treatment need. These limitations include the survey’s use of self-reported data; the exclusion of certain high-risk populations; and a sample for some subpopulations, such as pregnant women, that is too small to produce valid estimates. To improve the accuracy of its estimates, OAS adjusted the NHSDA data with data from other sources that are presumed to be more reliable. For example, with this adjustment, OAS estimates of treatment need in 1995 increased by nearly a third. This adjusted estimate, however, is still considered conservative and does not provide subpopulation estimates of treatment need. OAS plans to expand NHSDA (effective in 1999) to further improve the accuracy of drug use and treatment need estimates. Several limitations of NHSDA can result in underestimates of treatment need for the general population and subpopulations, such as pregnant women. HHS and the Institute of Medicine have reported on a number of these limitations. For example, NHSDA data are based on self-reports, which rely on respondents’ truth and memory. Although NHSDA procedures were designed to encourage honesty and improve recall, SAMHSA and others assume some degree of underreporting; however, SAMHSA has not adjusted NHSDA data to account for this limitation. NHSDA also excludes certain populations at high risk for drug use. NHSDA was initially designed as a survey to determine the rate of drug use within U.S. households and as such has excluded drug use by individuals in institutional settings, such as prisons and residential treatment centers, and by those with no permanent residence, including homeless and transient people. As a result, the survey does not include population groups known to have high rates of drug use who are often not in a household environment. In addition, NHSDA’s sample size for some subpopulations is too small to produce valid estimates. For example, for the 1994-95 survey, OAS reported that the number of women who were pregnant at the time of the interview—770—and reported using illicit drugs—28—was too small to make certain estimates. To partially account for NHSDA’s undercoverage of hard-to-reach populations and underreporting of drug use by survey respondents, OAS developed a methodology that substitutes data from sources presumed to be more reliable. Using this methodology, OAS estimated that in 1995, about 8.9 million people in the United States needed drug abuse treatment compared with the 6.9 million estimate—including 2.6 million women—derived solely from NHSDA. While this adjustment results in a treatment need estimate that is about 29 percent higher than the estimate based on only NHSDA data, it still results in conservative estimates of treatment need. In addition, while OAS’ ratio adjustment was designed to improve the national estimate of treatment need for the general population, it does not estimate treatment need for women and other subpopulations. The ratio adjustment replaces some NHSDA data with information from Uniform Crime Reports (UCR) and the National Drug and Alcohol Treatment Unit Survey (NDATUS), now known as the Uniform Facility Data Set, to estimate treatment need. These data sources provide information on the number of persons arrested, treated for drugs, or both and are presumed to be more reliable. UCR, compiled by the Federal Bureau of Investigation from administrative records of police departments nationally, contains information on arrests and is adjusted for nonresponse and underreporting. NDATUS is a 1-day annual census of all specialty drug abuse and alcohol treatment units nationally. To obtain data on persons treated for drug abuse, approximately 11,800 specialty providers are surveyed on the number and type of patients treated and services received. This adjustment categorizes NHSDA responses into one of four arrest and treatment groups: arrested and treated, treated but not arrested, arrested but not treated, and not arrested and not treated. According to OAS, the NHSDA estimates appear to significantly underestimate the number in each of the first three categories; to compensate, numbers from UCR and NDATUS are substituted for NHSDA data. The methodology provides only a partial adjustment because any underreporting in the not arrested and not treated category is not affected by the adjustment. Also, the adjustment is still subject to NHSDA limitations. Therefore, according to OAS, the ratio-adjusted estimates represent improved, but conservative estimates of treatment need. OAS is expanding NHSDA’s sample from 18,000 to 70,000 respondents each year and modifying its methodology to obtain state-level data and better national and subpopulation prevalence estimates. The expanded NHSDA will capture larger samples of youth, racial and ethnic minorities, pregnant women, and hard core drug users, which are expected to result in more accurate subpopulation estimates. The expanded NHSDA is expected to produce comparable state estimates of need annually; however, the sample sizes are not large enough to produce annual substate estimates. According to SAMHSA officials, it will be possible to generate substate estimates by combining multiple years of NHSDA data. While the additional data are expected to result in more precise estimates, treatment need will likely still be underestimated due to the survey’s continued exclusion of certain high-risk populations and reliance on self-reported data. A major component of the expansion is to allow for estimates for each of the 50 states and the District of Columbia. A regression model OAS developed in 1996 uses NHSDA sample data and local area indicators to estimate state-level drug prevalence and treatment need. However, because of sample size requirements, this methodology only generated estimates for 26 states and 25 metropolitan areas. (See the appendix for a description of this methodology and individual state and metropolitan area estimates.) The expanded sample uses a similar methodology but has been designed to produce direct estimates for the 8 most populous states with smaller samples drawn for the other 42 states and the District of Columbia. The smaller samples will support model-based estimates that use information from the national sample, local indicators derived from the Census Bureau and other sources, and state samples. The method for collecting information and the content of the NHSDA questionnaire will also be modified under the expansion. Specifically, NHSDA will employ computer-assisted interviewing in 1999, which is expected to minimize respondent errors and partially increase the reliability of self-reporting by building in greater privacy for the respondent. The content of the questionnaire will also be augmented to obtain income and insurance data, national mental health statistics, data on treatment and prevention, and information on crime and other deviant behaviors. The projected annual cost for the expansion is $34 million. According to SAMHSA officials, the expanded NHSDA will help them identify states with serious drug abuse problems and help target technical assistance and discretionary funds. SAMHSA expects the expanded NHSDA to improve its prevalence estimates of drug abuse in the 50 states and the District of Columbia—one of the goals included in its 1999 performance plan. SAMHSA officials also said that the expanded NHSDA will provide data to monitor the performance of various federal and state agencies engaged in efforts to reduce the supply and demand of illicit drugs. For example, the expanded NHSDA is expected to allow for measurement of the national goal of reducing past month use of illicit drugs among 12- to 17-year-olds by 35 percent by the end of year 2002. Some experts question the additional cost associated with expanding NHSDA’s sample size to provide state-level estimates. They state that less costly alternatives using modeling techniques that rely on currently available estimates, such as synthetic estimation, could achieve similar goals at a significantly reduced cost. However, SAMHSA officials believe that the approach used in the expanded NHSDA will result in more accurate estimates than those produced using a purely synthetic estimation methodology. They also pointed out that the methodology used for the expanded NHSDA has been tested and validated. However, SAMHSA officials and other experts believe that more validation is needed overall in the methods used to estimate drug abuse treatment need. SAMHSA collects state and local treatment need data through state block grant applications and state reports required under STNAP. Through STNAP, CSAT has provided financial and technical assistance to states to conduct needs assessments. However, while SAMHSA is overseeing state efforts to develop and report estimates of treatment need, not all states have produced such estimates. In addition, CSAT’s monitoring and review of states’ block grant reporting does not ensure the data are complete, accurate, and consistently reported. Our review of needs assessment information in states’ fiscal year 1997 block grant applications found the data to be incomplete and of questionable quality. While data developed under STNAP have been used as a state resource and planning tool, the program has been limited in developing state in-house capacity and improving states’ reporting in block grant applications, as intended. One of SAMHSA’s goals is to increase the proportion of state block grant applications that include needs assessment data developed under STNAP. However, HHS’ performance plan did not include any information on how SAMHSA will accomplish its goal of increasing state reporting or how it would improve the accuracy of the data reported by states. Further, SAMHSA’s oversight of STNAP does not encourage coordination among CSAT staff providing oversight and technical assistance or strict monitoring of states’ compliance with program requirements. More than $1 billion in block grant funds are distributed to states for planning, carrying out, and evaluating activities to prevent and treat substance abuse. States report, as part of their annual block grant applications, information on intended use of federal funds for drug treatment. They are asked to report information on populations, areas, and localities with the greatest need for treatment services and information on the state’s capability to provide treatment. This information is collected to provide SAMHSA with information on how states are using block grant funds and assist states in identifying gaps in services and targeting resources. Although states are required by federal law to report needs assessment information in block grant applications, the data reported does not affect their block grant awards. Our review of needs assessment information in fiscal year 1997 block grant applications found the data to be incomplete, inaccurate, and inconsistently reported. According to SAMHSA, this is due, in part, to states’ lack of sufficient data and resources to complete the extensive amount of data required in block grant applications. While some states have reported complete information, our review showed that about 25 percent (14 states) did not report on the total population needing treatment and about a third (18 states) did not report information on the total population seeking treatment. In addition, a number of states did not provide information on subpopulations. For example, about 25 percent of states did not report information on women needing treatment, and almost 60 percent did not report information on children and adolescents aged 17 and under needing treatment. We also found inaccuracies in the data reported by states. For example, the number of males and females under age 11 reported needing treatment in one state was greater than the state’s entire population. Our review of 1997 applications also revealed inconsistencies in states’ reporting of needs assessments, both within a state and across states. For example, some states’ reporting of total women needing treatment on one of the forms in the application was inconsistent with the reporting of that same information—disagreggated by age, sex, and race or ethnicity—on another form in the application. States’ reporting of information is also not consistent across states. States define need differently and employ different methods and databases to estimate need. Due to the lack of quality of needs assessment data reported in block grant applications, the data have limited use in determining gaps between needs and services available and assuring federal officials that federal funds are being used for the purposes intended. Under block grant regulations, states are required to submit the best available needs assessment data. According to agency officials, the phrase “best available” leaves the agency little basis on which to challenge the data submitted by states in block grant applications. While SAMHSA has not taken the initiative to ensure that accurate, complete, and consistent information is reported in the applications—nor has it validated state estimates or reviewed the methodologies used to develop them—SAMHSA officials expressed concerned about the quality of the data and are in the process of addressing these concerns. In 1992, CSAT developed STNAP to help states produce better estimates of treatment need and develop plans for use of treatment resources. Between 1992 and 1996, CSAT awarded STNAP contracts to 53 states and territories totaling $59 million. As of June 1998, 23 states and territories had been awarded new contracts, totaling approximately $24 million, to continue activities under a second round of contract awards. STNAP was designed to develop and maintain a data collection and analysis infrastructure to assist states in surveillance, planning, budgeting, and policy development. STNAP has three primary objectives: (1) assist states in better allocating treatment funds, (2) enhance and sustain states’ in-house capabilities to assess need, and (3) improve states’ reporting in block grant applications. The program has had limited success in meeting its objectives. According to some state officials, STNAP has been useful in helping states target resources and enhance service delivery. For example, New Jersey reported using prevalence estimates, developed from an STNAP contract, in its allocation formula for distributing alcohol treatment money to better reflect the distribution of need at the county level. Iowa reported using its results to allocate funds based on objective estimates of need, which helped them target outreach efforts that offer the most potential for success. Iowa officials also reported that they used STNAP data to redesign the state’s approach for providing tailored outreach and treatment services for women. Data generated in New Mexico were reportedly used to initiate substance abuse recognition and counseling training in public health offices and create specialized counseling for health care providers to create smoking and alcohol cessation programs for pregnant women. However, states have been slow in developing in-house capacity to assess need—one of STNAP’s objectives. According to CSAT, most states have been unable to develop sufficient capacity due to inadequate state-level resources and expertise and, as a result, have relied on outside consulting firms, local universities, or both. CSAT officials characterize these relationships as mixed and said that effective contracts with consultants and universities is dependent on the quality of state oversight. While contracts with consultants and universities can limit the development of in-house expertise and result in a lack of continuity and a sustained data infrastructure, they have allowed some states to establish and maintain a knowledge base and network. For example, while Texas and South Carolina used universities for data collection, they used in-house staff expertise for analyses and reporting. To further assist states in developing their in-house capacity to assess need, CSAT contracted with the National Technical Center (NTC) at Harvard Medical School to provide technical assistance. According to CSAT officials, states’ reporting of results developed under STNAP in block grant applications—the third objective of the program—has not yet been fully realized because most states have not completed their planned data collection and analyses. As of February 1998, 19 states have contracts that have been completed or allowed to expire, with some work remaining on final reports. Although states were initially awarded 3-year contracts, most states received unfunded contract extensions and are taking, on average, 5 years to finish. SAMHSA requires states to incorporate needs assessments developed under STNAP in block grant applications, but SAMHSA has not enforced this requirement for those states that have completed their contracts. Although one of SAMHSA’s performance goals is to increase to 80 percent the proportion of state applications that include STNAP needs assessment data, SAMHSA did not provide any information in the performance plan on how it will increase state reporting or verify the data reported by states in block grant applications. Individual state estimates developed under STNAP were also originally intended to be used as a basis for developing national estimates of need. However, this goal has been dropped by SAMHSA because of data incomparability across states. Specifically, while states are required to assess need for a core set of abused drugs using clinical definitions of dependence, states have overall flexibility in designing their studies. As a result, states employed different survey instruments and sample sizes that affect the resulting estimates’ comparability. CSAT’s oversight of STNAP has not ensured timely completion of the contract or compliance with some program reporting requirements. Of the 19 states that completed the contract, only 8 (42 percent) did so within the original 3-year time frame. According to a former state official, the complex data collection and analysis procedures and unrealistic expectations about response rates developed under CSAT’s contract attributed to delays in contract completion. CSAT officials stated that the extended time necessary for states to complete the contract is an indication of a need for more program direction. States are also required to report findings to CSAT—through monthly, annual, and final reports—as part of their contracts and to report STNAP-collected data in block grant applications. Our review found that only 11 states have submitted final reports, and CSAT could only locate 6 of the 11 reports. Further, some states completed the project but did not report data in their block grant applications. CSAT has not consistently communicated STNAP objectives and requirements to states. Also, CSAT project officers acknowledge that their review of state contracts has been inconsistent and there is little coordination among them. Specifically, CSAT project officers responsible for STNAP oversight and state technical assistance have not coordinated their efforts or taken advantage of experiences and lessons learned from their involvement with different states. CSAT officials acknowledge that stricter monitoring of states’ compliance with program requirements is needed. According to SAMHSA, some changes have been instituted to improve monitoring; however, specific plans of action to achieve these goals have not yet been fully developed. Reliable assessments of treatment need—at national, state, and local levels and for specific population groups—are an essential component to accurately target treatment services. While SAMHSA has efforts under way to improve its national estimates through the expansion of NHSDA, the survey is still likely to result in an underestimate of treatment need. Also, STNAP’s goals to help states develop estimates of treatment need and improve state reporting of need data have not been fully accomplished. Even though states are required to provide estimates of treatment need as part of their block grant applications, not all states report this information and some of the data reported are inaccurate. SAMHSA recognizes the need to increase state reporting and has set a target for increasing the number of states that provide the information. It also recognizes that the overall quality of the data reported is problematic. However, SAMHSA has not indicated how it will increase state reporting or improve the quality of the data reported by states in block grant applications. In keeping with its goal of improving state reporting, we recommend that the Administrator of SAMHSA develop an action plan for how the agency will increase states’ reporting of accurate, complete, and consistent treatment need data in block grant applications and include a summary of these actions in HHS’ year 2000 performance plan. We provided copies of a draft of this report to SAMHSA and others for review. SAMHSA generally agreed with the report’s findings and with the need for an action plan aimed at improving state reporting of treatment need data as we recommended. While SAMHSA recognized the need for an action plan, it stated that it would be inappropriate to include in a performance plan the level of detail required for an action plan. We did not intend to imply that the performance plan should include extensive detail; however, it should include a discussion of strategies the agency will use to achieve its goals. Accordingly, we modified our recommendation to clarify how action plan information should be reflected in the performance plan. SAMHSA also provided a number of technical comments, which we incorporated where appropriate. We also obtained comments from researchers and experts in the field who were knowledgeable about these issues and incorporated their comments where appropriate. We are sending copies of this report to the Secretary of HHS, the Administrator of SAMHSA, officials of state substance abuse agencies, appropriate congressional committees, and other interested parties. We will make copies available to others upon request. Please contact me at (202) 512-7119 or James O. McClyde, Assistant Director, at (202) 512-7152, if you or your staff have any questions. Other major contributors to this report were Ann Calvaresi Barr and Janina Johnson. In 1996, OAS developed models for estimating state-level treatment need that use regression analyses combining NHSDA data with local area indicators—such as drug-related arrests, alcohol-related death rates, and Census Bureau data—that were found to be associated with substance abuse. The models produce estimates that are a weighted average of an indirect synthetic regression estimate and a direct survey estimate. Therefore, the models require at least some NHSDA sample data for each area under consideration. A total of 26 states and 25 metropolitan areas met the sample size criteria (at least 300 interviews) required for estimation using these models. According to OAS, the analysis applies a consistent methodology across states; however, the estimates produced are subject to many of the limitations of NHSDA national estimates. OAS has developed state and selected metropolitan area estimates using this regression analysis for 1991 through 1993. (See tables 1 and 2.) According to an OAS official, OAS is developing state estimates using 1994 through 1996 NHSDA data. Number (in thousands) Anaheim-Santa Ana, Calif. Atlanta, Ga. Baltimore, Md. Boston, Mass. Chicago, Ill. Dallas, Tex. Denver, Colo. Detroit, Mich. El Paso, Tex. Houston, Tex. Los Angeles, Calif. Miami-Hialeah, Fla. Minneapolis-St. Paul, Minn. Nassau-Suffolk, N.Y. New York, N.Y. Newark, N.J. Oakland, Calif. Philadelphia, Pa. Phoenix, Ariz. San Antonio, Tex. San Bernardino, Calif. San Diego, Calif. St. Louis, Mo. Tampa-St. Petersburg, Fla. Washington, D.C. The first copy of each GAO report and testimony is free. Additional copies are $2 each. 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A recorded menu will provide information on how to obtain these lists. | Pursuant to a congressional request, GAO reviewed the need for drug abuse treatment, focusing on: (1) the Substance Abuse and Mental Health Services Administration's (SAMHSA) efforts to estimate drug abuse treatment need on a national basis, including estimates of subpopulations, and possible limitations of these efforts; and (2) state estimates of drug abuse treatment need. GAO noted that: (1) SAMHSA's national estimates of drug abuse treatment need are primarily derived from the agency's National Household Survey on Drug Abuse (NHSDA); (2) while NHSDA is the principal measure of the prevalence of illicit drug use in the United States, SAMHSA and others have recognized that certain survey limitations affect the accuracy of need estimates, which may result in an underestimate of treatment need; (3) NHSDA's reliance on self-reported data likely results in underreported drug use; (4) to compensate for these limitations, in 1996, SAMHSA developed a method for assessing treatment need that adjusts NHSDA prevalence data with other data sources, including crime reports and treatment facility data; (5) SAMHSA estimated that in 1995, about 8.9 million people in the United States needed treatment for an illicit drug, compared to its estimate of 6.9 million derived solely from NHSDA data; (6) beginning in 1999, SAMHSA will expand NHSDA to provide better national drug use estimates of subpopulations and to provide state estimates of prevalence and treatment need; (7) in any case, these adjustments will only partially correct NHSDA's limitations and are likely to still result in an underestimate of treatment need; (8) states use various methods to develop estimates of treatment need, which are used to help make planning and resource allocation decisions; (9) states are required to report these estimates in applications for federal block grant funds for substance abuse prevention and treatment; (10) GAO's review of fiscal year (FY) 1997 block grant applications show that not all states submitted such data, and of those that did, some submitted incomplete or inaccurate data; (11) according to SAMHSA, the incomplete and inaccurate data are due, in part, to states' lack of sufficient data and resources to complete block grant applications; (12) in response to prior concerns about the lack of state and substate estimates of treatment need, the State Treatment Needs Assessment Program (STNAP), administered by the Center for Substance Abuse Treatment (CSAT), was initiated in 1992; (13) under 3-year contracts with CSAT, states are provided financial and technical assistance for conducting needs assessments and developing estimates of treatment need to include in their block grant applications; and (14) SAMHSA has established the improvement of state STNAP needs assessment reporting as a goal in its FY 1999 performance plan. |
The temperature of geothermal resources generally dictates their use. Low temperatures from 40 to 70 degrees Fahrenheit (F) that occur in the ground at shallow depths are best used for geothermal heat pumps. Geothermal heat pumps, also known as ground-source heat pumps, are devices that take advantage of the relatively constant temperature immediately beneath the earth’s surface to provide heat in the winter and air conditioning in the summer. During the winter, a heat pump transfers the heat of the ground to a fluid filled set of coils and then pumps this fluid to the building. A heat exchanger then transfers the heat to another set of coils filled with a refrigerant that boils. The resulting gas is then compressed and pumped to a condenser, where it gives up its heat as a fan blows over the condenser coils. During the summer, heat pumps work in reverse, extracting heat from the building and transferring it to the ground. Although heat pumps run on electricity, they produce three to four times the energy that they consume. As a result, they can reduce energy consumption by 20 to 70 percent relative to conventional electrical heating and cooling systems. They also can produce hot water for free during the summer and for about half price during the winter. Direct use applications begin with geothermal resources that have temperatures as low as 70 degrees F and can include geothermal resources as hot as 300 degrees F. Geothermal waters can be mixed with groundwater or surface water to achieve the most desirable temperature for the specific application. Geothermal waters with temperatures between about 70 and 125 degrees F are best used in spas and resorts for recreational swimming and bathing, in aquaculture operations for raising fish and other aquatic animals (fig. 1), and within sidewalks and roads for melting snow. Geothermal resources between about 125 and 300 degrees F can be used for various applications, each of which has optimal temperature ranges. Specific applications include food processing; fruit and vegetable drying; space and district heating; raising flowers, plants, and trees in greenhouses; processing pulp and paper; drying lumber, cement, and aggregate; curing concrete blocks; pasteurizing milk; dyeing fabric; making ice; and providing refrigeration. Electricity generation requires geothermal resources of at least 200 degrees F, with higher generation capacity coming from temperatures above 350 degrees F. Geothermal power plants extract geothermal fluids—hot water, brines, and steam—from the earth by drilling wells to depths of up to 10,000 feet (fig. 2). The geothermal resources are then used, in lieu of running water or the burning of fossil fuels, to produce a vapor that turns the blades of a turbine that spins a generator to produce electricity. Geothermal resources with temperatures from about 200 to 350 degrees F are best suited for binary power plants. In a binary plant, the geothermal fluids are passed through a heat exchanger to heat a secondary fluid, like isopentane, that vaporizes at a lower temperature than water and spins the power-producing turbines. The fluid is then condensed back into a gas and recycled, and the geothermal resources are injected back into the reservoir. When geothermal resources have temperatures over about 350 degrees F, flash plants are most appropriate. In flash power plants, highly pressurized hot water is brought to the surface, where the pressure decreases and part of the water explosively boils, or “flashes,” into steam. The steam is then separated from the remaining hot water and used to turn the turbines. Residual water is injected back into the reservoir. In some rare geothermal systems with temperatures above 455 degrees F, as at an area known as The Geysers Geothermal Field (The Geysers) in northern California, the geothermal resources may consist entirely of steam within the reservoir. Dry steam power plants use the steam directly to spin the turbines. Although some of the steam condenses back to water that can be injected back into the reservoir, much water is lost to evaporation in this process. Flash and binary power plants can also be combined in sequence for the most efficient generation of electricity. In these hybrid power plants, hot water is first flashed within a flash plant and then the steam is condensed, combined with the lower temperature water, and routed to a binary plant for further generation of electricity. The leasing of federal lands for geothermal resources is governed by the Geothermal Steam Act of 1970, as amended. To explore and develop geothermal resources on federal lands, developers must first obtain a federal lease from BLM. The lease is a contract between the federal government and the lessee that specifies certain terms for development and payment of rents and royalties. Regardless of the federal agency managing the lands where the geothermal resources are located, BLM has responsibility for issuing these leases after obtaining concurrence from the federal land managing agency. Before passage of the Act, BLM designated certain areas that it believed to have a reasonable potential for the commercial development of geothermal resources as “known geothermal resource areas (KGRA).” Within a KGRA, BLM was required to lease lands to the highest qualified bidder under a formal competitive bidding process, as long as the highest bid equaled or exceeded fair market value. For land outside of a KGRA, BLM was required to issue a lease noncompetitively to the first qualified buyer applying for the lease. Under provisions of the Act, BLM no longer establishes KRGAs, but instead accepts nominations from parties interested in leasing available lands and holds a competitive auction at least once every 2 years. If bids are not received for lands offered in the sale, the Secretary is to make them available for 2 years for noncompetitive leasing. BLM issues geothermal leases for 10 years and requires lessees to pay an annual rental of at least $1 per acre until commercial production is established. Thereafter, lessees pay a royalty from 10 to 15 percent of the value of production. BLM will not issue federal geothermal leases until the federal land management agency completes an extensive environmental review process. The leasing and development of these lands must be consistent with the management objectives for the lands as documented in the appropriate resource or forest management plan. Should these plans not adequately address exploration and development of geothermal resources, the appropriate agency personnel may need to amend or rewrite the plans. Prior to leasing, agency officials must also comply with provisions of the National Environmental Policy Act of 1969, as amended (NEPA). NEPA requires federal agencies to prepare an environmental impact statement (EIS) for major federal actions that may have a significant affect on the quality of the human environment. When an agency is not sure whether an activity will have significant impact on the environment, the agency prepares a less detailed environmental assessment (EA). If an EA determines that the activity will significantly affect the environment, the agency then prepares an EIS. During these analyses, agency personnel analyze potential impacts of geothermal leasing to various resources such as air and water quality, vegetation, wildlife, threatened and endangered species, and visual and cultural resources. In California, state laws also require a similar environmental review. Agency personnel may also need to comply with provisions of other federal legislation, such as the Endangered Species Act of 1973, as amended, and the National Historic Preservation Act, as amended. Under the Geothermal Steam Act of 1970, as amended, calculating geothermal royalties was relatively simple because the developers of the geothermal fields sold steam and hot water to power plants, establishing a sales price upon which royalties could be based. The statutory royalty rate specified in the lease, which was from 10 to 15 percent, was multiplied by the sales value of the geothermal resource each month to yield royalties due. In the 1980s, the developers sold the fields to the power plants, and this basis for valuing the geothermal resource was lost. In 1991, MMS issued new regulations that were in effect until passage of the Act. These regulations established the value of the geothermal resource based on the value of the electricity sold. The regulations called for subtracting, or “netting back” from the electricity’s sales revenues, the costs of generation and transmission. Formulas for netting back these costs were complex due to different methods of accounting for depreciation, uncertainty over which costs qualified for deduction, and commingling of federal and nonfederal resources. The Act contains provisions aimed at simplifying this process by allowing lessees the option on existing leases to pay royalties based on a percentage of gross sales revenue and by prescribing a set schedule of royalty rates for future leases. In addition, royalties due on direct use facilities prior to passage of the Act were based on the price of natural gas, which has risen substantially in recent years, making the direct use of federal geothermal resources unattractive. The Act provides for replacing this system of direct use royalties with a schedule of fees that encourages the development of geothermal resources. Electricity generated from geothermal resources is small, about 0.3 percent of the total electricity produced in the United States, with about half of this amount coming from federal resources. Recent estimates of the potential for additional electricity generated from geothermal resources vary from an increase of about 25 percent by 2015 to 367 percent by 2017. There were over 2,300 businesses and heating districts that used geothermal resources for heat and hot water in the United States in 2005, with only two businesses using federal geothermal resources. The total potential for direct use applications is largely unknown because of the widespread occurrence of lower temperature geothermal resources and the many diverse applications. Geothermal resources currently produce about 0.3 percent of the annual electricity in the United States, or 2,534 megawatts—enough electricity to supply 2.5 million homes. Even though the percentage of electricity generated from geothermal resources is small nationwide, it is locally important. For example, geothermal resources provide about 25 percent of the Island of Hawaii’s electricity, 5 percent of California’s electricity, and 9 percent of northern Nevada’s electricity. As of January 2006, companies were constructing geothermal power plants in California, Nevada, and Idaho that collectively will produce another 390 megawatts of electricity. Table 1 shows the number, location, and capacity of geothermal power plants that currently produce electricity or are under construction. Over half of the nation’s electricity generated from geothermal resources, about 1,275 megawatts, comes from geothermal resources located on federal lands. Of the 54 geothermal power plants, 26 are located on federal lands managed by BLM, and 28 are located on private or state lands. As of January 2006, there were 50 federal geothermal leases from which electricity was produced—48 on BLM lands, and 2 on Forest Service lands. Twelve of these leases are located in The Geysers in northern California, and they account for over one-third of the electricity produced from federal geothermal resources. The other 44 producing federal geothermal leases are located in and near the Sierra Nevada Mountains of eastern California, near the Salton Sea in the southern California desert, in southwestern Utah, and scattered throughout Nevada. Industry and government estimates of the potential for electricity generation from geothermal resources vary widely, due to differences in the date by which forecasters believe the electricity will be generated, the methodology used to make the forecast, assumptions about electricity prices, and the emphasis placed on different factors that can affect electricity generation. Five estimates published since 1999 indicate that the potential for electrical generation from known geothermal resources over the next 9 to 11 years is from about 3,100 to almost 12,000 megawatts. By 2025, two of these sources estimate that electrical generation from these known resources will increase to between 6,800 and 13,000 megawatts. The difference in estimates could also be due to the different methodologies used to make the forecasts, such as surveys of experts in the geothermal industry and/or detailed economic modeling. Placing different emphasis on geothermal development costs, electricity prices, natural gas prices, and/or reservoir characteristics also probably led to differences in the estimates. Table 2 summarizes the estimates of potential electricity generation from geothermal resources. A detailed comprehensive study of electricity generation from all geothermal resources in the United States has not been undertaken since 1978, when the U.S. Geological Survey (USGS) published Circular 790, “Assessment of Geothermal Resources of the United States—1978.” This assessment, based on the amount of thermal energy in place, estimated that known geothermal resources could generate 23,000 megawatts if all of them were developed, significantly more than that estimated by the five other studies. The other five estimates in table 2 differ from the USGS estimate in that they attempt to estimate how much electricity could be economically produced from known resources, given competing commercial sources of electricity, and they are based on more extensive reservoir, production, and economic data. In addition, none of the five estimates include undiscovered resources; the USGS estimated that undiscovered resources could generate an additional 72,000 to 127,000 megawatts. Over 2,300 businesses and heating districts in 21 states used geothermal resources directly for heat and hot water in 2005. About 85 percent of these users are employing geothermal resources to heat homes, businesses, and government buildings (table 3). While most users heat one or several buildings, some users have formally organized heating districts that pipe hot water from geothermal wells to a central facility that then distributes it to heat many buildings more economically than other available sources of energy. The largest concentration of geothermal heating districts occurs in Boise, Idaho, where four heating districts distribute geothermal waters to over 50 buildings, including the Capitol and City Hall (fig. 3). Geothermal heating districts supply heat to about 20 commercial and government buildings in Klamath Falls, Oregon, and to 400 homes in Reno, Nevada. The next most plentiful direct use applications are resorts and spas, accounting for over 10 percent of sites. About 244 geothermal resorts and spas offer relaxation and therapeutic treatments to customers in 19 states. Spas and resorts can be as primitive as an unsheltered hot spring in the backcountry to an elaborate resort with multiple soaking pools, an Olympic-sized swimming pool, a 100-room hotel, and gourmet restaurants. Two percent of geothermal direct use applications consist of heated greenhouses in which flowers, bedding plants, and trees are grown. Idaho leads the nation with the most geothermally heated greenhouses—13, and New Mexico leads the nation with the largest geothermally heated greenhouse—covering 32 acres. Another 2 percent of geothermal direct use applications are for aquaculture operations that heat water for raising aquarium fishes for pet shops; catfish, tilapia, freshwater shrimp and crayfish for human consumption; and alligators for leather products and food (fig. 4). Other direct use geothermal applications include dehydrating vegetables, like onions and garlic, and melting snow on city streets and sidewalks. Geothermal direct use applications are summarized in table 3. Nearly all direct use businesses and heating districts are currently located on private lands. Only two direct use businesses that use federal geothermal resources are currently in operation. One of these businesses, located at Honey Lake in northern California, uses geothermal resources to preheat a boiler in which biomass is burned to create electricity. Four additional businesses—a nursery, a food processing plant, and two mines— have also used federal resources at one time in direct use applications. A nursery in New Mexico used federal geothermal resources for heating greenhouses, but the owner reported that he stopped using the federal geothermal resources because he considered the federal royalties to be excessive. Two gold and silver mines also used geothermal waters from BLM lands in Nevada to enhance their cyanide heap leeching operations but suspended these operations, due in part, to high federal royalties. The owner of the food processing plant, which dried garlic, reported being forced out of business by lower priced imports from China. The potential for additional direct use of geothermal resources in the United States is uncertain due to the geographically widespread nature of low-temperature geothermal resources and the many different types of applications. The USGS performed the first national study of low- temperature geothermal sites in 1982 and estimated the amount of heat in- place that could be available for direct use applications across the United States. However, this study was neither specific enough to identify individual sites for development, nor did it estimate the amount of heat that could be recovered and converted into energy savings for homes or businesses. In 2005, the Geo-Heat Center at the Oregon Institute of Technology identified 2,211 geothermal wells and springs with temperatures appropriate for direct use. The Geo-Heat Center estimated that 404 of these wells and springs might be commercially developed because they are within 5 miles of communities. The study estimated the minimum amount of heat that could be produced at each site but did not assess the economics or business climate of the various direct use applications. Geothermal heat pumps have become a major growth segment of the geothermal industry by making use of the earth’s warmer temperature in the winter to heat buildings and using the earth’s cooler temperature in the summer for air conditioning. The Geothermal Heat Pump Consortium estimated that 1 million units were in operation in all 50 states as of January 2006. The number of geothermal heat pumps has steadily increased over the past 10 years. Because geothermal heat pumps are effective where ground temperatures are between 40 and 70 degrees F, they can be installed in almost any location in the United States and, therefore, are the most widespread geothermal application and have the greatest potential. Until 1999, few geothermal heat pumps were installed in federal facilities. The annual federal investment in geothermal heat pumps has increased substantially since then, from $6 million in 1999 to $74 million in 2001—the latest year for which data are available. As of November 2005, federal facilities had installed over 25,000 individual heat pumps—over 24,000 of them in military bases. The other 1,000 heat pumps were installed by the Department of Housing and Urban Development, DOI, the U.S. Postal Service, and the Environmental Protection Agency. The development of geothermal resources for electricity production faces major challenges, including high risk and financial uncertainty, inadequate technology, and insufficient transmission capacity. Developers of geothermal power plants face additional challenges when operating on federal lands. These challenges include: (1) a lengthy review process for the approval of leases and permits,(2) insufficient resources at BLM to conduct the necessary reviews, (3) different priorities between the BLM and the Forest Service when lands under their jurisdiction occur within a project area, (4) fragmented lease holdings that make it difficult to develop an economically viable project, and (5) a complex federal royalty system. Developers of geothermal resources for direct uses also face a variety of other business challenges, remote locations, water rights issues, and higher federal royalties over the past few years. The recently passed Act addresses some of these challenges and is discussed in the next section of this report. Geothermal development for the production of electricity is a risky, expensive, and lengthy process. Geothermal groups reported that most attempts to develop geothermal resources are unsuccessful, that costs to develop geothermal power plants can surpass $100 million, and it can take 3 to 5 years for plants to first produce and sell electricity. The development of geothermal resources for electricity generation follows a series of phases, starting with finding the geothermal resources through exploration, then confirming the magnitude and extent of the resource, and ending with full field development and power plant installation. Although some resources are easy to find because they produce telltale signs such as hot springs or fumaroles, most resources are buried deep within the earth—at depths sometimes exceeding 10,000 feet—and finding them often requires an in-depth knowledge of the area’s geology, geophysical surveys, remote sensing techniques, and at least one test well. The Geothermal Energy Association estimates that average wells cost from $2 million to $5 million and that only about 25 percent of the initial test wells are successful in finding commercial geothermal fields. Companies must then drill additional wells to assess the extent, temperature, pressure, and productivity of the reservoir, thereby allowing companies to confirm the magnitude and extent of the resource and decide whether it is economically viable. Estimates of failure rates for wells drilled during this phase run as high as 60 percent. According to the Geothermal Energy Association, developers typically spend about 10 percent of the total cost for this phase. It costs $75 million to develop a typical 25 megawatt power plant. Such a plant can produce enough electricity for 19,000 homes. The drilling of additional wells to produce and manage the reservoir, installing the power plant, and connecting the wells to the plant with pipes generally account for another 23 percent, 54 percent, and 7 percent of the total costs of the plant, respectively. In addition, operating and maintenance costs for a plant of this size could be about another $5 million per year. The risks and high initial costs associated with geothermal development limit financing and make financing more difficult. Energy consultants told us that few companies, including venture capitalists, are willing to provide funding for geothermal projects, particularly for the initial phases of exploration and confirmation. Industry officials who do provide funding for geothermal development told us that they would only fund projects that are either fully confirmed or are in areas of well-known geothermal potential. Even when fully confirmed, moreover, few lenders will finance a geothermal project until a contract has been signed by a utility or energy marketer to purchase the expected electricity. Geothermal industry officials describe the process of securing a contract as complicated and costly, especially for small geothermal developers who are generally unfamiliar with the various bidding mechanisms that utilities use to establish electricity prices. Officials with a large utility expressed their reluctance to purchase more costly electricity from geothermal plants and cited an inability to pass on the additional cost to ratepayers. Electricity from geothermal resources may also be unavailable during time frames specified by the contract because of delays due to environmental litigation or lack of available transmission. In addition, an energy consultant told us that most utilities are unfamiliar with geothermal resources, and they are unlikely to invest the necessary time to assess geothermal projects because geothermal electricity would make up a small percentage of their total energy portfolio. Inadequate technology adds to the high costs and risky nature of geothermal development. Since geothermal systems are geologically more complex than oil and gas systems, exploration tools commonly used in the oil and gas industry, such as geophysical surveys, are less effective. In general, geothermal reservoirs are located in very hard and fractured rocks that make drilling difficult. Operators often experience difficulty in drilling because drill bits wear quickly and because the medium used to lubricate the borehole and remove rock fragments, called drilling fluid, is commonly lost into the many fractures in the rock. Compared with oil and gas wells, the temperatures encountered when drilling are considerably higher and the geothermal resources are more corrosive, resulting in corrosion of drilling equipment and production casing and the failure of electronic components. Geothermal wells are also larger in diameter than oil and gas wells drilled to the same depth, which drives up drilling costs. The recent boom in oil and gas drilling has added to the scarcity and higher costs for drilling rigs and equipment. Lack of available transmission creates a significant impediment to the development of geothermal resources for electricity production. To send electricity produced at geothermal power plants to utilities, geothermal companies often need to construct new transmission lines from their plant to existing lines. In the West, however, many geothermal resources are located far from existing transmission lines, making the construction of additional lines economically prohibitive, according to federal, state, and industry officials. For example, there are no significant transmission lines between the geothermal resources in northern Nevada and the populated area of Las Vegas in southern Nevada. In California, there is a need for new or upgraded transmission to access renewable resources in Nevada and in the Imperial Valley of southern California, which has significant geothermal potential. Even when geothermal resources are near major transmission lines or developers can fund the construction of an additional transmission line, adequate transmission capacity may still be unavailable. Many existing transmission lines are operating at or near capacity and may not be able to transmit electricity without significant upgrades. Paramount among transmission concerns is who will pay for the needed transmission capacity. Transmission costs can be very large. In Nevada, a BLM official told us that transmission lines there cost over $500,000 per mile. The California Energy Commission said in a June 2005 report that new transmission lines with interconnections cost between $375,000 and $3.3 million per mile for single circuit lines, depending on their voltage. In the summer of 2005, FERC denied a request from a utility to pass the costs for transmission lines on to ratepayers. According to utility officials, this reaffirms that developers must pay for the costs since utilities will not voluntarily absorb the costs directly. Under current rules, when a developer requests new transmission capacity, the bulk of the costs are assigned to the project that first pushes the transmission system beyond its existing capacity. In addition, federal, state, and industry officials note that small geothermal plants are discouraged from connecting to these large transmission lines because utilities do not want to bother with the small amounts of electricity unless there are many of them in the same area. Cumbersome planning and permitting processes have hindered the addition of necessary transmission capacity. In a July 2005 report, a consultant for the Edison Electric Institute noted that nationally the task of getting a transmission project planned, approved, permitted, and financed remained daunting. The authors stated that the investment climate for transmission remained fragmented by different procedures, incentives, and constraints from one region of the country to another. The California Energy Commission noted in a November 2005 report that the state’s inefficient transmission planning and permitting processes were contributing to worsening the state’s transmission problems. Addressing the same issue, an official of a large California utility told us that obtaining agreement on where to construct transmission lines, addressing environmental issues, obtaining approvals, and a “not in my backyard” philosophy, contributed to the uncertainty and long lead times in building additional transmission capacity. In addition, a geothermal developer complained about extensive hearings and an inability to determine jurisdictions between the state and the federal government and between agencies within California. Geothermal developers state that the process for approving leases and issuing permits to drill wells and construct power plants has become excessively bureaucratic. BLM and Forest Service officials often have to amend or rewrite resource or forest management plans, which can add up to 3 years to the approval process, depending upon the complexity of the proposal and when the last plan was written. Delays in finalizing resource and forest management plans and in conducting environmental reviews have resulted in a backlog of 31 lease applications in California, with an average age of 7.4 years, and 136 lease applications in Nevada, with an average age of about 2 years. Despite the high backlog in Nevada, BLM officials noted that they processed 177 lease applications from January 2001 through June 2005. In contrast, during the same period, BLM did not process any lease applications in California. Nevada BLM officials reported that they can generally make decisions on whether to allow leasing and development faster because the public raises fewer issues and BLM documents its decision within a shorter document known as an EA. In California, however, the public raises more environmental issues and concerns involving Native American spirituality so BLM often prepares a more detailed document called an EIS, which typically takes 2 years to complete. While geothermal developers told us that they support environmental analyses, they complained about the duplication of federal and state documentation in California and of the appeals and lawsuits filed by groups opposing the federal and state decisions, citing that it often takes years for their resolution. The California Energy Commission reported in a June 2005 report that the entire process from exploration to the first production of electricity can take more than a decade and that it was not unusual to redo environmental documents because they became outdated. Geothermal applications, permits, and environmental reviews are also delayed because of a lack of staff and budgetary resources at the BLM state and field offices that conduct the necessary work. Nevada and California BLM officials noted that lack of funding and dedicated staff to work on lease applications was a constant problem. Lack of funding in California has slowed completion of BLM resource management plans and EISs necessary for lease approvals and drilling permits. BLM officials noted in California that they received only $90,000 to conduct two extensive EISs for which staff had requested $1.2 million while Nevada BLM received a one-time allocation of $700,000 for processing a backlog of lease applications and writing several less extensive EAs, which generally cost $80,000 to $90,000 each. Approvals for leases and permits may also be delayed when BLM must coordinate with the Forest Service, which manages land in some project areas. The Forest Service manages significant lands on geothermal projects in Oregon, Washington, California, and Nevada. Although BLM is the lead federal agency for geothermal development, the Forest Service must concur with leasing and development, and it has its own permitting process. BLM and industry officials report that there can be a lack of coordination between the Forest Service and BLM because of differing objectives and directives. While both agencies manage their lands according to the multiple use doctrine, they may have different priorities for land use and the public often submits more negative comments concerning geothermal development on Forest Service lands. A Forest Service official noted that it is important to balance the competing issue of geothermal development with other land uses such as preservation and recreation. He cited a limited budget for updating forest management plans, which can lead to delays, and noted that since geothermal development generates far less revenue than logging and coal mining on Forest Service Lands, geothermal development receives less priority. Companies may also encounter difficulties in developing geothermal resources for electricity production due to a patchwork of lease ownership. Geothermal resources within a project area may be owned by the federal government, state government, or private entities. Even when all resources within a project are under federal lease, several lessees with competing interests and objectives may own these leases. Some BLM officials noted that some developers have reported difficulty in consolidating the various geothermal leases into an economically viable project that can recover the costs of the power plant and transmission line. These developers, according to these BLM officials, say that speculators often lease geothermal resources not for development purposes but rather to resell the leases at a significant profit, running up the cost of the project. Geothermal developers, BLM officials, and MMS officials concur that the complex federal royalty system in effect before passage of the Act was a challenge to the development of geothermal electricity plants. While developers did not consider this royalty system to be a major obstacle in constructing a geothermal power plant, some described calculating royalty payments as burdensome and reported expending considerable time and expense on royalty audits. Several industry officials cited the complex royalty system as a reason for advocating revisions to the Geothermal Steam Act of 1970, as amended. The small business owners, operators of heating districts, and individuals who commonly develop geothermal resources for direct use face a variety of business challenges. Foremost among these challenges are obtaining capital, overcoming specific challenges unique to their industry, containing costs, and securing a competitive advantage. While the amount of capital to start a business that relies on geothermal resource is small compared with the amount of capital necessary to build a geothermal power plant, this capital can be large relative to the financial assets of the small business owner or individual. Unforeseen problems in well construction, piping, and water disposal can also increase original funding estimates. Obtaining funding is difficult as commercial banks are often reluctant to loan money for unproven projects and ideas that appear risky. Even district heating systems that are operated by municipalities have encountered financing difficulties as city or state legislatures may be reluctant to provide funding or customers may be reluctant to pay for modifications that are necessary to use geothermal resources in their current heating systems. We observed a number of business challenges unique to various industries that the successful owners of direct use businesses were able to overcome. They used their extensive knowledge of their respective industries to combat diseases in fish farms; to combat corrosive waters used in space heating; and to control temperature, humidity, and light according to the specifications of the various plant species they grew in nurseries. Escalating costs also pose a challenge to direct use operations. Rising labor costs and cheaper imports closed a food processing plant in Nevada. Greenhouses in Idaho and Oregon remained profitable by shifting from high-cost natural gas to cheaper geothermal resources for heating. Successful operators of direct use businesses have secured competitive advantages by entering specialty niches (see figs. 5 and 6). For example, the operators of two aquaculture facilities in Idaho and Oregon sell alligator meat, tilapia, and freshwater shrimp to restaurants. Also, a resort operator in Alaska that relies on geothermal resources constructed and markets an “ice museum” where guests can spend the night with interior furnishings sculptured from ice. We noticed that some greenhouse operators gained a marketing advantage by selling from their retail outlet rather than selling at a lower price to wholesalers. The remote location of many geothermal resources hampers their development for direct use. Geothermal direct use is constrained because the geothermal waters cannot be economically transported over long distances without a significant loss of heat. An official with the Geo-Heat Center noted that for space heating, spas, and resorts, the geothermal resources should be located within 5 miles of the location where they will be used. While some greenhouses, aquaculture operations, and food processors that rely on geothermal resources have successfully produced their products far from consumers, they still need access to adequate transportation and a cheap labor market, both of which are generally dependent on proximity to population centers. The distant location from major population centers of geothermal resources on federal lands contributes to their unattractiveness for direct use applications. Obtaining water rights can be a significant challenge to direct use development. Western states are not uniform in classifying geothermal resources, considering them legally to be mineral, water, or having characteristics of both minerals and water. Depending sometimes on the depth and/or the temperature at which they occur, geothermal resources can be subject to state water laws in the western states and are then managed by the state agency responsible for protecting groundwater. Even when not legally classified as water, the production of geothermal resources for direct use applications may still fall under regulations enforced by a state agency responsible for groundwater protection. In areas of high groundwater use, the western states generally regulate geothermal water according to some form of the doctrine of prior appropriations, under which specific amounts of water are appropriated to users in the order when they first made beneficial use of the water. Additional amounts, if available, are appropriated in the future to applicants on a first-come basis. Those that have more senior rights have priority in using the water when use exceeds supply, such as during a drought. Western states that generally follow the prior appropriations doctrine when managing the production of geothermal water for direct use include Utah, Idaho, Oregon, New Mexico, and Nevada. Developers of geothermal resources for direct use would face problems obtaining appropriations in the Snake River Basin of Idaho, which consists of much of the state below the panhandle, because groundwater is fully appropriated there and used predominantly for irrigation. Over half of the state of Utah also includes areas in which geothermal resources for direct use would be excluded or restricted due to prior appropriations, and the state water engineers in Nevada and New Mexico may also restrict appropriations in some areas of their states. In addition, applications for development of geothermal resources for direct use on federal lands may also be subject to state water laws. Unless the federal government has reserved water rights on land in which a geothermal developer is interested and the geothermal development fulfills the specific purpose of the federal reservation, the development may still be subject to restrictions under state water laws. Developers interested in using federal geothermal resources for direct use were concerned about high federal royalties prior to passage of the Energy Policy Act of 2005. Royalties were computed according to a formula that relies on the amount of heat extracted from the resource and the cost of a reasonably available alternative form of energy. Since most inquiries into the use of federal resources have been by operators of greenhouses, this alternative form of energy—natural gas—has been the source generally used to heat greenhouses. Average wellhead natural gas prices in recent years have increased about two and a half times from $3.68 per million British thermal units in 2000 to $9.50 in September 2005. Operators of greenhouses have told us that heating greenhouses with natural gas is no longer economically feasible as the costs of raising plants would exceed the price they obtain for these plants. During meetings between BLM, MMS, state, and industry officials, general consensus was reached that natural gas was too expensive an energy source upon which to base royalties, and a working group was formed to propose an alternative energy source. In the report they drafted, the group proposed Powder River Basin coal, which averages about 30 cents per million British thermal units—a fraction of the price of natural gas. The report states that lower royalties on direct use may encourage development and result in higher royalty revenues in the long run. However, based on other challenges facing the development of direct use applications, the lowering of federal royalties alone is unlikely to stimulate the direct use of federal geothermal resources. The Act includes a variety of provisions designed to help the geothermal industry address numerous challenges, including the high risk and financial uncertainty of developing renewable energy projects, lack of sufficient transmission capacity, delays in federal leasing, and complex federal royalties. Although these efforts show promise, it is too early to assess their effectiveness. Through the Department of Energy (DOE) and the California Energy Commission, the federal government and the state of California are attempting to overcome technical challenges by awarding cost-share grants for research and development. State and local governments have also made efforts to address challenges to geothermal development. Chief among these efforts are financial incentives, such as tax credits for production from renewable energy sources, sales and property tax exemptions, and mandates that certain percentages of the electricity generated within the state come from renewable energy sources, such as geothermal resources. Provisions within the Act address the high risk and financial uncertainty of producing renewable energy by providing tax credits and other incentives for renewable energy producers, including the producers of geothermal electricity. Starting on January 1, 2005, section 1301 of the Act extends for 10 years a tax credit on the production of electricity from geothermal resources for already existing plants and for any new plants producing by December 31, 2007. The credit is now 1.9 cents per kilowatt-hour and has future adjustments for inflation. Although government and industry officials praised this provision, they told us that for the credit to be more effective, the date by which plants must produce electricity needs to be extended. They explained that since it can take 3 years or longer for the construction of geothermal electricity plants, plants probably will not qualify unless they are ready to break ground immediately. The Act also provides a financial incentive for tax-exempt entities that cannot take advantage of the production tax credit. Section 1303 of the Act permits the issuance of clean renewable energy bonds by tax-exempt entities, such as municipalities and rural electric cooperatives, for the construction of certain renewable energy projects, including geothermal electricity plants. Investors can purchase the bonds, which pay back the original principal and also provide a federal tax credit instead of an interest payment. The Department of the Treasury will manage the issuance of these bonds and the setting of credit rates. The total issuance of bonds cannot exceed $800 million, and the bonds are to be issued between December 31, 2005, and December 31, 2007. The Act also extends the federal government’s Renewable Energy Production Incentive, which expired on September 30, 2003. This incentive entitled eligible electric production facilities, including not-for-profit cooperatives, public utilities, and various government entities who sell renewable electricity, including that generated from geothermal resources, annual financial incentive payments from the federal government. Additionally, section 1333 of the Act makes a $300 tax credit available to purchasers of geothermal heat pumps who place them in service in 2006 and 2007. Another provision in the Act may decrease the uncertainty inherent in geothermal exploration. The Act directs the Secretary of the Interior, acting through the USGS, to update the 1978 Assessment of Geothermal Resources made by the USGS. This assessment, published as Circular 790, is widely considered to be out of date and in need of revision. USGS officials reported that, since 1978, there have been significant advancements in technology that are not reflected in Circular 790. Now, electricity can be generated from lower temperature resources and from resources located deeper within the earth. Today, according to USGS officials, scientists and engineers can make more accurate resource estimates because they are more knowledgeable of reservoir characteristics and have benefited from the knowledge gained during the 27 years of exploration and development that has occurred since the original study. State governments are also offering financial incentives to the geothermal industry by creating additional markets for their electricity through Renewable Portfolio Standards (RPS). An RPS is a state policy directed at electricity retailers, including utilities, that either mandates or encourages them to provide a specific amount of electricity from renewable energy sources, which may include geothermal resources. To date, 22 states plus the District of Columbia have RPSs, and three other states have set RPS targets. Requirements for the program vary by state as each RPS is unique, and not all states have significant geothermal resources. California and Nevada, which have large geothermal production and potential, have each established an ambitious RPS. California law mandates that retailers must supply 20 percent of their electrical energy from renewable energy by 2017, and the state is currently seeking to move this date up to 2010. Nevada requires certain percentages of its electricity to be generated from renewable energy each year, with 20 percent by 2015. Since California and Nevada requirements were implemented, one 20 megawatt-geothermal plant in Nevada, which has gone on line, and geothermal developers have signed contracts for three plants in California for as much as 260 megawatts of future geothermal power, which can be attributed to RPSs. Nevada utilities currently are not meeting their annual RPS requirements. Officials from two large California utilities told us that they are interested in purchasing electricity generated from geothermal resources specifically because of RPS and noted that the RPS may be instrumental in constructing a new transmission line from the Imperial Valley to utilities in southern California. Additional state programs also provide tax credits and other financial incentives for renewable energy development, including electricity generation from geothermal resources. These incentives include property tax incentives, sales tax incentives, and business tax credits. For example in California, eligible geothermal developers can be awarded supplemental energy payments from the state if they have a contract for electricity at above market costs with one of California’s three investor-owner utilities. In Nevada, state law exempts from local sales and use taxes the sale, storage, and consumption of products or systems designed to generate electricity from renewable resources. In Utah, the purchases of equipment to generate electricity from renewable resources are excluded from state sales tax. Both Nevada and Oregon do not count the value added by renewable energy systems when assessing property taxes. Oregon also offers a business energy tax credit of up to 35 percent of the cost of certain renewable energy projects, including geothermal systems. DOE and the state of California provide financial assistance and grants to the geothermal industry in trying to overcome technical challenges. At DOE, the Geothermal Technologies Program’s mission is to work in partnership with U.S. industry to establish geothermal energy as an economically competitive contributor to the U.S. energy supply. Several goals of the program include reducing the cost of geothermal development to 5 cents per kilowatt-hour by 2010 and increasing electrical capacity from geothermal resources to 40,000 megawatts by 2040. The program seeks to accomplish these goals by competitively awarding cost-shared grants to industry for research and development. The program’s budget was $25.3 million in fiscal year 2005. In the past, program funds have been used to pioneer new drill bits, demonstrate the large scale use of binary technology, produce new seismic interpretation methods, commercialize geothermal heat pumps, develop slimhole (reduced diameter) drilling for exploration, and produce a strategy for reinjection at The Geysers. Within the program, an initiative called GeoPowering the West provides technical and institutional knowledge on opportunities to use geothermal resources and on how to overcome challenges. Goals of this initiative are to increase the number of homes using geothermal energy to 7 million by 2010 and to double the number of states producing geothermal electricity to eight by 2006. California provides financial and technical support for geothermal development through grants under two programs administered by the California Energy Commission. Under the Geothermal Resources Development Account, grants are competitively awarded to promote research, development, demonstration, and commercialization of geothermal resources in California. Funding is provided from a portion of the federal geothermal royalties disbursed to the state. The program’s costs are shared with awardees. One noteworthy project funded by the program was the piping of treated wastewater from Santa Rosa, California, to The Geysers, where it was injected into the geothermal reservoir, increasing reservoir pressure and boosting electricity production by an estimated 10 percent. For California’s fiscal year 2006, $3.9 million in funding is available for 12 to 15 projects. The state’s Public Interest Energy Research Program also funds awards for renewable resource projects, including geothermal projects. Money comes from a surcharge on California residents’ electricity bills. Of the $62 million collected by the state in 2005, $2 million was available for geothermal projects. The Act may also address transmission challenges by providing FERC with new authorities in permitting transmission facilities and in developing incentive-based rates for electricity transmission in interstate commerce. FERC can now approve new transmission lines in certain instances in a “national interest electric corridor” when a state fails to issue a permit within 1 year of a company’s filing of an application. The Act also authorizes companies that obtain FERC permits for transmission facilities to acquire rights of way through eminent domain proceedings. In addition, the Act directed FERC to develop incentive-based rates for transmission of electricity in interstate commerce to promote increased investments in transmission. Within 1 year of passage of the Act, FERC is to issue a rule establishing incentive based rates. In November 2005, FERC initiated the rulemaking process for establishing these rates. Several planning initiatives are aimed at addressing challenges to transmission. In the West, a number of regional entities composed of state public utility commissions, local governments, utilities, and others are working on transmission planning. These entities include Southwest Transmission Expansion Planning, the Northwest Transmission Assessment Committee, and the Rocky Mountain Area Transmission Study. Certain utilities are also being proactive. The Los Angeles Water and Power District is proposing that the City of Los Angeles spend $240 million to help construct or upgrade a transmission line from the Salton Sea, an area rich in geothermal resources near the Mexican border, to the Los Angeles area. Similarly, San Diego Gas and Electric is proposing a new transmission line from the Imperial Valley to its service area. Provisions within the Act are aimed at streamlining or simplifying the federal leasing system, principally by mandating competitive geothermal lease sales every 2 years, by combining prospective federal lands into a single lease, and by improving coordination between DOI and the Department of Agriculture, which manages lands in the National Forest System. Since companies can nominate tracks of federal land for sale, some geothermal companies see the competitive sale provision as a mechanism to jump start leasing in areas where it has stalled in recent years. BLM officials speak positively of both this provision and the provision that allows combining prospective lands into a single lease, saying that these provisions make it more likely that companies with the financial resources to develop the lands can do so. The Act also requires the Secretary of the Interior and the Secretary of Agriculture to enter into a memorandum of understanding that establishes an administrative procedure for processing geothermal lease applications and that establishes a 5-year program for leasing of Forest Service lands and reducing its backlog of lease applications, as well as establishing a joint data retrieval system for tracking lease and permit applications. A senior official with the Forest Service’s Geothermal Program said that, since the Forest Service already has a memorandum of understanding with BLM, drafting the new memorandum should not be difficult. The Act also contains provisions that simplify federal geothermal royalties on resources that generate electricity and simplify and or reduce royalties on resources put to direct use. For electricity production, the Act defines three types of leases and provides different incentives for each. For the first type—leases that currently produce electricity—the Act allows lessees to negotiate a royalty rate equal to a percentage of gross sales revenues, instead of using the significantly more complex process known as “netback.” For the second type of lease—those that were issued prior to the Act and will first produce electricity within 6 years following the Act’s passage—lessees can elect for the first 4 years of production to pay 50 percent of the royalties that would have been due. For the third type of lease—those that have not yet been issued—lessees will pay according to a schedule in which royalties are equal to certain percentages of gross sales revenues. In addition, the Act significantly changes royalties due in the future on direct use applications. The Act directs the Secretary of the Interior to establish a schedule of fees, in lieu of the current complicated system, that encourages the development of direct use resources. BLM’s 5-year strategic plan for its geothermal program also attempts to address some challenges to federal leasing. The plan calls for annual workforce planning documents to reflect the skills and staffing necessary to implement an active geothermal program. A BLM official within the Geothermal Program said that this provision will allow the state and field offices to identify current budgetary needs so that they can process geothermal applications and permits in a timely manner. The strategic plan also calls for BLM to develop an inspection and enforcement plan, which it currently does not have. Such a program could help in ensuring that the federal government collects the correct royalty revenues from the sale of electricity generated from geothermal resources. Under provisions of the Act, geothermal royalties retained by the federal government will be cut in half because half of the royalties that originally were retained by the federal government will now have to be disbursed to the counties in which the federal leases are located. Although provisions within the Act may change the royalties due on specific types of leases, the overall revenue impact of these provisions should be minor if electricity prices remain relatively stable and if the Secretary of the Interior relies on past royalty histories in determining future royalties. However, it is not possible to predict with reasonable assurance how electricity prices will change in the future, and price changes could significantly impact future royalty collections if they are not accounted for in royalty calculations. A royalty provision of the Act redistributes the federal royalties collected from geothermal resources—cutting in half the overall geothermal royalties previously retained by the federal government. Set by the Geothermal Steam Act of 1970, as amended, the prior distribution provided for 50 percent of geothermal royalties to be retained by the federal government and the other 50 percent to be disbursed to the states in which the federal leases are located. The Act changes this disbursement. While the Act provided that 50 percent of federal geothermal royalties will continue to be disbursed to the states in which the federal leases are located, an additional 25 percent will now be disbursed to the counties in which the leases are located, leaving only 25 percent to the federal government. The Act also changes how the federal government’s share of geothermal royalties can be used. Prior to passage of the Act, 40 percent of the federal government’s share was deposited into the reclamation fund created by the Reclamation Act of 1902, and 10 percent was deposited into the general fund of the Department of the Treasury. For the first 5 fiscal years after passage of the Act, the federal government’s share is now to be deposited into a separate account within the Department of the Treasury that the Secretary of the Interior can use without further appropriation and fiscal year limitation to implement both the Geothermal Steam Act and the Act. DOI officials explained that some of these funds could be used for activities such as issuing geothermal leases, conducting environmental reviews, collecting geothermal royalties, and inspecting geothermal leases. Despite several provisions of the Act that alter the amount of royalties due on both the generation of electricity and direct use operations, federal geothermal royalties could remain about the same, but only if electricity prices remain stable. However, electricity prices are not possible to predict with certainty, and price changes could significantly impact royalty revenues on electricity sales, which account for about 99 percent of total geothermal royalty revenues. The Act contains provisions for each of three specific types of leases that generate electricity: (1) leases that currently produce electricity, (2) leases that were issued prior to passage of the Act and will first produce electricity within 6 years following the Act’s passage, and (3) leases that have not yet been issued. There is also a provision in the Act that replaces the current method of calculating royalties due on direct use operations with a schedule of fees that shall encourage the development of geothermal resources. Since direct use royalties accounted for less than 1 percent of total geothermal royalties from 2000 through 2004, the financial impact of the switch to a schedule of fees is likely to be minimal. For leases that currently produce electricity, the Secretary of the Interior is to seek to collect the same level of royalties over the next 10 years but under a simpler process. Prior to passage of the Act, lessees of 13 of the 15 geothermal electricity projects paid federal royalties according to a provision within MMS’s geothermal valuation regulations referred to as the “netback process.” To arrive at royalties due under this process, lessees are to first subtract from the electricity’s gross sales revenue their expenses for generation and transmission and then multiply that figure by the royalty rate specified in the geothermal lease, which is from 10 to 15 percent. The Act simplifies the process by stating that within the 18 months after the effective date of the final regulations issued by DOI, lessees who were producing electricity prior to passage of the Act have the option to request a modification to their royalty terms. This modification allows for royalties to be computed as a percentage of the gross sales revenues from the electricity so long as this percentage is expected to yield total royalty payments equal to what would have been received for comparable production under the royalty rate in effect before passage of the Act. MMS has already implemented a procedure similar to this provision for the two projects that produce electricity at The Geysers, setting their future royalties equal to a percentage of gross sales revenues based largely on past royalty histories and future projections. Royalty revenues from a geothermal lease currently producing electricity will remain the same if the lessee elects not to convert to the new provision within the Energy Policy Act. In this case, the lessee will continue to calculate and pay royalties just as the lessee did before passage of the Act. Royalty revenues from a geothermal lease currently producing electricity should also remain about the same if the lessee does convert to the simpler method of calculating royalties in the Act, provided that DOI negotiates with the lessee a future royalty percentage based on past royalty history and provided that electricity prices remain relatively constant. This situation is illustrated in table 4, which uses data based on actual royalty data from a geothermal project on federal lands. According to table 4, the lessee pays royalties equal to $20,000 under the netback process. Royalties are equal to the production of 8,000 megawatt hours times the sales price of $100 per megawatt hour less $600,000 in expenses times the statutory royalty rate of 10 percent. Figures in table 4 represent averages over a 5- year period and show that royalties are equal to 2.5 percent of gross sales revenue. If production remains the same and if electricity prices average $100 per megawatt hour, future royalty revenues will remain the same whether royalties are calculated under the netback process or if royalties are calculated at 2.5 percent of gross sales revenues. However, if electricity prices increase and royalties are based on historic percentages of gross sales revenues, royalty revenues will actually decrease relative to what the federal government would have collected prior to passage of the Act. More revenue would have been received under the netback process because expenses for generation and transmission do not increase when electricity prices increase and the higher 10 percent statutory royalty rate would have applied to all of the increase in sales revenues. This impact is illustrated in table 5. Using the historic average of 2.5 percent computed in table 4, the royalties will actually be $12,000 less than what would have been collected under the netback process when the average price increases by $20 per megawatt hour. On the other hand, if average electricity prices drop by $20 per megawatt hour, royalty revenues will increase by $12,000 relative to what would have been collected under the netback process. For the second type of lease—leases that were issued before the Act and that will first produce electricity within 6 years after the Act’s passage— royalty revenues are likely to drop somewhat because lessees are likely to take advantage of an incentive within the Act. The Act allows for a 50 percent decrease in royalties for the first 4 years of production so long as the lessee does not elect to pay royalties based on a percentage of gross sales revenues and continues to use the netback process. Because of the substantial reduction in royalties, it is likely that lessees owning leases issued before passage of the Act will elect to pay only 50 percent of the royalties due on new production for the 4-year period allowed by the Act. This incentive also applies to sales revenues from the expansion of a geothermal electricity plant that exceeds 10 percent. Owners of geothermal electricity plants currently paying royalties under the netback process may elect to take the production incentive for new plant expansions if they perceive that the royalty reduction is worth the additional effort and expense in calculating payments under the netback process and worth the possibility of being audited. BLM officials said that leases in Utah, California, and Nevada may become subject to the royalty reduction provisions within the Act for new production and new plant expansions. It is difficult to predict exactly how royalty revenue from the third type of lease—leases that have not yet been issued—will change, but it appears that revenue impacts are likely to be minor, based on our review of historic royalty data. The Act specifies that the Secretary of the Interior should seek to collect the same level of royalty revenues over a 10-year period as before passage of the Act, but it will be difficult for DOI to compare an estimate of what royalty revenue would have been without the Act with royalty revenues after the Act because the production and expenses of future plants could vary substantially due to their unique geological, engineering, and economic attributes. The Act provides that, for future leases, royalties on electricity produced from federal geothermal resources should be not less than 1 percent and not greater than 2.5 percent of the sales revenue from the electricity generated in the first 10 years of production. After 10 years, royalties should be not less than 2 percent and not greater than 5 percent of the sales revenue from the electricity. We attempted to analyze the revenue impact on future leases by using historic royalty data maintained by MMS and sales revenue data maintained by BLM. A detailed description of our methodology is in appendix II. First, we attempted to analyze revenue impacts on the first 10 years of electricity production, but we had difficulty obtaining relevant royalty data so we could not complete this analysis. Next, we examined the impact on royalties after the first 10 years of production by analyzing data for seven geothermal projects from 2000 through 2004. In analyzing royalty data, we found that MMS did not maintain gross sales revenue data so we used data that BLM supplied to MMS. We also found that 40 percent of the royalty data maintained by MMS was erroneous or missing so we corrected or obtained these data as necessary. We then calculated royalties paid as a percentage of gross sales revenues for each project. This analysis showed that lessees were paying a wide range of percentages—from 0.2 to 6.3 percent. Three of the seven projects paid under the minimum 2 percent royalty rate prescribed in the Act, suggesting that some projects in the future could pay more under the Act’s new provisions than they would otherwise have paid. On the other hand, one project paid greater than the maximum 5 percent prescribed in the Act, suggesting that it is possible for a plant to pay less in the future than it would otherwise have paid. However, both the royalty revenue that the one plant would have overpaid and the total of the royalty revenues that the three plants would have underpaid are small—about 0.2 percent and 0.01 percent, respectively, of all geothermal royalties reportedly paid during the period of our analysis. Even though provisions within the Act may decrease royalties on direct use applications, the impact of these provisions is likely to be small because total royalty collections from direct use applications are minimal. In fiscal years 2000 through 2004, MMS reported collecting annually about $79,000 from two direct use projects, or less than 1 percent of total geothermal royalties. In addition, MMS reported collecting an additional $222,000 during this period in settlement for royalties owed on a direct use project from 1987 through 2003. While a provision within the Act may encourage the use of federal geothermal resources for direct use by lowering the federal royalty rate, we believe based on challenges facing developers that it is unlikely that this royalty incentive alone will stimulate substantial new revenues to compensate for the loss in revenue due to the lower royalty rate. We believe that, in order to substantially increase the development of federal direct use applications, developers must overcome the relatively high capital costs for investors, unique business challenges, and water rights issues. MMS does not routinely collect meaningful data on the revenue from electricity sales. Since the Act requires the Secretary of the Interior to seek to achieve the same level of royalty revenues when issuing new royalty regulations, these data are necessary to know how future royalties will compare with what would have been collected before passage of the Act. To make these comparisons, MMS needs to calculate the percentage of gross sales revenues that lessees pay in royalties. MMS requires royalty payors to record sales revenue data on Form MMS-2014 under the data field “sales value.” MMS’s Geothermal Payor Handbook instructs royalty payors using the netback method to record in this field its net sales revenue, which is equal to gross sales revenues less deductions for expenses such as generation and transmission. As such, this sales value cannot be used as one of the factors to calculate the percent of gross sales revenues paid in royalties. In preparing an analysis for the Royalty Policy Committee, MMS obtained gross sales revenue data from BLM for many of the geothermal projects. While BLM regulations require geothermal plant operators to report to BLM the amount of electricity produced, these regulations do not require the reporting of gross sales revenues. Nevertheless, BLM officials said that they collect the sales revenue data. BLM officials in Nevada and southern California reported examining the production and gross sales revenue data for reasonableness and patterns in order to check on the accuracy of royalty reporting. A BLM official also reported collecting sales revenue and production data at The Geysers in northern California, but he said that BLM lacked the resources to examine these data and was unable to compile these data either for MMS or for us. These data from The Geysers are important because they represent about 61 percent of total federal geothermal royalties. Some royalty data from The Geysers were obtained and audited by the state of California, but an MMS official said that it would be more efficient and timely if MMS collects gross sales revenue data directly, rather than having to ask BLM or the states for these data. The official also said that MMS could use the gross sales revenue data in the future to conduct general compliance audits by comparing the percent of gross sales revenue paid in royalties with percentages prescribed within the Act and by examining trends in the data, without having to undertake lengthy and expensive on-site visits to the geothermal plants. The Energy Policy Act of 2005 addresses a wide variety of challenges facing developers of geothermal resources. The Act incorporates many of the lessons learned by state governments and federal agencies in an attempt to make federal processes more efficient and provide financial incentives for further development. However, the Act is new and insufficient time has passed to assess its effectiveness. Several of the Act’s major provisions will be left to the federal agencies within DOI for implementation, and the drafting and public comment period for regulations that implement these provisions will take time. Agencies will also need to spend considerable time and effort in working out the details for implementation and securing the necessary budgets to implement the new system. To assist in these efforts, the Congress has authorized the agencies to use the federal government’s share of royalty collections to implement the geothermal program for 5 years. All the while, the Act directs the Secretary of the Interior to seek to maintain the same level of geothermal royalty revenues over the next 10 years as would have been collected prior to the Act. This is a tall mandate, as one of the factors that can most affect geothermal royalty revenue—the price of electricity—is outside the control of the managing agencies. Although it is impossible to predict with reasonable assurance how these prices will change in the future, the federal agencies must make their best effort to mitigate the impact of changing prices if federal royalty revenue are to remain the same. This mitigation can only be achieved if there is timely and accurate knowledge of the revenues that lessees collect when they sell electricity. Without such knowledge, MMS will have difficulty collecting the same level of royalties from lessees that elect to use the new royalty process. To assist in achieving the same level of geothermal royalties as would have been collected prior to the Energy Policy Act of 2005, we recommend that the Secretary of the Department of the Interior instruct the appropriate managers within the Minerals Management Service to take the following two actions: Correct erroneous and missing royalty data, when necessary, so that it will have an accurate baseline of royalty collections for each payor; and Routinely collect from royalty payors the gross sales revenues for electricity sold in order to compare these revenues with past royalty collections and to verify compliance with the percentages prescribed within the Act for leases to be issued in the future. We provided a draft of this report to the Department of the Interior for review and comment. DOI provided written comments, which are presented in appendix II. DOI agreed with our recommendations and emphasized the importance of correct and relevant data in fulfilling the requirement to collect the same level of geothermal royalties as would have been collected prior to the Energy Policy Act of 2005. Specifically, DOI stated that MMS plans to take steps to correct erroneous and missing royalty data, including initiating an audit and directing payors to correct data. DOI also stated that MMS is drafting new geothermal regulations as part of implementing the Act and that these regulations will refer to instructions that require payors to report to MMS the gross sales revenues for electricity sold. MMS also provided several technical comments that we have incorporated in the report. As agreed with your office, unless you publicly announce the contents of this report earlier, we plan no further distribution until 15 days from the report date. At that time, we will send copies to other interested congressional committees. In addition, we will send copies of this report to the Secretary of the Interior, the Director of BLM, the Director of the Minerals Management Service, the Secretary of the Department of Agriculture, the Chief of the Forest Service, and the Secretary of Energy. We also will make copies available to others upon request. In addition, the report will be available at no charge on the GAO Web site at http://www.gao.gov. If you or your staff have any questions about this report, please contact me at (202) 512-3841 or [email protected]. Contact points for our Offices of Congressional Relations and Public Affairs may be found on the last page of this report. Key contributors to this report are listed in appendix III. In this report, we discuss (1) the current extent and potential for geothermal development; (2) challenges faced by developers of geothermal resources; (3) federal, state, and local government actions to address these challenges; and (4) how provisions of the Energy Policy Act of 2005 (Act) are likely to affect federal geothermal royalty collections. To describe the current extent and potential for geothermal development, we reviewed key studies on the extent and potential of geothermal development that were published by the Department of Energy, the California Energy Commission, the U.S. Geological Survey, the Western Governors’ Association, the Geo-Heat Center at the Oregon Institute of Technology, the Geothermal Energy Association, and the state of Utah. We contacted and visited the authors of the studies prepared by the Department of Energy in Golden, Colorado; the California Energy Commission in Sacramento, California; and the Geo-Heat Center in Klamath Falls, Oregon. We also visited the Geothermal Resources Council in Davis, California. We obtained statistics on federal geothermal leases from the Bureau of Land Management (BLM) and data on geothermal heat pumps from the Geothermal Heat Pump Consortium, the Department of Energy’s Geothermal Technologies Program, and the General Services Administration. To identify the challenges facing geothermal developers and to assess actions taken by federal, state, and local governments, we interviewed a variety of government and industry officials, reviewed substantial supporting documentation and the Act, and visited geothermal facilities. We interviewed BLM officials in Washington, D.C.; California; Nevada; and Utah, as well as Forest Service officials in Washington, D.C.; Minerals Management Service (MMS) officials in Lakewood, Colorado; and Department of Energy officials in Washington, D.C.; and Golden, Colorado. We contacted state officials in California, Nevada, and Idaho. We also interviewed geothermal industry representatives in Washington, D.C.; California; Nevada; and New Mexico and toured geothermal electricity plants in California and Nevada and direct use facilities, including heating districts, food processing plants, greenhouses, aquaculture operations, and a spa in Idaho, Nevada, Oregon, and Colorado. Specifically to assess financial challenges faced by the geothermal industry, we also interviewed officials with public utilities and officials who specialize in arranging financing for geothermal plants. In assessing challenges specific to federal lands, we also reviewed processes for approving lease applications and conducting environmental analyses under the National Environmental Policy Act of 1969; examined federal regulations addressing leasing, geothermal operations, and royalty valuation for both electricity production and direct use; and read the 148-page Geothermal Valuation Handbook. To assess how provisions within the Act will affect federal geothermal royalties, we interviewed MMS employees in Lakewood, Colorado, and BLM employees in California, Utah, and Nevada and reviewed a report authored by the Royalty Policy Committee. We reviewed in detail how provisions of the Act address the disbursement of federal geothermal royalties and specifications for geothermal royalty collections from leases that are currently producing electricity, leases that will first start to produce electricity within the 6 years following passage of the Act, and leases that have not yet been issued. To assess how provisions of the Act could impact royalty revenue from the sale of electricity, we started by trying to obtain monthly geothermal royalty data and sales revenue data from MMS for January 2000 through December 2004 for 10 geothermal projects paying royalties according to the netback process. We discovered that MMS does not require payors to submit gross sales revenue data but instead collects these data from BLM. We assessed whether MMS’s royalty data and BLM’s sales revenue data were complete enough and accurate enough for MMS to determine what percentage of gross sales revenues is equivalent to the current level of royalties being paid, should lessees elect to convert to paying a percentage of gross sales revenues, as allowed by the Act. We reviewed MMS’s and BLM’s data for reasonableness and completeness. While we found BLM’s data to be reasonably complete and accurate for the 10 geothermal projects, we found that BLM could not furnish us with sales revenue data for the 2 steam projects at The Geysers Geothermal Field in northern California. We also found that about 40 percent of the monthly royalty data maintained by MMS for the 10 projects was missing or erroneous. The most common error, accounting for 73 percent of erroneous and missing data, was not paying the 0.1 percent minimum royalty required by MMS regulations. This error did not result in significant monetary underpayments; monthly underpayments for this type of error generally amounted to less than $500. After assuming that the correct royalty due was 0.1 percent of net sales revenue for those months in which underpayments were less than the minimum royalty calculation, we determined that royalty data was reasonably accurate and complete for January 2000 through December 2004 for 6 of the projects and for January 2003 through December 2004 for one additional project. In assessing revenue impacts from leases that were currently issued and producing electricity, we considered MMS’s past history of approving royalty calculations based on a percentage of gross sales revenues at The Geysers. We also reviewed MMS’s calculations of the percentages of gross sales revenues that appear in the report to the Royalty Policy Committee. Based on these considerations, we assumed that MMS could determine a percentage of gross sales revenues equal to what would have been collected prior to the Act if electricity prices do not change. We also determined the impact of changing prices on royalty revenues as illustrated in table 5. In assessing revenue impacts from leases that were currently issued and not producing, we contacted BLM officials to ascertain the likelihood for these leases to first start producing in the next 6 years and the likelihood of producing leases to expand their production by more than 10 percent. We also discussed with industry officials their opinions on paying royalties according to the netback process. To assess how royalty collections from future leases could be impacted, we began to examine royalty data from the first 10 years for the 15 federal geothermal projects, all of which first started producing prior to 1987. We abandoned this attempt after conversing with MMS officials. MMS officials noted that contracts for the sale of electricity prior to 2000 were different and would probably not be representative of future situations. In addition, sales in the 1980s often involved the sale of geothermal resources such as steam and hot water rather than electricity, complicating the use of MMS’s royalty data. Although some industry officials said that their projections suggest that royalties during the first 10 years of a project’s life are substantially less than the royalties during the remainder of the project’s life, we could not verify this estimate without actual royalty data. To assess how royalty collections from future leases could be impacted 10 years after they first produce, we proceed with examining royalty data for 7 of the projects from our original sample of 10 geothermal projects. We calculated royalties as a percentage of gross sales revenues from January 2000 through December 2004 and compared their range with the range of percentages prescribed within the Act for production after the first 10 years. We also compared royalties as the percentages of gross sales revenues for five of the flash plants with royalties as a percentage of gross sales revenues for two of the binary plants. We found that flash plants paid royalties from 0.6 to 6.3 percent of gross sales revenues while binary plants paid from 0.2 to 2.6 percent of gross sales revenues. It appeared to us that each project, whether flash or binary, faces unique geological, economic, and engineering situations that can combine to yield different percentages of gross sales revenues. In addition, the small number of observations and the significant overlap in range of the data indicated to us that generalizations about the difference in percentages between the two types of plants would be inaccurate. To determine the impact of the Act on royalties from direct use of geothermal resources, we obtained direct use royalty data from MMS and reviewed the calculations on an alternative to the current calculation of direct use royalties that appears in the report to the Royalty Policy Committee. In addition to the individual named above, Dan Haas, Assistant Director; Jeanne Barger; Ron Belak; John Delicath; Randy Jones; Frank Rusco; Anne Stevens; and Barbara Timmerman made key contributions to this report. | The Energy Policy Act of 2005 (Act) contains provisions that address a variety of challenges that face the geothermal industry, including the high risk and uncertainty of developing geothermal power plants, lack of sufficient transmission capacity, and delays in federal leasing. Among the provisions are means to simplify federal royalties on geothermal resources while overall collecting the same level of royalty revenue. The Act also changes how these royalties are to be shared with local governments (disbursements). This report describes: (1) the current extent of and potential for geothermal development; (2) challenges faced by developers of geothermal resources; (3) federal, state, and local government actions to address these challenges; and (4) how provisions of the Act are likely to affect federal geothermal royalty disbursement and collections. Geothermal resources currently produce about 0.3 percent of our nation's total electricity and heating needs and supply heat and hot water to about 2,300 direct use businesses, such as district heating systems, fish farms, greenhouses, food-drying plants, spas, and resorts. Recent assessments conclude that future electricity production from geothermal resources could increase by 25 to 367 percent by 2017. The potential for additional direct use businesses is largely unknown because the lower temperature geothermal resources that they exploit are abundant and commercial applications are diverse. One study has identified at least 400 undeveloped wells and hot springs that have the potential for development. In addition, the sales of geothermal heat pumps are increasing. Developers of geothermal electricity plants face many challenges including a capital intensive and risky business environment, developing technology, insufficient transmission capacity, lengthy federal review processes for approving permits and applications, and a complex federal royalty system. Direct use businesses face unique business challenges, remote locations, water rights issues, and high federal royalties. The Act addresses many of these challenges through tax credits for geothermal production, new authorities for the Federal Energy Regulatory Commission, and measures that streamline federal leasing and that simplify federal royalties, which totaled $12.3 million in 2005. In addition, the Department of Energy and the state of California provide grants for addressing technology challenges. Furthermore, some state governments offer financial incentives, including investment tax credits, property tax exclusions, sales tax exemptions, and mandates that certain percentages of the electricity within the state be generated from renewable resources. Under the Act, federal royalty disbursement will significantly change because half of the federal government's share will now go to the counties where leases are located. Although the Act directs the Secretary of the Interior to seek to maintain the same level of royalty collections, GAO's analysis suggests this will be difficult because changing electricity prices could significantly affect royalty revenues. Also, MMS does not collect sales data that are necessary to monitor these royalty collections. |
Since 1979, when the United States and China signed a bilateral trade agreement, China’s economy has grown at an unprecedented rate, as has China’s bilateral economic engagement with the United States. In recent years, China’s economy grew an average of 10 percent a year, and in 2010 China replaced Japan as the world’s second largest economy. Total U.S.-China trade increased from $2 billion in 1979 to $536 billion in 2012. China is currently the second largest U.S. trading partner, the third largest U.S. export market, and the largest source of U.S. imports. The governments of the United States and China have established two important bilateral dialogues—the JCCT and S&ED, which discuss and resolve trade and investment matters, including reducing trade barriers for U.S. firms and investors. (See figure 1 for the organization of the JCCT and the S&ED.) According to senior U.S. officials, the United States also engages with China at all levels of government in other bilateral interactions, such as formal and informal conversations at U.S.-China summits. In addition, the two governments discuss trade and investment issues in multilateral forums, such as the WTO and the Asia-Pacific Economic Cooperation (APEC) forum. The JCCT, established in 1983, is the main bilateral dialogue for addressing trade matters and promoting commercial opportunities between the two countries. Since 2004, the U.S. Secretary of Commerce, the U.S. Trade Representative, and China’s Vice Premier for foreign trade have co-chaired the JCCT. The dialogue, which has multiple working groups focusing on specific issue areas, operates year-round and culminates in an annual plenary meeting that alternates between the United States and China. The two most recent JCCT plenary meetings took place in December 2012 in Washington, D.C., and in December 2013 in Beijing, China. The S&ED, established by the Presidents of the United States and China in April 2009, represents the highest-level bilateral dialogue to discuss a broad range of issues between the two nations. The S&ED addresses bilateral, regional, and global economic and strategic issues, both medium and longer term. Under the S&ED, the two sides meet once a year, alternating between Washington, D.C., and Beijing. The fifth S&ED meeting was held in Washington, D.C., in July 2013. The S&ED has strategic and economic tracks; the U.S. Secretary of State and China’s State Councilor for foreign affairs co-chair the strategic track, and the U.S. Treasury Secretary and China’s Vice Premier for foreign trade co- chair the economic track. From 2006 through 2008, the S&ED was preceded by the SED, in which the two governments discussed the most important economic, but not political, issues in the bilateral relationship. The S&ED’s economic track has four pillars, one of which focuses on trade and investment, and addresses short, medium, and longer term economic issues. In setting S&ED priorities, the Department of the Treasury (Treasury) and the National Security Staff lead an interagency process, working closely with the Department of Commerce (Commerce), the Office of the U.S. Trade Representative (USTR), and other agencies, on trade and investment issues. According to Treasury officials, discussions of S&ED economic track issues continue throughout the year between the annual plenary meetings. Agencies report the outcomes of the JCCT and S&ED dialogues through public statements in the form of fact sheets that present commitments made by the United States and China. These fact sheets are issued following the conclusion of the JCCT and S&ED annual meetings. Commerce and USTR issue a JCCT fact sheet following the JCCT annual meeting; Treasury issues jointly with China an S&ED fact sheet for the economic track that presents the joint commitments negotiated by the United States and China following the S&ED annual meeting. Treasury also issues a U.S. fact sheet that discusses the benefits of the commitments for U.S. workers and companies. The Department of State (State) issues the fact sheet for the S&ED strategic track. According to senior U.S. agency officials, these fact sheets outline the official commitments negotiated with the Chinese government. In addition to reporting commitments, the JCCT and S&ED fact sheets have in recent years included sections that identify cooperative or exchange activities between the United States and China. (These are referred to as “cooperative activities” in JCCT fact sheets and “institutional arrangements” in S&ED fact sheets.) According to Commerce officials, JCCT cooperative activities are undertaken with the goal of advancing U.S. priorities and are often crucial for developing successful policy commitments from China. They may involve discussions with public and private sector participants focusing on issues or areas at the pre-commitment level. For example, in 2009, China and the United States held a program, pursuant to JCCT commitments, with public and private participants to discuss legal liability for intellectual property rights infringement that occurs on the Internet. There were JCCT commitments related to this issue in 2010 and 2012 that resulted, according to U.S. officials, in the Supreme People’s Court’s publication of a judicial interpretation stating that those who facilitate online infringement will be held jointly liable for that conduct. Similarly, the S&ED allows for activities, such as consultations or technical exchanges, that are separate from commitments but allow the two sides to engage in a dialogue on a range of issues. For example, in 2012 the United States and China agreed to expand technical exchanges under the U.S.-China Transportation Forum and enhance coordination under the APEC framework. China has made 298 trade and investment commitments since 2004 in the JCCT and S&ED, ranging from statements affirming open trade principles to statements that focus on trade actions specific to a sector. The prominence of issue areas across the commitments differs between the dialogues, reflecting differences in the dialogues’ structure and focus. Some commitments reaffirm prior commitments and some commitments acknowledge progress since the previous year’s meeting. We identified 184 commitments in the JCCT since 2004 and 114 trade and investment commitments in the S&ED since 2007 that involve China or China and the United States. The commitments include statements affirming open trade principles, statements of policy intent, and statements that focus on trade actions specific to a sector. U.S. officials stressed that not all commitments are of equal value and significance. We examined the JCCT and S&ED commitments to provide an overview of their areas of emphasis and other characteristics. We identified 11 issue areas to characterize the content of each commitment, including sector-specific issues. Fifty-four percent of the JCCT commitments and 48 percent of the S&ED trade and investment commitments were related to two or three issue areas. See figure 2 for the list of issue areas and number of commitments related to each issue area. Table 2 in appendix I describes each issue area and provides examples of commitments. At the JCCT, a large share of commitments are related to intellectual property rights (62 commitments or 34 percent) and technical and regulatory barriers to trade (45 commitments or 24 percent). China has made commitments related to both of these issue areas every year since 2004, with at least 20 percent of commitments related to intellectual property rights and at least 10 percent of commitments related to technical and regulatory barriers to trade. In addition, 110 commitments (or 60 percent of all China’s JCCT commitments) refer to a specific sector, including 28 commitments related to pharmaceuticals and medical devices, 19 commitments related to agriculture, and 18 commitments related to software use. For the S&ED, 70 percent of the trade and investment commitments are related to one or more of the following three issue areas: investment (30 commitments or 26 percent), multilateral issues (26 commitments or 23 percent), and transparency (24 commitments or 21 percent). Differences in the number of commitments associated with specific issue areas across the two dialogues may reflect differences in the dialogues’ structure and focus. According to U.S. officials, the JCCT has had greater focus on bilateral trade issues and sectors, in contrast with the S&ED, where trade and investment issues have been discussed within a broader range of economic and strategic issues. In addition, our analysis shows that statements of joint actions by China and the United States are more common at the S&ED (75 percent). According to Treasury officials, this reflects the broad economic focus and cross-cutting discussions of the S&ED’s economic track. The majority of China’s JCCT commitments (76 percent) involve China alone. Commitments in the two dialogues generally do not specify timeframes although according to U.S. officials, many commitments are either expected to be implemented by the next annual meeting or are considered to be ongoing. According to Commerce officials, that would be the case, for example, for a commitment by China to provide fair treatment to foreign investors. According to Treasury officials, in the S&ED the two sides work under the general assumption, unless stated otherwise, that each year’s S&ED commitments are to be implemented by the next S&ED meeting. Some JCCT and S&ED commitments do specify a timeframe. Of the commitments we identified, timeframes were specified in 17 percent of China’s 184 JCCT commitments and 18 percent of China’s 114 S&ED trade and investment commitments. For example, at the 2011 JCCT meeting, China agreed to publish procedures for telecommunications network access license and radio type approval by the end of 2011. At the 2013 S&ED meeting, China committed to submit a new revised offer to join the WTO’s Government Procurement Agreement (GPA) by the end of 2013. Our analysis shows continuity of issues and objectives pursued at the two dialogues from 2004 through 2013. Some specific commitments have been made repeatedly, while others have evolved. Within S&ED issue areas, some commitments have been reaffirmed over time. For example, in investment—which is associated with 26 percent of China’s S&ED trade and investment commitments—the United States and China committed to bilateral investment treaty negotiations each year, with commitments becoming increasingly specific. The 2013 commitment stated that the bilateral investment treaty will provide national treatment at all phases of investment, including market access (“pre-establishment”), and be negotiated under a “negative list” approach.” In another example, China repeatedly affirmed its intent to follow the generally accepted principles and practices of sovereign wealth funds. Other commitments illustrate how efforts to address trade barriers in an issue area or sector have evolved over time. For example, the United States has secured multiple commitments in both the JCCT and S&ED concerning the terms under which China will accede to the GPA. These have become increasingly specific, moving from initially seeking China’s commitment to submit a revised accession offer to subsequently seeking commitments related to the specific elements of such an offer. USTR reported U.S. concerns with each offer in its annual National Trade Estimate Reports on Foreign Trade Barriers (NTE) for 2011 through 2013: At the May 2010 S&ED, China committed to submit a revised offer to accede to the GPA by July of that year, which it did. However, USTR reported that China could improve its next offer by, among other things, including sub-central entities and certain state-owned enterprises. At the December 2010 JCCT, China committed to submit a second revised offer—whose content would be based on intra-governmental consultations on the entities to be subject to the agreement—to join the GPA before the WTO Committee on Government Procurement’s final meeting in 2011. USTR reported that China submitted the offer but that it excluded too many state-owned enterprises. At the May 2012 S&ED, China committed to submit a new comprehensive revised offer that responded to the requests of the GPA parties to the WTO Committee on Government Procurement before the committee’s final meeting in 2012. China submitted its third revised offer in November 2012. China’s commitments in software have also evolved over time. We identified 22 software-related commitments—18 in the JCCT beginning in 2004 and 4 in the S&ED beginning in 2011. In 2004, China committed to extend an existing ban on the use of pirated software in central and local governments. This commitment continued in subsequent years with the inclusion of state-owned enterprises in 2006. In 2010, China committed to establish software asset management systems for government agencies and to allocate budgetary funds for purchasing, upgrading, and replacing agency software, and in 2012, China confirmed that it required state- owned enterprises to use legitimate software. In the S&ED, China committed to strengthening inspections to ensure legitimate government software use in 2011 and to extending software management pilot projects to the enterprise sector in 2012. U.S. agencies track the implementation of commitments through various means including interactions with their Chinese counterparts and outreach to industry. U.S. agencies identified JCCT working groups and mid-year reviews, discussions with Chinese officials while developing joint fact sheets prior to S&ED meetings, U.S. industry associations and companies, and U.S. officials based in China as key sources for information on progress. U.S. agencies use several tracking documents that capture information on the status of some commitments over time and do not have a single document that encompasses either dialogue. In addition, U.S. agencies have sought to identify commercial metrics such as increased sales to use as indicators of implementation progress where possible, but cited challenges in identifying appropriate data. U.S. agencies collect information on the status of commitment implementation through several means, including ongoing engagement with their Chinese counterparts in preparation for meetings, and regular outreach to domestic stakeholders. One important source of tracking information is the 16 JCCT working groups. The working groups each comprise U.S. and Chinese officials; some focus on specific industries, such as steel, and some on trade issues such as intellectual property. According to U.S. agency officials and documents, the JCCT has added working groups in response to changes in the trade relationship—for example, adding the Trade and Investment Working Group which covers a range of trade and investment issues. U.S. agencies obtain updated information on implementation status from their Chinese counterparts at working group meetings. For example, Commerce and USTR officials received information from working group meetings about Chinese actions taken to shut down websites selling counterfeit medicines, in response to 2010 and 2011 JCCT commitments. Intellectual Property Rights working group officials stated that their working group has been instrumental in following the implementation of commitments to reduce end-user piracy of software by government agencies and state-owned enterprises. The Office of Science and Technology Policy (OSTP) tracks implementation of commitments China makes at the Innovation Dialogue which are part of the overall S&ED commitments. Established in 2010 at the request of the U.S. and Chinese leaders of the S&ED, the Innovation Dialogue is a forum to share best practices in promoting innovation. The dialogue established a working group of U.S. and Chinese private sector experts and government officials, which monitors implementation of commitments and advises on barriers to successful implementation. U.S. government officials also analyze commitment implementation while preparing the joint fact sheet for the coming year’s S&ED plenary meeting, according to Treasury officials. Treasury solicits and compiles input from key U.S. federal agencies on their priorities, which it exchanges with its Chinese counterparts. They then negotiate the wording of the joint fact sheet. This process can identify information on the status of past commitments, as well as in some cases on follow-on commitments. USTR and Treasury officials stated that participants actively negotiate JCCT commitment language immediately before and during the JCCT plenary meetings, and Treasury officials said that joint fact sheet language is also actively discussed during the time of the S&ED plenary meetings. In addition, in 2010, the United States and China instituted a mid-year review within the JCCT as an additional tool to track commitment implementation and to prepare for annual plenary meetings. According to a USTR official and our review of mid-year review agendas, the review focuses on selected priority commitments from the previous year and proposing outcomes for the upcoming plenary. U.S. officials observed that discussions of the status of particular commitments take place across a wide range of settings aside from those directly related to the JCCT and S&ED. Treasury officials stated that they follow up on the implementation of certain types of S&ED commitments in various meetings with their Chinese counterparts, citing government procurement issues as particularly relevant for discussions with their counterparts at the Ministry of Finance, which leads on the issue. One agency cited mechanisms for engaging their Chinese counterparts, such as memoranda of understanding with provisions related to implementation of JCCT commitments. U.S. reports cited forums such as WTO standing committees and the APEC forum as examples of meetings where JCCT and S&ED trade and investment commitment implementation may be discussed. For example, according to WTO documents, China reported to the WTO Committee on Government Procurement that it expected to submit a revised offer on government procurement to the committee before the end of 2013, consistent with its 2013 S&ED commitment. U.S. agencies obtain information on implementation status from U.S. industry and U.S. officials abroad. U.S. officials based in Washington told us they work with U.S. industry associations and companies in developing information on an ongoing basis on China’s implementation progress. For example, USTR solicits written submissions from interested parties through the issuance of Federal Register notices issued in conjunction with the preparation of annual mandated reports. U.S. officials based in China provide information on implementation status in reporting to headquarters while preparing annual mandated reports on trade issues, such as the Special 301 Report (on intellectual property rights protection) and the NTE. Embassy staff submits cables on key issues that include discussions of the status of trade barriers raised in the JCCT. U.S. officials serving in China obtain feedback from industry representatives based in that country. For example, locally based industry representatives provided information to U.S. embassy officials that China had effectively implemented a 2009 JCCT commitment to eliminate redundant medical device product recall regulations. According to Treasury officials, they regularly solicit government and industry sources for information on S&ED priorities in preparation of and after each dialogue. U.S. agency officials stated that they use various documents to track the status of implementation over time and that there is no single, consolidated document or system that captures the status of implementation of JCCT or S&ED commitments. USTR officials said that the preparation of documents used to brief senior officials in advance of formal meetings—such as annual plenary meetings, mid-term reviews, and ad hoc high level meetings between U.S. and Chinese officials—is one of the processes used for tracking the status of implementation. According to representatives of the JCCT’s Intellectual Property Rights working group, briefing papers, together with other sources, also serve as a useful record of the status of implementation, and can help to facilitate knowledge transfer in the event of personnel turnover. According to Commerce officials, a Commerce staff person, designated to help coordinate Commerce’s JCCT activities, maintained a spreadsheet for the official’s own use in tracking follow-up on China’s JCCT commitments. The official used the spreadsheet to identify actions taken on the commitments made in the current year and to facilitate briefing senior officials in advance of meetings. Commerce officials stated that this spreadsheet is not an interagency document and does not constitute a department or interagency position on the status of implementation of commitments. Some policymakers and private sector representatives have asked the administration to use commercial metrics (e.g., exports and sales) to track commitment implementation where possible. According to a senior agency official, framing commitments in terms of commercial results such as increased sales can focus attention on the ultimate goal of increased exports rather than on individual trade barriers, which may be removed but replaced by different trade barriers. Although agency officials identified one JCCT or S&ED commitment directly linking a commercial metric (increased sales) to implementation, they cited the difficulty in identifying appropriate commercial metrics generally. In a 2012 S&ED commitment concerning intellectual property- intensive industries, the United States and China committed to create environments for their respective markets in which the level of sales of legitimate intellectual property-intensive products and services would increase in line with the two countries’ status as globally significant producers and consumers. In addition, officials indicated that it is easier to measure implementation of commitments that entail concrete and transparent legal actions – such as enactment of a law or other measure, or accession to a treaty – than to measure implementation of commitments to reaffirm existing policies or to a general policy direction. USTR includes information in nine reports on trade barriers generally and efforts to address them, but does not provide comprehensive information to Congress and the public on the status of implementation of JCCT and S&ED trade and investment commitments. The reports focus on various aspects of trade barriers and market access and have different areas of focus and structures. Our analysis of selected commitments indicated that reporting on implementation status is not comprehensive because the reports are sometimes not clear and complete. This lack of comprehensive information makes it more difficult for policymakers to understand the progress made by the implementation of these commitments in removing trade barriers. USTR reports on the status of trade barriers and market access broadly through nine reports, which it identified as the source for public information on JCCT and S&ED commitment implementation. In its strategic plan for fiscal years 2013 through 2016, USTR identifies these reports as important for building congressional support for the administration’s trade agenda by helping Congress gain a comprehensive understanding of the efforts the administration undertakes to dismantle trade barriers. Further, it characterized the reports as important to the agency’s commitment to transparency and accountability to Congress and stakeholders. In addition, the administration has identified the work of these bilateral dialogues in removing trade barriers in China as critical to the success of the national goal of doubling exports by the end of 2014. The nine reports respond to statutory requirements and have different focuses and structures. The China WTO Compliance report, the only one focusing solely on China trade issues, examines the status of commitments made by China in connection with its accession to the WTO. Since 2008, the China WTO Compliance report has included a section on bilateral engagement that describes the outcomes for the present year; information on the status of past commitments is not included in that section but can be found in other sections of the report. Others among the nine reports have a worldwide scope and may include information on a specific sector, trade barrier, or policy area, including information on China and on the JCCT and S&ED commitments where appropriate. Section 1377 Review of Telecommunications Agreements, for example, focuses on trade barriers in a specific sector and the NTE identifies key barriers to U.S. trade and describes barriers in a number of countries. Table 1 provides an overview of the nine reports. USTR officials told us that the WTO Compliance report is the primary report on the status of the implementation of commitments, and the other eight reports contain additional information on some commitments. USTR prepares these nine reports with assistance from Commerce, Treasury, and other agencies on the Trade Policy Staff Committee. Such assistance includes reporting from U.S. embassies, reviewing drafts to ensure accuracy and, in the case of the China WTO Compliance and Special 301 reports, holding public hearings to obtain private sector views. For instance, a senior Treasury official told us that Treasury participates in the preparation of the China WTO Compliance report by reviewing a draft for accuracy. In addition to this public reporting, Commerce, USTR, and Treasury officials stated that they inform stakeholders on the status of implementation through briefings to industry associations and to members of Congress and their staffs, participation in congressional hearings, and briefings to the trade advisory committees. Further, agency officials said they have briefed Congress repeatedly on broader U.S. engagement with China. Agency officials told us that while they did not generally provide reports to accompany the briefings, they may bring fact sheets, remarks, and recent speeches; we did not identify additional regular documentary reporting on the status of implementation of JCCT and S&ED commitments beyond the public reports. Our review of reporting on implementation status revealed challenges to obtaining clear and comprehensive information. For some commitments, the reports lack information on the status of implementation and for some the reporting is not clear. Additionally, differences in the formats of the reports make locating information on a given commitment or issue area across reports difficult in some cases. The lack of detailed information on China’s progress in implementing certain commitments makes it difficult for Congress and other stakeholders to fully understand the progress the United States is making in reducing trade barriers. Our analysis found several instances of incomplete reporting on the status of specific commitments related to market access barriers in sectors, such as software, and in cross-cutting areas such as industrial policy. For example, We identified 9 commitments from the 2008-2011 JCCT, and 1 from the 2011 S&ED related to software legalization. Based on our analysis of the nine reports identified above, we were not able to clearly identify the implementation status of most of these specific commitments. For example, USTR has not reported on whether China has increased resources devoted to conducting audits and inspections as it committed to do at the 2011 JCCT. A second software legalization example illustrates a lack of clarity across reports on implementation status. At the 2011 JCCT, China committed to complete software legalization programs at the provincial level by the middle of 2012 and to publish the results of its software audits. The 2013 NTE report indicated that, because of a lack of published information, USTR could not verify that China had completed a program to ensure provincial governments used legal software. However, the 2013 Special 301 report, issued a month later, stated that China had completed the program. In addition to the difference regarding completion status of the legalization program at the provincial level, it is unclear whether China has implemented its related commitment to publish the results of audits. Thus, it cannot be determined whether the gap in implementation is one of program completion or one of reporting. There has not been reporting on implementation of commitments concerning certain Chinese industrial policies. Specifically, at the 2011 JCCT, China committed to ensure open and transparent processes for developing standards for smart-grid products and technologies. USTR has not reported on the status of implementation of this commitment, despite having a specific report that describes progress in greenhouse gas reducing technologies. The greenhouse gas reports issued in 2012 and 2013 do not describe the steps taken in the JCCT regarding this issue. USTR has not reported on the implementation of some commitments made by China related to its use of technical standards to favor domestic suppliers. In the 2011 JCCT, China reported on the development and publication of revised safety standards for medical devices, acknowledged the value of closer cooperation with the United States on those standards, and committed to participate in an information exchange program with the United States in 2012. The status of that commitment was not addressed in either the 2012 or 2013 reports. Reporting on implementation of China’s commitments to reform state- owned enterprises has been incomplete. In the 2010 S&ED, China committed to continue its reform of these entities by, among other actions, inviting non-public and foreign investors to take equity stakes in them. China also committed at the 2010 JCCT that all enterprises in China, including state-owned enterprises, will make purchases and sales based solely on commercial considerations. As part of that same commitment, it committed to leave such decisions to those entities and to provide equal treatment to public and private enterprises. USTR has not reported on the status of implementation of these commitments in any of the nine trade-related reports. In addition to incomplete or unclear reporting on the status of implementation of some commitments, differing report structures make it difficult in some cases to obtain information across reports. For example, we found reporting relevant to a 2010 S&ED commitment on new energy technologies discussed in the import barriers section of the NTE report’s chapter on China, whereas the WTO Compliance report discussed it under investment. Similarly, with respect to a 2012 JCCT commitment by China to issue a catalogue for the purchase of official use vehicles, the WTO Compliance report discussed the commitment in the intellectual property rights section, and the NTE report discussed it in a newly created category for the China chapter of the report, “Indigenous Innovation, Technology Transfer and Strategic Emerging Industry Barriers.” In interviews and documents, agency officials emphasized the need to balance reporting on the status of implementation of commitments with the requirement to avoid disclosures that would disadvantage the United States in ongoing consultations. For example, in the NTE report, USTR indicates that it does not provide estimates of the impact of trade barriers that are the subject of ongoing consultations to avoid disrupting them. In the case of the trade agenda, USTR may submit classified information to Congress in confidence, if it deems necessary. The absence of clear and complete reporting on the status of implementation of commitments makes it difficult for policymakers to gain a comprehensive understanding of the progress made toward reducing trade barriers through the implementation of commitments from the dialogues. Moreover, accountability is reinforced through public reporting of agency results and, if appropriate, confidential reporting to Congress. China has made a significant number and wide array of commitments to the United States in the JCCT and S&ED, high-level bilateral U.S.-China dialogues which address trade issues. While information on the commitments is available from agency fact sheets, information on the status of implementation is not presented in a manner that provides a comprehensive understanding of China’s overall progress in implementing the commitments. Although at least nine reports present information on the status of U.S. efforts to decrease trade barriers with China, in some cases referencing the JCCT and S&ED, obtaining specific information on implementation status from the reports presents challenges. These nine reports aim to provide a comprehensive picture of the administration’s efforts to address trade barriers through consultative mechanisms such as the JCCT and S&ED. Without comprehensive reporting—easily accessible in one location and complete—it is difficult for external parties to understand the progress being made in removing barriers to this very important export market through bilateral dialogue. More consolidated and complete information on the status of China’s implementation of its JCCT commitments and S&ED trade and investment commitments would give policymakers a better basis to identify areas of success or failure. To improve policymakers’ and the public’s understanding of progress through bilateral dialogues in increasing access to China’s markets, we recommend that the U.S. Trade Representative, in conjunction with the Secretary of Commerce and the Secretary of the Treasury, work to provide clearer and more comprehensive reporting on the status of China’s implementation of its JCCT and S&ED trade and investment commitments. This reporting should include more complete information on the status of implementation of these commitments, as well as a more clearly identified source for consolidated information, which could be an existing report. We provided a draft of this report to Commerce, USTR, Treasury, State, USDA, and OSTP. Commerce and USTR provided written comments which are reproduced in appendixes II and III. Commerce, USTR, Treasury, USDA, and OSTP provided technical comments which we incorporated as appropriate. Neither Commerce nor USTR directly agreed or disagreed with our recommendation. Commerce stated that it would take GAO’s ideas and findings under careful consideration, but expressed concern regarding our conclusion that lack of comprehensive reporting makes it difficult for external parties to understand progress made in bilateral trade dialogues with China. It further observed that assessments of reporting needs should include consideration of resource requirements. We agree that resource considerations are a key factor in agency approaches to reporting, but believe that steps to make information on commitment implementation status more comprehensive and accessible can be taken. USTR stated that it welcomed GAO’s suggestions and would consider them carefully, but identified several concerns. First, USTR expressed its view that some commitments are more noteworthy than others and counting and categorizing commitments can be misleading when used as the basis for conclusions about the relative significance of issue areas. We agree that not all commitments are of equal significance and reflected that view in our draft report. We believe, however, that summary quantitative information is one useful tool for conveying information about the issues addressed in these dialogues. USTR commented that the report’s discussion of agencies’ tracking of the implementation of China’s commitments is generally accurate, but stated that the role of U.S. stakeholders such as industry associations and companies is not adequately reflected in the report. We agree that such organizations are an important source of information on commitment implementation and have added additional information in the report to reflect their role. With respect to U.S. agency reporting on commitment implementation, USTR stated that in its view the Administration’s written reporting currently provides congressional policymakers and other stakeholders comprehensive information on China’s implementation of JCCT and S&ED commitments, and stated that it also meets with those parties on these issues. It stated that not all JCCT and S&ED commitments warrant discussion in the reports, but acknowledged that GAO’s analysis identifies commitments whose implementation status should be reported on and has not been. Based on extensive analysis of agency reporting on the implementation of these commitments, we concluded that information on the status of commitments made in these bilateral dialogues with China is not complete and easily accessible, which can make it difficult for policymakers to identify areas of success and failure and assess options for moving forward. We recognize that meetings with policymakers and stakeholders are also an important part agency communication on these issues. We are sending copies of this report to the appropriate congressional committees; the U.S. Trade Representative; the Secretaries of Commerce, the Treasury, State, and Agriculture; the Director, Office of Science and Technology Policy; and other interested parties. The report also is available at no charge on the GAO website at http://www.gao.gov. If you or your staff has any questions about this report, please contact David Gootnick at (202) 512-3149 or [email protected]. Contact points for our Offices of Congressional Relations and Public Affairs may be found on the last page of this report. Key contributors to this report are listed in appendix IV. In this report, we (1) describe the commitments China made at the Joint Commission on Commerce and Trade (JCCT) and the trade and investment commitments China made at the Strategic and Economic Dialogue (S&ED), (2) describe U.S. agency tracking of China’s implementation of these commitments, and (3) evaluate U.S. agency reporting on the status of commitment implementation. To conduct this review, we interviewed knowledgeable U.S. government officials from the Department of Commerce (Commerce), the Office of the U.S. Trade Representative (USTR), the Departments of the Treasury (Treasury), State (State), and Agriculture (USDA) as well as the Office of Science and Technology Policy (OSTP) in Washington, D.C., and in Beijing, China (via a videoconference). We also interviewed representatives of trade associations and research organizations. To describe the commitments, we conducted a detailed review of the fact sheets issued at the conclusion of annual meetings at the JCCT from 2004 through 2012, the S&ED from 2009 through 2013, and the SED from 2006 through 2008. Commerce and USTR issue a JCCT fact sheet; Treasury issues jointly with China an S&ED fact sheet for the economic track that presents the joint commitments negotiated by the United States and China. (Treasury also issues a U.S. fact sheet that discusses the benefits of the commitments for U.S. workers and companies.) According to senior Commerce, USTR, and Treasury officials, the fact sheets present the commitments negotiated between the U.S. and Chinese governments. In addition to presenting the commitments, the fact sheets also contain details of cooperative activities between the two countries. We used the joint fact sheets for our analysis of China’s S&ED commitments because, according to senior officials, they reflect the two governments’ understanding of the results of the S&ED plenary meeting. For the S&ED, we limited our analysis to China’s commitments in the trade and investment pillar of the dialogue’s economic track. In our analysis, “S&ED commitments” refer to the trade and investment commitments China made in the S&ED in 2009 through 2013 and in the SED in 2007 and 2008. We discussed the fact sheets with cognizant officials from Commerce and USTR, the two agencies that jointly lead the JCCT for the United States, and from Treasury, which leads the S&ED’s economic track for the United States, to obtain an understanding of the information they contain and how they are put together. According to senior USTR officials, the commitments as presented in the fact sheets are high-level political commitments and are the outcomes of the structured dialogues established to address and resolve a range of issues. While the outcomes documents are not legal instruments, the commitments are taken seriously, according to these officials. To identify the commitments, we separated the fact sheet text describing steps taken by China into individual commitments, created a database, and systematically analyzed individual commitments. The fact sheets state China’s commitments, U.S. commitments, and joint U.S-China commitments. We excluded fact sheet text reflecting U.S. commitments, but included statements about commitments made jointly by the United States and China and by China alone. We identified 184 JCCT commitments and 114 S&ED trade and investment commitments. (An inventory of the commitments we identified and their categorization by issue area, described below, is provided in an online e-supplement, GAO-14-224SP.) JCCT fact sheets, written by the U.S. government, are typically written in bulleted form, with each bullet generally considered by us as one commitment. S&ED fact sheets are different in that the precise wording of every commitment is negotiated jointly by the U.S. and Chinese governments. The 2013 S&ED fact sheet listed the trade and investment commitments in bulleted format. Prior to that, the commitments were written in paragraphs that included statements on multiple topics. The JCCT and S&ED fact sheets vary in terms of the number of areas and activities addressed, and in the specificity of the statements. We discussed with U.S. agencies ways to identify and count specific commitments in fact sheets, and determined that there is no single way to do so. For example, an analysis of the S&ED fact sheets for 2009 through 2012 might treat a paragraph as a commitment. We chose to break some paragraphs into multiple commitments, using decision rules that we developed to ensure the consistency and completeness of this exercise. These included whether the paragraph referred to more than one intended action or discrete concept, and whether it specified a deadline. In addition, if the same or similarly worded commitment was made in multiple years, we counted it anew each time. After identifying individual commitments, we categorized them by several characteristics (issue areas, joint or China-only, deadline). We identified 11 issue areas to characterize the content of each commitment after an iterative review of all of the commitments in our database by several analysts. To support development of these categories we used as a reference point categories developed in a previous GAO report on China’s commitments as well as the headers used in JCCT source documents. (S&ED fact sheets do not use headers and sub-headers for the commitments in the trade and investment pillar.) These were adapted and recombined producing a set of categories that took into account the specific language of the specific sets of commitments from recent years and covered both dialogues. See the list of issue areas with descriptions and examples in table 2. We then assessed each commitment for the issue area(s) it covered. Because many commitments covered multiple issue areas, we assigned up to three issue areas to each commitment. Ninety-nine of the 184 JCCT commitments and 55 of the 114 S&ED commitments were associated with two or three issue areas. We identified some commitments that did not fit any of the 11 issue areas and categorized these commitments as “other.” Many commitments, including 110 JCCT and 11 S&ED commitments, were related to specific sectors (see examples for agriculture and software in table 2). We identified 15 sectors: agriculture, distribution/retail, information technology and security, insurance, new energy vehicles, pharmaceuticals and medical devices, postal/courier, shipping, software, steel, telecommunications, textiles, transportation, travel and tourism, and wind power. We discussed this methodology with officials from Commerce, USTR, Treasury, State, and USDA. To ensure the validity of this analysis we performed multiple sets of reviews and checks. Initial testing of subsets of the commitments was done by two analysts and a methodologist. The full analysis of all commitments was performed by two analysts who cross-checked each other’s analysis and reconciled differences through discussion. A methodologist provided a spot-check of the analysis. Finally, the full team met and discussed in detail every commitment to ensure final consensus on the issue area categorization. To describe how agencies track the status of implementation of commitments, we interviewed officials and reviewed documents from Commerce, USTR, Treasury, State, USDA, and OSTP. We also discussed these issues with U.S. embassy staff in Beijing, via videoconference. We discussed with the officials their processes for tracking commitment status, and sought corroborating information where needed. For example, we sought corroborating information from officials concerning their engagement with China in other various bilateral and multilateral forums, and their obtaining input from industry stakeholders and U.S. government officials based overseas. We corroborated this information by reviewing public reports from the outcomes of other diplomatic forums such as minutes from World Trade Organization standing committee meetings and public comments submitted by industry officials in conjunction with agency preparation of public reports. We also reviewed a cable from the 2010 JCCT mid-year review and a cable about the 2010 S&ED annual meeting. Finally, we reviewed agendas for the 2010-2012 JCCT mid-term reviews. We also interviewed industry associations. With respect to the use of tools such as tracking sheets to maintain and share information on commitment implementation, we discussed agency staff-level methods for tracking the status of commitments with officials from Commerce. For contextual purposes, we also discussed with State officials their process for tracking the status of commitments in the strategic track of the S&ED. We discussed with Commerce staff the characteristics and use of a tracking document developed by staff for compiling information on commitment implementation for use in briefing senior officials for key meetings. To evaluate how U.S. agencies report on the status of commitment implementation, we asked agency officials and consulted agency documents to identify relevant public documents and other types of reports they use to inform the public and Congress on the outcomes and status. They identified nine reports that describe administration efforts to reduce trade barriers through negotiations, consultations and dispute settlement, which are identified in the body of this report. To make assessments of the reporting that we identified across the reporting documents, we focused primarily on identifying information that specifically referenced the status of implementation of the commitment by the Chinese government or other relevant Chinese entities. To assess the completeness of the reporting, we examined the nine reports for information on the status of implementation of commitments made in the JCCT and the S&ED in 2010 and 2011 and in additional years—2008 and 2009—related to software legalization. We examined these commitments related to software legalization because intellectual property was a prominent JCCT issue area and we had identified software earlier in our review as a potential illustrative area. For each of these commitments, we reviewed reporting subsequent to when the commitment was made. The assessment included keyword searches of the nine reports.. For example, for a software legalization commitment we performed keyword searches using “software,” “legalization,” and other terms specific to the commitment. We also did a more general reading of reporting language relevant to a given commitment. This analysis was reviewed by a second analyst and any differences the reviewer had with the original analysis were reconciled. We reviewed the congressional budget justifications for Commerce, USTR, Treasury, and USDA to describe how U.S. efforts to track and report on the status of China’s implementation of commitments supported agency and administration goals. We also reviewed comments from industry representatives submitted in conjunction with the preparation of statutory reports. We conducted this performance audit from May 2012 to February 2014 in accordance with generally accepted government auditing standards. Those standards require that we plan and perform the audit to obtain sufficient, appropriate evidence to provide a reasonable basis for our findings and conclusions based on our audit objectives. We believe that the evidence obtained provides a reasonable basis for our findings and conclusions based on our audit objectives. In addition to the individual named above, Celia Thomas (Assistant Director), R. Gifford Howland, Shakira O’Neil, Sada Aksartova, Karen Deans, David Dornisch, Etana Finkler, and Ernie Jackson made key contributions to this report. | China is the largest destination for U.S. exports outside North America and also the source of the largest U.S. bilateral trade deficit. The countries engage in two high-level dialogues to address trade barriers and cross-cutting economic issues. These are the JCCT, co-led for the United States by Commerce and USTR, and the economic track of the S&ED, led by Treasury. GAO was asked to review China's bilateral trade commitments made in these dialogues. This report (1) describes trade and investment commitments China has made at the JCCT and S&ED; (2) describes U.S. agency tracking of China's implementation of these commitments; and (3) evaluates U.S. agency reporting on implementation. GAO analyzed documents, including public fact sheets stating commitments; interviewed officials, industry representatives, and other experts; used a structured process to categorize commitments; and reviewed reports officials identified as reporting implementation status of commitments. GAO identified 298 trade and investment commitments made by China in the U.S.-China Joint Commission on Commerce and Trade (JCCT)—184 since 2004—and the U.S.-China Strategic and Economic Dialogue (S&ED) and its predecessor—114 since 2007. The commitments range from affirmations of open trade principles to sector-specific actions. GAO identified 11 issue areas to characterize the content of each commitment. The prominence of issue areas, measured in number of commitments associated with an issue area, differs between the dialogues, reflecting differences in the dialogues' structure and focus. Intellectual property rights commitments are among those most common in the JCCT and investment commitments are among those most common in the S&ED. (For a detailed inventory of commitments and their categorization, see GAO-14-224SP .) U.S. agencies track commitment implementation through several means, including outreach to domestic stakeholders, issue-based working groups with China in the JCCT, and consultations in advance of S&ED annual meetings. No single document is used to track implementation, according to U.S. officials. In addition, although there have been calls to use metrics such as exports and sales in developing commitments, agencies identified only one such commitment in the dialogues and cited challenges in identifying appropriate data. Although several reports on trade barriers present information on JCCT and S&ED commitments, information on commitment implementation in these reports does not provide a clear and comprehensive picture of progress across the dialogues. The Office of the U.S. Trade Representative (USTR) produces these reports with assistance from other agencies, including the Departments of Commerce (Commerce) and Treasury (Treasury). GAO's analysis of 10 software commitments from 2008-2011 shows, for example, that the implementation status of most could not be clearly identified. More comprehensive reporting would give Congress and other policy makers a clearer understanding of progress and the role of the dialogues as they continue to assess challenges in the U.S.-China relationship. To improve understanding of progress through the bilateral dialogues in increasing access to China's markets, USTR, in conjunction with Commerce and Treasury, should work to improve reporting on China's implementation of JCCT and S&ED trade and investment commitments. In written comments, USTR and Commerce did not directly agree or disagree with the recommendation, but raised several concerns. USTR maintained current reporting is comprehensive and Commerce noted resource constraints. GAO continues to believe improved reporting would benefit policymakers. |
All employers must file their Form 941 returns quarterly, although some are to make employment tax deposit on differing schedules during a quarter. The form contains information concerning the tax deposits made for a quarter and is generally due by the end of the month after the close of the quarter. Until IRS receives and processes the Form 941 returns, it cannot match tax deposits reported on the returns with its records of deposits received. Once it matches this information, IRS notifies employers of any delinquencies using a written notice. This is the employers’ first statutory notice of the delinquency. If the employer fails to respond to this first notice, IRS sends follow-up notices and may later contact the employer by phone or, eventually, make a personal visit. Although this entire process can take years for those employers who do not respond, under IRS’ processing procedures, initial notices are sent within several weeks after IRS receives the Form 941 return. IRS provides a variety of outreach efforts to help employers understand how to meet their tax obligations, many of which are designed to explain requirements and to meet other needs of small business taxpayers. For example, IRS makes tax forms with instructions and publications that explain requirements available to taxpayers in a variety of formats including hard copy, CD-ROM, and electronic form on the Internet. In addition to conducting various workshops and seminars, many of which are tailored to the needs of small businesses, IRS also recently established a Web site specifically designed to address the needs of small business taxpayers. Beginning in September 2001, IRS’ Web site allows employers nationwide to use the Internet to deposit employment taxes via the Electronic Federal Tax Payment System On-Line. Current IRS strategies and program plans call for providing more services to taxpayers, including employers, to prevent noncompliance. To that end, IRS has shifted its focus from addressing compliance issues after returns are filed to addressing them as early as possible, often through efforts to better educate taxpayers about their tax responsibilities and to improve forms, guidance, and other information available to taxpayers. This is consistent with IRS’ strategic objectives to reduce taxpayer burden, uncertainty, and errors by clarifying tax law responsibilities and resolving issues early in the process. IRS believes that its efforts to reduce taxpayer burden will show significant progress over the next 2 years and will be further enhanced by its plans for long-term business systems modernization. To determine how long IRS takes to contact employers after an employment tax delinquency occurs, we analyzed the time between (1) the receipt of a quarterly Form 941 return and IRS’ mailing of an initial delinquency notice, (2) when a Form 941 was due and IRS’ mailing of a delinquency notice when the employer fails to file a Form 941, and (3) when the employers should have deposited employment taxes during a quarter and IRS’ mailing of an initial delinquency notice. For all three situations, we interviewed cognizant officials from IRS’ Small Business and Self-Employed Division (SB/SE), IRS’ National Office, and various field offices, and we obtained related documentation. To determine the time between when a Form 941 return was due but not filed and IRS’ mailing of initial delinquency notices and the time between when an employer fails to make a deposit during a quarter and IRS’ mailing of a notice, we relied on the flowchart of IRS’ processes and associated timeframes that we developed. We confirmed our summaries of IRS’ processes and related timeframes necessary to notify employers of delinquencies with appropriate IRS officials at the National Office, Atlanta Service Center and the Martinsburg Computer Center. IRS did not have data in its BMF One Percent Sample File that we could use to estimate these timeframes. To determine the length of time between when IRS receives the Form 941 return and the issuance of the initial notice to the employer, we analyzed data extracted from IRS’ Business Master File (BMF). The data we used in this time analysis was extracted from an IRS data file entitled the BMF One Percent Sample File. IRS uses this data file to perform its own analysis of BMF information and to verify system performance and output. IRS considers the results of analysis from the BMF One Percent Sample data to be valid and uses the data file to perform comparable analyses, however it does not use the data file to make estimates projectable to the entire BMF. In addition, because we did not have access to taxpayer data, we were not able to independently verify taxpayer information contained in the data file. IRS officials did not have programming resources available to extract a random sample of employment tax-related delinquencies from the BMF, thus IRS’ BMF One Percent Sample File provided the best alternative for obtaining the data for the time analysis. In providing delinquent employment tax information for the time analysis, IRS extracted Form 941 return records and associated transaction date information from the BMF One Percent Sample File. After removing the employee identification numbers (EIN) from the file, IRS provided us with a file containing transaction date information for the delinquent Form 941 returns selected. The data used in the time analysis reflects taxpayer account information from the BMF as of September 2001. For tax years 1999 and 2000, over 66,000 account records were used in the analysis. About 25,000 records were eliminated from the time analysis because they were not posted to the BMF as normal Form 941 quarterly returns. We also developed flowcharts to describe IRS’ processes and associated timeframes for initially contacting delinquent employers to further validate the BMF sample timeframe analysis; and verified the accuracy of the flowchart with IRS officials. we reviewed and analyzed statistical information related to employment taxes—including the number of Form 941 returns filed based on amounts paid to determine the frequency of deposits. We also reviewed and analyzed IRS employment tax-related collection policies and procedures, obtained relevant publications and instructions, and reviewed relevant IRS web pages and related reports. To identify IRS’ current employment tax intervention programs and program evaluation efforts, we interviewed appropriate IRS officials within SB/SE and other operational groups who identified the following four intervention programs: Mentoring and Monitoring, Federal Tax Deposit (FTD) Soft Letter, ABC’s of FTDs, and FTD Alert Program; and obtained and discussed pertinent program documentation including plans, progress reports, and schedules with IRS officials. To determine IRS’ plans under modernization as they related to employment tax intervention and evaluation efforts, we interviewed and discussed with cognizant IRS officials IRS’ business system modernization efforts; and obtained and reviewed relevant documentation including IRS’ Strategic Plan (Fiscal Year 2000-2005), and 2000 Progress Report-IRS Business Systems Modernization Program . You expressed interest in the level of resources IRS uses to contact taxpayers with employment tax delinquencies. We researched this by interviewing IRS officials and reviewing past reports by IRS and us. On the basis of this work, we advised you that IRS’ financial and data systems do not collect or produce such specific information. Currently, IRS cannot isolate the resources it uses to notify employers having employment tax delinquencies for specific form types such as the Form 941 return. As a result, you suggested that we not pursue the resource issue at this time. You also expressed interest in whether there are intervention programs and initiatives in use at other federal agencies or relevant nonfederal organizations that could serve as best practice models for IRS. We are not reporting on this topic because during our review of eight federal agencies and five state tax authorities we did not find any intervention programs or initiatives that could serve as best practice models. The primary reason for this is that many of the organizations under review had significantly different procedures than IRS for formally identifying a delinquency. For example, these organizations often have shorter collection cycles than IRS which enables them to notify delinquent parties in less time than IRS. IRS’ collection cannot begin until after it receives the quarterly Form 941 returns. This review primarily focuses on IRS’ intervention efforts as they relate to the initial notification of employment tax delinquencies. In addition, the review covers IRS’ efforts to intervene with taxpayers in order to educate and inform them of their tax obligations and to expedite compliance. The review did not cover IRS’ subsequent enforcement and collection activities such as contacting delinquent employers through IRS’ Automated Collection System (ACS) or contacts made by IRS’ collection representatives in the field. We performed our work from June 2000 through December 2001 in accordance with generally accepted government auditing standards. The time IRS takes to notify employers of deposit or return delinquencies and the amount of interest and penalty assessed is affected if employers fail to meet two major employment tax responsibilities. Employers must make periodic employment tax deposits during each quarter and file Form 941 returns by the last day of the month following the close of each calendar quarter. The periodic deposits made throughout the quarter are subsequently reported on the Form 941 returns. Filing these returns is crucial because IRS determines compliance by matching its accounting records of deposits made throughout the quarter with the deposit information reported on the return. Consequently, failure to file Form 941 returns necessitates additional IRS processing and can further delay employer notification of delinquencies thus increasing employers’ interest and penalty charges. Based on IRS data and our discussions with IRS officials, we found the following: Our analysis of IRS’ data containing delinquent employment tax accounts shows that IRS took an average of about 5 weeks from the date the Form 941 returns were filed to notify employers of a missed, late, or underpaid deposit. Based on our analysis of the steps IRS follows to detect and notify employers of a failure to file a 941 return, which we confirmed with IRS officials, we found that IRS normally takes from 14 to 28 weeks. During the first two quarters of the calendar year, individual return processing demands affect the time IRS takes to process these notices. Following a similar analysis confirmed by IRS, we found that when employers have delinquent deposits, IRS notification reaches most employers from 3 to 23 weeks from the due date of the delinquent deposit the exact time is primarily dependent upon when the deposit involved was due. From the employers’ standpoint, the date of any missed or underpaid deposit is important because IRS computes interest and penalties from the date of the delinquent deposit. Our analysis of IRS’ delinquent employment tax data indicates that once IRS receives Form 941 returns, it takes about 5 weeks to notify employers of employment tax delinquencies. The time required to notify employers is contingent on the date that employers file their Form 941 returns and the ensuing IRS processing workload. Employers generally have until the end of the month after the quarter closes to file their returns. During calendar years 1999 and 2000, IRS received and processed about 5.7 million Form 941 returns per quarter. Using the 4th quarter of calendar year 2000 as an example, IRS service centers began receiving and processing Form 941 returns in mid-January 2001, although most were received in the surge of returns arriving at IRS service centers following the due date of January 31. Figure 1 shows the multiple steps involved in IRS’ weekly batch processing of the Form 941 returns and the related time frames for each step of processing 4th quarter returns. When employers fail to file Form 941 returns, IRS takes longer to notify them because it first processes timely-filed returns before it begins to identify missing returns. In that regard, we found that IRS normally takes from 14 to 28 weeks after the due date to notify employers of their failure to file a Form 941 return. IRS officials concurred with that timeframe for IRS to notify employers of these delinquencies. IRS officials added that the time variance is due to differences of tax quarter workloads with the heaviest workload falling in the first two quarters of the calendar year. In response to increased workloads, IRS prioritizes the processing of taxpayer notices by notifying employers with the greatest liability and with repeated return delinquencies first. These notices do not assess penalties or interest against the employers but rather advise them that IRS has not received the Form 941 returns and ask the employers for explanations. For employers who also have failed to deposit taxes due, interest and penalties continue to accrue until they become compliant. Although the receipt date of the Form 941 returns is key to IRS’ processing and employer notification, interest and late penalties accrue from the date of the employers’ delinquent deposits. Accordingly, delinquent deposits from early in a quarter will result in higher interest and penalties than delinquent deposits from later in the quarter. Employers owing smaller amounts of employment taxes are allowed to make less frequent deposits. As shown in table 1, in calendar year 2000, about 71 percent of employers owed employment taxes of $50,000 or less annually and could make deposits on a quarterly or monthly basis. Conversely, 29 percent of employers owing more than $50,000 annually had to deposit employment taxes more frequently. Employers who are in this deposit category made 95 percent of the total employment tax deposits. Beginning January 1, 2001, more employers were allowed to pay employment taxes quarterly as opposed to monthly or more frequently. From that date, employers owing less than $2,500 (rather than $1,000) could pay when they file their returns, reducing employer burden and decreasing the chance for delinquencies and other mistakes. Had this change been in effect during calendar year 2000, the number of employers depositing quarterly would have increased from about 19 percent to about 37 percent. Because these employers pay when they file their Form 941 return, interest and penalties have less time to accrue before they receive a notice concerning delinquencies. Therefore, these depositors would be subject to less interest and penalty than employers who fail to make deposits during the quarter before the form 941 return is due. A reduction in the frequency of required deposits can decrease the amount of time that interest and penalties can accrue. However, for employers who are required to deposit employment taxes more frequently than either monthly or quarterly, missing or underpaying their first payment in the quarter allows interest and penalties to accumulate for a longer period of time. Table 2 shows the interest and penalty consequences for a hypothetical monthly depositor and a depositor who pays more frequently during the quarter, both of whom miss their first and last deposit due in the 4th quarter. The table demonstrates the increased interest and penalty amounts for missing deposits early in the quarter for both types of depositors. It also shows that the impact is greater on depositors who pay more frequently, as their deposits are due earlier in the quarter. If employers fail to respond to the initial notice of a delinquency, interest and penalty amounts can pyramid. For example, if employers fail to deposit the correct amount within 10 days of receiving the notice, the penalty increases from 10 to 15 percent of the delinquent deposit. Interest continues to accrue until the deposit is paid. Generally, the late pay penalty can accumulate up to 25 percent of the delinquent amount. Had these employers also failed to file Form 941 returns, they would be subject to an additional penalty of 4.5 percent per month, which could also compound to 22.5 percent. IRS has developed several specific programs designed to intervene with employers to help prevent employment tax delinquencies and reduce the pyramiding of additional tax, interest, and penalty charges. IRS officials identified four programs that specifically seek to intervene with employers to prevent or reduce delinquent employment taxes: (1) Mentoring and and (4) FTD Alert. While the first three programs are in various stages of completion, the fourth is an established program that is undergoing changes intended to improve it. To evaluate the effectiveness of these programs, IRS planned to compare compliance rates of test and control groups and to use customer surveys and focus groups. IRS has experienced difficulties in completing performance evaluations for such reasons as time delays in obtaining the data required to determine the programs’ effectiveness. The programs and IRS’ evaluations of them are discussed below. Mentoring and Monitoring Program. This pilot program is IRS’ largest recent effort to prevent employment tax delinquencies among new employers. Under the program new employers are given special educational materials at the time they receive their employer identification number and some of these new employers receive follow-up monitoring. IRS conducted this pilot program for more than 13,000 new employers in four states (Kansas, New Mexico, Oklahoma, and Texas). The 2-year program began in August 1999, and IRS expects to complete its evaluation in early 2002. IRS sent the special educational materials to two separate test groups of new employers and offered additional services to the ones IRS considered at higher risk of noncompliance. Every employer in the test groups received educational materials that included a videotape, entitled “ABC’s of FTDs;” a workbook concerning FTD requirements; and other information to help new employers. Nearly 7,000 employers in test groups considered higher risk were offered additional monitoring services, which included assigning a Small Business Representative to act as a mentor to to answer questions, provide forms and publications, and remind employers of deposit and filing requirements during monthly monitoring calls. Of the 1,716 employers that initially accepted IRS’ offer of these services, about 800 remained in this part of the program at the time it was discontinued in July 2001. IRS planned a two-pronged evaluation, using customer surveys for the test group and a comprehensive evaluation of compliance data comparing the test and control groups. In contrast to the special materials and services provided the test groups, employers in the control groups received only the letter IRS normally sends when new employers request an EIN. IRS planned to mail customer surveys to test employers in fiscal year 2000, directly after the educational materials were delivered and the monitoring services were under way. These surveys were designed to obtain the views of test employers on the program materials and other services, but the surveys were never conducted because of a lack of funding. As of October 2001, IRS had awarded a contract to have focus groups conducted in place of the customer surveys; however, the focus groups were not expected to be completed until mid-January 2002. The delays between the time that materials and services were received and the time focus groups were to provide their opinions could affect the usefulness of their responses. IRS also plans to evaluate this program by comparing the compliance rate of various risk categories of employees among the test group employers and with corresponding categories within the control groups. Although it has been delayed, IRS plans to begin evaluating the compliance data for the test and control groups when they become available in late fall 2001. The data will include such information as deposits made, returns filed, delinquencies and resulting notices sent, and FTD penalties assessed. The analysis of these data, along with a cost-benefit summary will be included in the business analysis case that will be prepared to support recommendations about the program’s future. In an August 2001 audit report on the results of its review of the Mentoring and Monitoring pilot, the Treasury Inspector General for Tax Administration (TIGTA) reported that the program should help new business taxpayers with their federal employment tax responsibilities. TIGTA expressed concerns, however, about the program’s sampling methodology, cost-effectiveness, and level of management oversight and raised certain questions about expanding it nationwide at this time. Among other things, TIGTA recommended that SB/SE Division management should provide oversight for the remainder of the project, including the planned business case analysis of the compliance results achieved under the pilot. FTD Soft Letter. This pilot program seeks to improve employers’ voluntary compliance through intervening much earlier than IRS’ long- standing FTD Alert Program allows. The FTD Soft Letter was sent only to employers required to make deposits more frequently than monthly and who appeared to have underpaid tax deposits during the quarter. Before their quarterly Form 941 return was due, IRS sent these employers a letter advising them of the potential discrepancy. IRS sent letters only to those employers identified nationwide who had historically been compliant but were assessed an FTD penalty in one of the past four quarters and paid it but appeared to have made smaller than expected tax deposits in the current quarter. In October 2000, IRS sent a soft letter to 1,806 employers nationwide who met the criteria. The letter included a phone number they could call to request assistance, and a tear-off portion to notify IRS if they were no longer in business or had no employees. In response, 339 of the 1,806 informed IRS that their businesses were defunct or no longer had employees. IRS originally planned to evaluate the compliance of the test group against a control group of similar employers that had not received a soft letter. IRS was to begin the evaluation in January 2001, with the final report due by July 2002. As of October 2001, IRS had not begun the evaluation, and no decision had been made on whether or not to proceed with it. According to IRS officials, evaluation plans were disrupted as the result of IRS’ ongoing reorganization. In that regard, responsibility for the soft letter program was transferred from the now defunct Small Business Lab to the SB/SE Division, established in October 2000. Although the program was transferred in early 2001, IRS did not assign formal program responsibility to the division until August 2001. In October 2001, newly assigned program officials decided to evaluate the program to determine the program’s effectiveness and possible future use. Current plans call for a report based on four quarters of compliance data to be completed by April 2002. The ABC’s of FTDs. This 2-hour class on FTD, including videotape entitled “The ABC’s of FTDs” and a course workbook, was designed to assist employers who experienced difficulties in staying compliant with their federal tax deposit obligations. Employers were invited to attend classes that were held in September 1998, February 1999, and June 1999 in the Seattle metropolitan area. If employers attended the class and remained compliant for two subsequent quarters, IRS excused them from paying up to three tax quarters of the FTD penalties they had previously incurred. However, only 28 of 315 employers invited to attend classes actually did so, according to IRS data. To analyze the pilot program, IRS established both a test group consisting of those employers who attended the educational classes and received the materials and various control groups that did not. IRS had planned to track payment compliance for these groups through June 2001, but instead concluded the evaluation in June 2000, using compliance data from five quarters. IRS’ evaluation of the program revealed that employers made more FTD deposits and filed fewer delinquent returns after attending the classes; however, IRS could not attribute these improvements to class attendance. The evaluation made several other points regarding the program: Low class attendance diminished the impact of the program. The test group tended to make more deposits than the control groups, even before they were invited to attend. The employers who attended chose to come and, therefore, may have been more motivated to be compliant. The evaluation made several recommendations that have apparently not been acted upon. The educational videotape and course workbook also were used, however, as part of the Mentoring and Monitoring program materials in an effort not only to educate employers but also to further evaluate the materials’ effectiveness. As previously discussed, however, the evaluation of this program, expected to be completed in mid-January 2002, is to be based on input from employer focus groups held more than a year after IRS’ originally planned customer surveys. FTD Alert. IRS’ FTD Alert program has existed since 1972 and is intended to improve overall employment tax compliance. The current program’s selection criteria identifies only those depositors who owe more than $50,000 per year, have delinquencies resulting in FTD penalties in recent quarters, and appear to have underpaid the current quarter. If the employers have FTD penalties in the four previous quarters, IRS Revenue Officers are required to contact them to help them understand deposit requirements and the cost and consequences of not depositing as required. Although the program provides IRS with an opportunity to intervene with these employers concerning their delinquencies, several aspects of the program have been criticized. IRS is in the early stages of addressing these weaknesses, as discussed below. Over the years, both our reports and IRS internal audit reports have been critical of several aspects of the FTD Alert Program. For example, we stated in a 1991 report that IRS lacked a tracking system to determine the result of contacts made with delinquent employers, and IRS echoed this same criticism in TIGTA’s 1998 internal report. Without such a system, IRS cannot assess the effectiveness of the program. The IRS National Office FTD analyst responsible for the program stated that a meeting is planned in January 2002 to begin development of such a system. As recommended by TIGTA in 1998, IRS’ research organization has been exploring ways to improve the FTD Alert Program that may result in current selection criteria being replaced. According to IRS, earlier efforts have demonstrated some success in identifying the most collectible delinquencies and prioritizing the workload to target those delinquencies. IRS’ effort to improve employer selection criteria was to be completed in mid-2000, but its information systems staff was unable to provide the required data when it was originally requested owing to competing priorities. IRS requires the data to develop algorithms based on the current selection criteria that will, if successful, allow IRS to identify and prioritize employers nationwide who are at risk of becoming delinquent. According to IRS officials, the needed data were to be delivered by August 30, 2001. IRS plans to test the algorithms during the winter, using test and control groups, and evaluate them by spring 2002. By the end of June 2002, IRS plans to prepare a final report detailing the methodology, findings, and recommendations regarding the selection criteria. IRS’ ongoing modernization efforts do not currently include any programs specifically designed to improve IRS’ notification to employers with tax delinquencies. However, sweeping organizational changes and information system improvements may in the future reduce taxpayer burden and improve compliance. These changes are not expected to be completed in the near term but will be phased in over the next several years. Information system improvements may help IRS to notify employers of tax delinquencies more quickly and effectively, but implementation is not expected to begin for business returns, such as the Form 941 returns, until at least 2005. IRS is making major organizational changes designed to reduce taxpayer burden and improve services. For example, it has created four new operating divisions tailored to more effectively meet the needs of specific groups of taxpayers. Similarly, IRS is also designating that only certain service centers will receive and process business tax returns and related tax information, and officials believe this specialization could eventually expedite processing. As part of its strategic plan, IRS will emphasize providing assistance to taxpayers before tax returns are filed and providing earlier intervention with taxpayers when problems arise. One of IRS’ four new operating divisions is dedicated to serving the needs of small business and self- employed taxpayers, while another serves large and mid-sized businesses. According to IRS’ plans, taxpayers in each of these divisions should benefit from IRS’ handling of all their respective tax issues within a single organization. IRS management and staff are expected to provide more tailored products and services to help their respective taxpayer segments comply with applicable tax laws. Although the new divisions officially began operations on October 1, 2000, they are still developing processes and operating procedures. The SB/SE Division, in particular, is not yet fully staffed. In addition, IRS is shifting its workload to allow certain locations to specialize in processing business returns. For example, instead of all 10 IRS service centers processing Form 941 returns, IRS plans to have only two service centers doing this work. IRS does not expect this change to be completed until at least 2002. Furthermore, according to an IRS modernization official, the specialized services centers are not expected to initially impact the current IRS processing time for Form 941 returns, although the processing time could be reduced as IRS gains experience in these two service centers. Under the new structure, IRS also plans to place an increased emphasis on prefiling activities, such as taxpayer education, outreach, and earlier intervention with taxpayers. This new emphasis on preventing problems instead of fixing them after the fact is one of modernization’s key changes intended to help employers avoid, or at least minimize, tax delinquencies. Central to IRS’ achieving its modernization vision is replacing the multiple, antiquated information systems it currently uses to maintain taxpayer accounts and to provide customer service with a single, integrated system known as the Customer Account Data Engine (CADE). IRS expects CADE to greatly improve its customer service capabilities by providing immediate updates of taxpayer accounts and expediting its processing of returns and payments. For example, CADE is to replace the current once- a-week processing schedule that adds to the time IRS takes to notify employers of employment tax delinquencies, with daily processing that could reduce the time for this notification. These changes, however, are not expected to be available for business processes for many years. IRS plans to incrementally phase CADE in, beginning with the simplest individual tax accounts. Accordingly, IRS will begin by processing the form 1040EZ using the CADE system and progress eventually to using the system for more complex forms, such as business returns. As a result, IRS’ plans do not call for CADE to begin processing Form 941 returns until at least 2005. Early notification can help businesses that have failed to pay in a timely manner their full employment tax liability or to timely file a Form 941 quarterly return by minimizing the penalty and interest charges associated with delinquent deposits and tax returns. Until IRS improves its computer systems, there does not appear to be much that can be done to further decrease the time that IRS’ processes require for routinely notifying all businesses of their employment tax delinquencies. In the interim, IRS has developed three new programs designed to prevent or reduce employment tax delinquencies by speeding up or enhancing the notification to certain groups of businesses. However, IRS has not successfully followed through on its plans to evaluate these programs. It has also experienced delays in evaluating its efforts to improve its long- standing FTD Alert program. We believe IRS needs to properly evaluate whether the benefits to be derived from expansion of the pilot programs and retention of the FTD Alert program justify the program costs. We recommend that the IRS Commissioner require the SB/SE Commissioner to develop and execute a plan for evaluating the effectiveness of the employment tax early intervention programs. The plan should address the resources needed to evaluate the interventions, ensure the clear and timely assignment of responsibility for the evaluations, and include milestones for completing the efforts. On January 3, 2002, we received written comments on a draft of this report from the Commissioner of Internal Revenue (see app.I). The Commissioner said that IRS has researched measurement practices used by public and private sector institutions in conjunction with SB/SE’s efforts to develop plans for outreach measurement. The Commissioner also said that the intervention programs we identified have already provided valuable insight into the needs of small business taxpayers. He agreed with our recommendation and said that the Commissioner, SB/SE, will review each of the programs in our report and determine the extent of evaluation required. Further, when the review is completed, each SB/SE office responsible for a program will evaluate the specific intervention effort and make recommendations for implementation. As agreed with your office, unless you publicly announce its contents earlier, we plan no further distribution of this report until 30 days from the date of this letter. At that time, we will send copies to the Commissioner of Internal Revenue and other interested parties. We will also make copies available to others upon request. If you have any questions regarding this report, please contact me or Joseph E. Jozefczyk at (202) 512-9110. The major contributors to this report were Marvin McGill, Linda Standau, Tom Bloom, and Grace Coleman. | Employers are required to withhold amounts from their employees' salary to cover individual federal income tax, Social Security, and Medicare taxes; match the amounts for Social Security and Medicare taxes; and deposit these amounts with the U.S. Treasury. In fiscal year 2000, the Internal Revenue Service (IRS) collected $1.3 trillion in this manner. Most employers withhold and deposit these taxes as required; however, the amount of unpaid employment taxes, penalty, and interest has grown significantly. IRS data show that in 1997, 1998, 1999, and 2000, delinquent employers owed about $3.2, $3.5, $4.4, and $5 billion, respectively, in unpaid employment taxes, penalties, and interest. The time IRS takes to notify employers of delinquent payment of employment taxes varies. On average, IRS takes about five weeks to initially notify employers regarding employment tax delinquencies after the Form 941 return is received. When employers fail to file Form 941 returns, IRS normally takes from 14 to 28 weeks to notify them of this delinquency. Aside from its usual efforts to educate and inform taxpayers of their responsibilities, IRS has four programs to prevent or reduce employers' tax delinquencies. Two of these programs were designed to achieve early contact with employers, and two were designed to identify employers with existing, multiple employment tax delinquencies and help them to return to compliance. To evaluate the effectiveness of these programs and to support informed judgments about whether to adopt new ones, IRS planned to compare compliance rates of test and control groups and to use customer surveys and focus groups. IRS' efforts to evaluate these programs are being adversely affected by, among other things, delays in obtaining reliable data. IRS officials did not identify any specific programs to improve employment tax intervention under IRS' ongoing effort to modernize its organizational structure, management processes, and information technology systems. However, certain aspects of its modernization effort have some future potential to improve intervention. |
EURATOM, a group of 15 western European countries in the European Union, was established in 1957 to promote and facilitate the growth of nuclear industries through the research and development of nuclear energy in the Union, to ensure a supply of nuclear materials, and to foster progress in the peaceful uses of nuclear energy. Figure 1 shows EURATOM’s 15 member countries. The U.S.-EURATOM agreement was signed in 1958. According to a State Department official, the agreement has served as the basis for substantial and historic peaceful nuclear cooperation and trade between the United States and the EURATOM countries for nearly 40 years. Negotiations are currently under way to try to secure a new U.S.-EURATOM agreement before the present agreement expires at the end of 1995. According to a State Department official, if a new agreement is not concluded prior to the expiration date, significant nuclear commerce between the two parties must be suspended. According to a Department of Energy (DOE) official, the existing U.S.-EURATOM agreement prohibits the EURATOM countries from using U.S.-origin nuclear materials or equipment for nuclear weapons or for other military purposes, and it requires that EURATOM safeguards or controls be applied to U.S.-origin materials in a EURATOM country. These safeguards are augmented by full-scope International Atomic Energy Agency safeguards in the EURATOM states that do not have nuclear weapons. The EURATOM nations are required to obtain U.S. consent before transferring U.S.-origin nuclear materials or equipment to a third party outside of the European Union. However, the agreement does not contain any other U.S. consent rights and therefore differs significantly from other U.S. nuclear cooperation agreements, which contain U.S. consent rights over the use (including reprocessing) of U.S.-origin nuclear materials. The largest amount of U.S. nuclear materials exported to EURATOM and Japan during the last 15 years was made up of depleted, natural, and enriched uranium. Table 1 shows the total amount of U.S. nuclear materials exported to EURATOM from 1980 through 1994 that are controlled by the agreement. Table 2 summarizes the total amount of nuclear materials exported to Japan during the same period. (App. I contains detailed information on U.S. exports to EURATOM and Japan.) Japan uses enriched and natural uranium as fuel for nuclear power reactors. The used or spent fuel is transferred to EURATOM for reprocessing, which chemically separates the depleted uranium and plutonium. Enriched uranium, totaling 4,542,383 kgs, constituted the largest amount of U.S.-origin nuclear materials transferred from Japan to EURATOM. From 1980 through 1994, Japan transferred to EURATOM between 115,651 kgs and 404,935 kgs annually of enriched uranium. Japan also exported about 37,187 kgs of plutonium to EURATOM during this period. Table 3 summarizes the total amount of U.S.-origin nuclear materials Japan transferred to EURATOM during the period. (App. I contains information on the amount of U.S.-origin nuclear materials Japan transferred to EURATOM annually during this period.) According to NRC officials, no nuclear power reactors were exported to EURATOM or Japan from 1980 through 1994. However, NRC issued licenses for the export of four major reactor components for use in research and nuclear power reactors to EURATOM in 1986, 1991, and 1992. In addition, nuclear reactor equipment and components have been exported by the United States to Japan annually between 1980 and 1994 under NRC’s general licenses. We obtained the dollar values of the uranium and plutonium exports from the Department of Commerce’s National Trade Data Base. However, this data base excludes the cost of loading the merchandise aboard the exporting carrier and also excludes freight, insurance, and any other charges or transportation costs beyond the port of exportation. The reliability of the data also depends on the accuracy of reporting by shippers on their export declarations. According to the Department of Commerce’s data base, the dollar value of U.S. exports to EURATOM countries of uranium (natural, enriched, and depleted) and plutonium in 1989 through August 1994 was about $1.1 billion. The value of these U.S. exports to Japan for the same period was about $4 billion. (App. II contains detailed information on the dollar value of U.S. exports to EURATOM and Japan.) According to U.S. nuclear industry officials, the services related to exported nuclear materials, such as uranium mining, enrichment, and fuel fabrication, should be factored into the value of U.S. nuclear exports. In the past, DOE provided uranium enrichment services to EURATOM and Japan. In 1993, uranium enrichment services were transferred to the U.S. Enrichment Corporation (USEC), a government-owned corporation, which was created to operate the U.S.-owned uranium enrichment plants and to market enrichment services. We contacted DOE and USEC to obtain the amount billed to EURATOM and Japan for enrichment services from 1989 through 1994. According to information from DOE, EURATOM was billed a total of $167,527,507 for enrichment services in fiscal years 1989 through 1993. Japan was billed a total of $1,593,567,205 for the same period. DOE’s billings under EURATOM and Japanese contracts, by fiscal year (FY), are shown in figure 2. The amounts billed by DOE included the cost of enriching the uranium delivered to the enrichment plant and of packaging and handling the services at the enrichment plant. The enriched uranium is delivered to the customer at the enrichment plant, but its cost does not include any subsequent services, such as fabricating reactor fuel assemblies. According to USEC, the amount billed under Japanese contracts for the period from 1989 through 1994 was $350 million to $400 million per year. Industry representatives anticipate that if the U.S.-EURATOM agreement is allowed to expire, EURATOM and Japan would turn to other suppliers of nuclear products and services outside the United States. U.S. participation in the European nuclear markets would be greatly reduced. In addition, because Japan also exports U.S.-origin spent fuel to EURATOM for reprocessing, Japan would be less likely to purchase uranium fuel sources from the United States in the future. The absence of a U.S.-EURATOM agreement would prohibit Japan from transferring this U.S.-origin spent fuel for reprocessing in any EURATOM country. Furthermore, these industry representatives point out that part of nuclear commerce includes relationships with the customers and the guarantee of reliable supply and services to them. A break in any of these ties, such as a failure to renew the U.S.-EURATOM agreement, would weaken the U.S. nuclear industry substantially, because the industry needs both its domestic and foreign markets. U.S. nuclear industry representatives stated that the nuclear industry is a market industry that can exist only in a global environment. According to USEC officials, if the U.S.-EURATOM agreement for cooperation expires, USEC’s future enrichment services would be seriously affected. Specifically, existing contracts with EURATOM, worth approximately $160 million, could be terminated. Other contracts, valued at approximately $470 million, would be in jeopardy. Another $1.8 billion in potential new business from EURATOM and Japan might be lost. According to a nuclear industry representative, the U.S. share of the European nuclear industry market currently is about $100 million and may reach $300 million annually after the year 2000. In addition, Japan currently is the largest single foreign purchaser from U.S. suppliers of nuclear power systems equipment, materials, and services. In the next 5 years, according to industry officials, anticipated U.S. participation in construction, equipment, start-up services, spare parts, and fuel for 10 nuclear power plants in Japan is expected to amount to about $500 million to $800 million annually throughout the plants’ lives. During May 1995, we provided drafts of this report to officials in NRC and the Departments of Commerce, Energy, and State to obtain their comments on the facts presented in this report. In general, these officials agreed with the facts presented in the draft report. NRC officials, including the Director, Division of Nonproliferation, Exports, and Multilateral Relations, Office of International Programs, made several editorial suggestions to improve the clarity of the information and noted that they had some questions about the Department of Commerce’s National Trade Data Bank information presented in table II.8 in appendix II. In particular, NRC officials stated that they were puzzled by the reported plutonium sales to some of the listed countries, especially Denmark, Greece, and Portugal. According to the NRC officials, these countries have very small nuclear research programs and no nuclear power programs; thus, they doubt that these countries have in fact imported plutonium from the United States. In addition, NRC stated that NRC’s export licensing data base shows no licenses for exports to Greece or Portugal, one small (0.005 kg) plutonium export case for Denmark, and only three plutonium export cases for Spain. However, NRC noted that U.S.-supplied nuclear materials to any country within EURATOM can be freely transferred within EURATOM without prior notification to, or approval by, the United States. Thus, according to NRC, it is possible, although not considered likely, that U.S.-supplied plutonium has gone to the countries in question and has been reported to the Department of Commerce’s National Trade Data Bank system without appearing in NRC’s export licensing records. (The text of NRC’s comments appears in app. III.) In their review of the draft, Department of Commerce officials, including officials at the Bureau of Export Administration, acknowledged the differences in NRC’s export licensing data base, DOE’s data base, and the National Trade Data Bank’s data. However, neither the Department of Commerce nor DOE has determined why these data bases differ. According to the Department of Commerce officials, they may, at a later date, examine why these differences exist. According to a DOE official, DOE is attempting to determine why the differences exist between the data bases. It was not within the scope of our review to determine why the various data bases differ. (The text of the Department of Commerce’s comments appears in app. IV.) DOE officials, including the Acting Director, Office of Nonproliferation and National Security, reviewed the draft and had no comments on the facts presented. DOE stated that it is confident that a new U.S.-EURATOM agreement will be achieved before the December 31, 1995, expiration of the current agreement. (The text of the Department of Energy’s comments appears in app. V.) The State Department’s Foreign Affairs Officer, Office of Nuclear Energy Affairs, Bureau of Political-Military Affairs, reviewed the draft and had no comments on the facts presented in the report. (The text of the Department of State’s comments appears in app. VI.) To determine what nuclear commerce items are subject to export controls under the U.S.-EURATOM agreement, we interviewed officials in NRC’s Office of International Programs, Division of Nonproliferation, Exports, and Multilateral Relations. We reviewed the export license requirements covered by 10 C.F.R. part 110. In addition, we obtained data on NRC’s approved licenses for U.S. nuclear material exports to EURATOM and Japan for 1980 through 1994 (the period selected was judgmental) from NRC’s Office of International Programs, Division of Nonproliferation, Exports, and Multilateral Relations. To determine what data bases contain data on nuclear material exports, we interviewed officials at DOE’s Energy Information Administration (EIA); the Program Manager for DOE’s Nuclear Materials Management and Safeguards System (NMMSS), and NMMSS officials at the Oak Ridge Operations Office in Oak Ridge, Tennessee; officials at the Customs EXODUS Command Center; NRC officials in the Office of International Programs, Division of Nonproliferation, Exports, and Multilateral Relations; and U.S. nuclear industry representatives, including the Nuclear Energy Institute, General Electric, Energy Resources International, Inc., and Edlow International, Inc. On the basis of these discussions, we found that the best data available on U.S. nuclear exports are contained in the NMMSS data base, which accounts for U.S. nuclear material exports controlled under the U.S.-EURATOM agreement. The information on exported nuclear materials and U.S.-origin materials transferred from Japan to EURATOM in the NMMSS data base is collected from DOE and NRC forms. These forms are filled out by parties involved in the shipment of these materials. According to an NMMSS official, the data in the NMMSS data base reflect the amounts of nuclear materials that were actually exported or transferred from one country to another country. To obtain the DOE/NMMSS export information, we worked with DOE/NMMSS staff at the Oak Ridge Operations Office in Oak Ridge, Tennessee, and NRC officials in the Office of International Programs, Division of Nonproliferation, Exports, and Multilateral Relations. However, we did not independently verify the accuracy of these data. To determine the dollar value of uranium and plutonium exports to EURATOM countries and Japan, we obtained available data (1989-Aug. 1994) from the Department of Commerce’s National Trade Data Bank. The accuracy of these data depends largely on the accuracy of the reporting by shippers in their export declarations. We did not independently verify the accuracy and completeness of the data. We recognize that DOE’s and the Department of Commerce’s data show different quantities of nuclear material exports. Both DOE and Department of Commerce officials also acknowledge the differences in these data. However, it was not within the scope of this review to determine why the various data bases differ. According to a DOE official, DOE is attempting to determine why the two data bases differ. According to Department of Commerce officials, they may, at a later date, examine why these differences exist. We interviewed nuclear industry officials, NRC officials, DOE/NMMSS staff, EIA officials, and officials from the State Department to obtain information on the nuclear commerce subject to the U.S.-EURATOM agreement. We also interviewed USEC officials to obtain available data (FYs 1989-93) on the value of enrichment services provided by DOE and USEC. Our work was performed between September 1994 and May 1995 in accordance with generally accepted government auditing standards. As arranged with your offices, unless you publicly announce its contents earlier, we plan no further distribution of this report until 15 days from the date of this letter. At that time, we will send copies to the Secretaries of Commerce, Energy, and State and to the Chairman, Nuclear Regulatory Commission. We will make copies available to others on request. Please call me at (202) 512-3841 if you or your staff have any questions. Major contributors to this report are listed in appendix VI. Figure I.1 shows that U.S. exports of natural uranium to EURATOM ranged from 4,324 kilograms (kgs) to 1,811,478 kgs annually during 1980 through 1994. The total amount of natural uranium exported was 11,886,101 kgs during this period. Natural uranium is used for fuel in some nuclear power reactors, but it is usually enriched or used for blending to produce low-enriched fuel. Figure I.2 shows that U.S. exports of enriched uranium to EURATOM ranged from 197,186 kgs to 615,415 kgs annually during 1980 through 1994. The total amount of enriched uranium exported was 6,049,307 kgs during this period. Enriched uranium contains 0.711 percent of the isotope uranium-235. Examples of enriched uranium’s typical uses include fuel for commercial power reactors (low-enriched uranium) and research reactor fuel (highly enriched uranium). Figure I.3 shows that U.S. exports to EURATOM of depleted uranium, with nuclear end use, ranged from 3,086 kgs to 10,286,236 kgs annually during 1980 through 1994. A total of 14,649,985 kgs were exported during this period. Depleted uranium also contains uranium-235 but contains less than 0.711 percent of this isotope. Depleted uranium is very dense and can be used in high-impact projectiles and as a shielding material against radiation. Figure I.4 shows that U.S. exports of thorium to EURATOM ranged from 0 to 2,517 kgs annually during 1980 through 1994. A total of 3,188 kgs of thorium were exported during this period. According to a DOE official, thorium is used for research and development purposes. Figure I.5 shows that U.S. exports of uranium-233 to EURATOM ranged from 0 to 26 grams annually during 1980 through 1994. A total of 62 grams of uranium-233 were exported during this period. According to the NRC, this uranium-233 was for use as standard samples in laboratory analyses and tests. Figure I.6 shows that U.S. exports of plutonium to EURATOM ranged from 0 to 32,307 grams, or 32.3 kgs, annually during 1980 through 1994. A total of 32,793 grams, or 32.8 kgs, were exported during this period. According to DOE, the plutonium category in the NMMSS includes all plutonium that contains less than 20 percent of the plutonium-242 isotope. This category may also include the isotopes plutonium-239, –240 and –241. Plutonium in this category has research uses. Figure I.7 shows that U.S. exports of plutonium-242 to EURATOM ranged from 0 to 41 grams annually during 1980 through 1994. A total of 94 grams were exported during this period. This category includes all plutonium that has greater than 20 percent of plutonium-242. According to NRC, plutonium-242 is used for research purposes in calibrating equipment, such as mass spectrometers used in research institutes. Figure I.8 shows that U.S. exports of plutonium-238 to EURATOM ranged from 0 to 83 grams annually during 1980 through 1994. A total of 99 grams of plutonium-238 were exported during this period. According to DOE and NRC, plutonium-238 can be used for research and thermionic heating sources. Figure I.9 shows that U.S. exports of enriched uranium to Japan ranged from 331,067 kgs to 823,421 kgs annually during 1980 through 1994. A total of 10,031,810 kgs were exported during this period. Figure I.10 shows that U.S. exports of natural uranium to Japan ranged from 1 kg to 301,883 kgs annually during 1980 through 1994. A total of 917,621 kilograms of natural uranium were exported during this period. Figure I.11 shows that U.S. exports of depleted uranium to Japan ranged from 0 to 7,502 kgs annually during 1980 through 1994. A total of 7,937 kgs of depleted uranium were exported during this period. Figure I.12 shows that U.S. exports of thorium to Japan ranged from 0 to 475 kgs annually during 1980 through 1994. A total of 2,705 kgs were exported during this period. Figure I.13 shows that U.S. exports of uranium-233 to Japan ranged from 0 to 20 grams annually during 1980 through 1994. A total of 56 grams were exported during this period. Figure I.14 shows that U.S. exports of plutonium to Japan ranged from 0 to 1,949 grams, or 1.95 kgs, annually during 1980 through 1994. The total amount of plutonium exported during this period was 2,420 grams, or 2.42 kgs. These exports, like the exports to EURATOM, are used as laboratory standards and for research purposes, according to NRC. Figure I.15 shows that U.S. exports of plutonium-242 to Japan ranged from 0 to 3 grams annually, during 1980 through 1994. A total of 7 grams were exported during this period. Like EURATOM, Japan uses plutonium-242 as laboratory standards and for research purposes. Figure I.16 shows that U.S. exports of plutonium-238 to Japan ranged from 0 to 15 grams annually during 1980 through 1994. A total of 19 grams were exported during this period. Figure I.17 shows that U.S.-origin enriched uranium transferred from Japan to EURATOM ranged from 115,651 kgs to 404,935 kgs annually during 1980 through 1994. Japan transferred a total of 4,542,383 kgs of U.S.-origin enriched uranium to EURATOM during this period. Figure I.18 shows that U.S.-origin depleted uranium transferred from Japan to EURATOM ranged from 0 to 23,822 kgs annually during 1980 through 1994. A total of 98,178 kgs were exported during this period. Figure I.19 shows that U.S.-origin plutonium transferred from Japan to EURATOM ranged from 780 kgs to 3,433 kgs annually during 1980 through 1994. A total of 37,187 kgs were exported by Japan to EURATOM during this period. We obtained the dollar values for uranium and plutonium exports from the Department of Commerce’s National Trade Data Bank. According to the Department of Commerce, the data bank was established by the Omnibus Trade and Competitiveness Act of 1988 to provide “reasonable public access” to an Export Promotion data system and an International Economic data system from 15 federal agencies. The export data bank contains statistics on the values of U.S. exports measured at the U.S. port of export. The value of a nuclear export item (material or component) is based on the transaction price, including inland freight, insurance, and the other charges incurred in placing the freight alongside the carrier at the U.S. port of export. The value excludes the cost of loading the merchandise aboard the exporting carrier and also excludes freight, insurance, and any other charges or transportation costs beyond the port of export. These statistics, however, do not always reflect the value as defined above, as exporters sometimes find it difficult to assign a value in accordance with this definition. The extent to which the statistics reflect this state depends largely on the accuracy of reporting by shippers on their export declarations. We used information from the export data bank to identify the total value and quantities for the commodities uranium and plutonium shipped by the United States to EURATOM countries and Japan. The data bank information covered the period for calendar years 1989 through August 1994. Tables II.1 through II.11 show the dollar values and amounts of uranium and plutonium exports to EURATOM countries, and tables II.9 through II.11 show the U.S. dollar values and amounts of U.S. exports to Japan. Bernice Steinhart, Associate Director, Energy and Science Issues Gene Aloise, Assistant Director Mary Alice A. Hayward, Evaluator-in-Charge Thomas J. Flaherty, Senior Evaluator Mario Zavala, Senior Evaluator Duane G. Fitzgerald, Nuclear Engineer The first copy of each GAO report and testimony is free. Additional copies are $2 each. Orders should be sent to the following address, accompanied by a check or money order made out to the Superintendent of Documents, when necessary. 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A recorded menu will provide information on how to obtain these lists. | Pursuant to a congressional request, GAO provided information on the United States-European Atomic Energy Community (EURATOM) agreement, focusing on the: (1) amount of U.S. nuclear exports to EURATOM and Japan and U.S.-origin nuclear materials transferred from Japan to EURATOM; (2) value of U.S. nuclear exports to EURATOM and Japan; and (3) nuclear industry's views on the potential impact on nuclear commerce if the U.S.-EURATOM agreement is not renewed. GAO found that: (1) from 1980 through 1994, the United States exported about 32.6 million kilograms (kgs) of nuclear materials to EURATOM and 11 million kgs to Japan, and Japan transferred about 4.7 million kgs of U.S.-origin nuclear materials to EURATOM for reprocessing; (2) various forms of uranium constituted the majority of the nuclear material exports and enriched uranium constituted the majority of the U.S.-origin material transferred to EURATOM; (3) Japan also transferred about 37,187 kgs of U.S.-origin plutonium to EURATOM from 1980 through 1994; (4) no nuclear power reactors were exported to EURATOM or Japan during this period, but reactor equipment and components were exported to EURATOM and Japan under general license agreements; (5) U.S. nuclear materials exported from 1989 through August 1994 were worth about $1.1 billion for EURATOM countries and $4 billion for Japan; (6) for fiscal years 1989 through 1993, U.S. enrichment services worth $168 million and $1.6 billion were charged to EURATOM and Japan, respectively; (7) the U.S. nuclear industry believes that if the U.S.-EURATOM agreement expires, EURATOM and Japan would seek other non-U.S. suppliers of nuclear materials and services and the industry would be substantially weakened; and (8) the expiration of the agreement could seriously affect the future of the U.S. Enrichment Corporation's uranium enrichment services, since it would jeopardize $630 million in current contracts and $1.8 billion in potential new contracts. |
Overall policy direction for the TC program is set by IAEA’s policy-making bodies—the General Conference and the Board of Governors. The United States is a permanent member of the Board of Governors, which typically meets 5 times per year. IAEA’s Secretariat—led by a Director General and structured into six functional departments—is responsible for implementing policies established by the Board of Governors and the General Conference. The Department of Technical Cooperation, which is headed by a Deputy Director General, is structured primarily around four regional divisions: Africa, Asia and the Pacific, Europe, and Latin America and the Caribbean. The department also includes a Division of Programme Support and Coordination, which is responsible for developing TC program strategies, communications, and partnerships, and managing relevant information systems and TC financial resources. In addition, an external auditor and IAEA’s Office of Internal Oversight Services conduct annual audits and reviews of the TC program. Several individuals are involved in the TC project team responsible for developing and overseeing the project. The team includes (1) a project officer within the TC Department; (2) a technical officer from each relevant IAEA department (such as the Department of Nuclear Sciences and Applications); and (3) a national liaison officer at the country level who represents the member state, serves as coordinator for TC projects in the host country, and acts as liaison with host country governments and institutes. Typically, the TC program develops and approves new projects on a 2-year cycle. The most recent set of new proposals were approved in fall 2008. Member states begin submitting project proposal concepts to IAEA in September of the year prior to approval. IAEA officials screen concepts through the fall, and member states develop and refine their proposals through March of the approval year. By July, IAEA’s Secretariat comes to a final agreement on TC project proposals that it will back for approval by the Technical Assistance and Cooperation Committee and the Board of Governors. The TC project proposals are discussed with member states in bilateral and regional group meetings during IAEA’s General Conference, which is held in September; in November, the Technical Assistance and Cooperation Committee and the Board of Governors give final approval to the proposed TC projects. Neither the United States nor IAEA seeks to systematically limit or deny TC assistance to countries designated as state sponsors of terrorism, even though under U.S. law these countries are subject to sanctions. In addition, TC assistance has been provided to countries that are not party to the NPT, and neither the United States nor IAEA has sought to exclude these nations from TC assistance. Finally, while the United States has encouraged IAEA to condition TC assistance to countries according to their safeguards status, IAEA does not take this factor into account when allocating program funds. Appendix II provides more detailed information on the states and territories that received TC assistance in 2007. Countries deemed by State as state sponsors of terrorism—meaning the Secretary of State has determined that the countries’ governments have repeatedly provided support for acts of international terrorism—have been provided nuclear equipment and other assistance through the TC program. The United States has designated four countries—Cuba, Iran, Sudan, and Syria—as state sponsors of terrorism, pursuant to several U.S. laws. According to our review of IAEA data and financial records, 111 TC projects were approved for these four countries from 1997 through 2007, and they received approximately $55.7 million in TC assistance over that period. These projects ranged across a number of areas, from applying nuclear technologies to treat diseases and improve crop productivity to assisting nuclear power development. Table 1 shows the dollar amount of TC assistance each U.S.-designated state sponsor of terrorism received from 1997 through 2007. According to State, the United States has applied several types of sanctions to these four countries, including restrictions on U.S. foreign assistance, a ban on defense exports and sales, certain controls over exports of dual-use items, and miscellaneous financial and other restrictions. These sanctions notwithstanding, direct U.S. nuclear trade with these countries involving the types of technologies provided by the TC program might not be permitted under U.S. adherence to other international nonproliferation controls. For instance, in a 2007 report to Congress, State concluded that three TC projects involving technology transfer for the operation and maintenance of the Iranian nuclear power plant at Bushehr could be subject to multilateral export controls if Iran were to procure such technology directly from suppliers. The State report noted, “nder the Nonproliferation Principle of the NSG [Nuclear Suppliers Group] Guidelines the United States and other responsible members of the NSG would deny such direct transfers.” The United States has not sought to systematically exclude or limit the four U.S.-designated state sponsors of terrorism from TC assistance. State officials told us that the department would not recommend withholding U.S. funding to the TC program because of the support that IAEA provides to these four countries. They said that it is a long-standing department policy to pay the full share of U.S. support to the TC program because doing so helps maintain international political support for and participation in IAEA, including international support for safeguards. In addition, because TCF resources are fungible, State officials asserted that withholding U.S. contributions to the TCF to punish state sponsors of terrorism would have no practical impact on the TC funding these nations receive. A U.S. Mission official told us that once the United States provides its contribution to the TCF, it cedes control over how the funds are disbursed by IAEA. Several laws govern U.S. support to the TC program. One restriction under these laws prohibits U.S. funds contributed to IAEA from being used for projects in Cuba, except in certain circumstances. Accordingly, State withholds a portion of its voluntary contribution to the TCF equal to the U.S. proportionate share of the TC program’s expenditures in Cuba. In the past, the United States also withheld a proportionate share of its TCF contribution for Iran, Libya, and Territories Under the Jurisdiction of the Palestinian Authority. State also must report annually to Congress on all IAEA programs or projects in certain countries, including Burma (Myanmar), Cuba, Iran, North Korea, and Syria. IAEA officials told us that the TC program does not attempt to exclude countries on the basis of their status as U.S.-designated state sponsors of terrorism or other political considerations. Under the TC program’s guiding principles, for example, the provision of TC assistance is not subject to any political, economic, military, or other conditions that are inconsistent with IAEA’s statute. Moreover, according to the Deputy Director General for the TC program, requests for TC assistance are evaluated strictly on technical merits and the contributions of proposed projects to a nation’s development priorities, subject to the conditions of the IAEA statute, IAEA guiding principles and operating rules pertaining to technical assistance, and any relevant decisions by the Board of Governors and the UN Security Council. This official added that the program seeks to include as many countries as possible and that “there are no good countries and there are no bad countries” participating in the program. In her view, denying or limiting participation of member states in the TC program was a matter for the Board of Governors to consider. Other IAEA officials told us that under the agency’s statute, IAEA’s Secretariat is powerless to limit or condition TC assistance to specific countries, even in cases where countries have been deemed by the Board of Governors to be violating their IAEA obligations or in cases where recipient countries were suspected of being engaged in undeclared, clandestine nuclear activities. For instance, the Board of Governors determined in September 2005 that Iran had breached its safeguards obligations and was not complying with IAEA’s statute. However, TC projects in Iran were not restricted until February 2007 following a UN Security Council resolution on Iran’s nuclear activities. In addition, in 2008, IAEA’s Director General stated it would be inappropriate to block approval of a TC project in Syria for a nuclear power plant feasibility study before IAEA verified claims concerning Syria’s alleged construction of an undeclared nuclear reactor. According to State officials, several countries, including the United States, asserted that the approval of this project would be “wholly inappropriate” when Syria had not provided all of the cooperation required by IAEA to investigate these allegations. IAEA’s Board of Governors ultimately approved the project in November 2008. The United States did not attempt to block approval of the project after receiving assurances that IAEA would monitor the project closely, report as appropriate, and ensure that any equipment provided under the project would be used only for the intended purposes. Finally, in addition to providing assistance to the four countries the United States has designated as state sponsors of terrorism, the TC program has also provided nuclear technology and expertise to other countries that the United States has sanctioned or taken other punitive actions against. Examples of such countries and the total amounts of TC assistance provided to them from 1997 through 2007 include the following: Approximately $7.3 million for Burma, which is subject to targeted U.S. trade, financial, and other sanctions. The Secretaries of State and of Energy have declared jointly that the development of nuclear infrastructure of any kind in Burma would be inappropriate. TC projects have been approved for Burma to improve nuclear instrument repair and maintenance services, enhance pest control, and apply nondestructive testing techniques in construction projects. Approximately $9.7 million for Belarus, which the United States has characterized as “a regime of repression in the heart of Europe” and against which the United States has imposed targeted financial sanctions and travel restrictions. TC support has been provided to assist Belarus in minimizing threats posed by radioactive waste at former military sites, establishing a center of competence on radiation oncology, and remediating areas affected by the Chernobyl accident. Approximately $6.1 million for Venezuela, which, among other things, State has determined to be engaging in diplomacy designed to deliberately undermine U.S. interests, including deepening relations with Iran and publicly supporting Iran’s nuclear program. IAEA has approved TC assistance for Venezuela to help it strengthen its technical capabilities in radiotherapy, nuclear medicine, and radiopharmaceutical services, and to more effectively apply nuclear techniques in managing water resources. Based on our review of recent project summaries, the TC assistance provided to these countries does not appear to involve support that could have direct weapons applications. However, as we discuss in the following section, given the dual-use nature of some nuclear technology and the absence of more complete information from IAEA, it is difficult for the United States to make firm judgments about the proliferation risks of TC proposals and projects. U.S. and IAEA officials have described the NPT as the cornerstone of the international nuclear nonproliferation regime and a key legal barrier to nuclear weapons proliferation. However, states that are not party to the NPT—India, Israel, and Pakistan—received approximately $24.6 million in TC assistance from 1997 through 2007. India has not received TC assistance through national-level TC projects but has received TC support as a participant in regional TC projects. Israel and Pakistan have received support for 63 national-level projects, as well as for regional TC projects. For example, national TC projects in Israel and Pakistan have included assistance to control fruit flies and suppress other pests, enhance nuclear medicine practices and establish radiation physics courses, and improve nuclear safety. Table 2 shows the total amount of TC assistance provided to each of these countries from 1997 through 2007. The TC program does not differentiate between states based on their NPT status. IAEA officials told us that creation of IAEA predates the entry into force of the NPT, and treaty membership is not obligatory for IAEA membership and receipt of TC assistance under the agency’s statute. India, Israel, and Pakistan joined IAEA before the NPT entered into force. State officials told us that the United States does not seek to systematically limit TC program support to countries that are not signatories to the NPT. State officials also told us that, in accordance with statutory requirements, State must annually determine and report to Congress that Israel’s right to participate in IAEA activities is not being denied. However in its annual funding pledge to IAEA, State asks that IAEA give preference to states that are party to the NPT in allocating the U.S. contribution to the TC program. While U.S. and IAEA officials have stressed the need for all countries to bring into force comprehensive safeguards agreements and additional protocols with IAEA as soon as possible, neither the United States nor IAEA has sought to limit TC funding to countries that have not implemented such agreements. Together, these safeguards measures allow IAEA to provide assurances that all declared nuclear material is being used for peaceful purposes and that a country has declared all of its nuclear material and activities. Nearly all states receiving TC assistance are nonnuclear weapon state parties to the NPT. Under Article IV of the NPT, all states party to the treaty have the right to participate in the exchange of equipment, materials, and scientific and technological information for the peaceful uses of nuclear energy. According to IAEA, Article III of the NPT also makes it mandatory for all nonnuclear-weapon states to conclude comprehensive safeguards agreements with the agency. These agreements are to be concluded by such states within 18 months of their accession to the treaty. The United States and IAEA have recognized an inherent linkage between nonnuclear weapon states’ rights to access peaceful nuclear technology and their obligation to accept safeguards on their nuclear activities, although State officials told us that to limit TC funding to states that have not completed comprehensive safeguards agreements with IAEA could be seen as inconsistent with IAEA’s statute. IAEA has not conditioned TC assistance provided to recipient states on the basis of their safeguards status. According to our analysis of IAEA records, 17 countries and territories that did not have comprehensive safeguards agreements in force with the agency at the end of 2007 received approximately $6.7 million, or about 7 percent, of the $93.3 million in TC assistance disbursed in 2007. This list includes three states and one nonstate territory that are not party to the NPT—India, Israel, Pakistan, and the Territories Under the Jurisdiction of the Palestinian Authority. The remaining 13 states have all been party to the NPT longer than 18 months—in most cases for more than 10 years—meaning they have not fulfilled their NPT Article III obligation. Table 3 shows the states and territories that did not have comprehensive safeguards agreements in effect in 2007 and the amounts of TC assistance they received that year. In addition, we found that 62 states and territories without an additional protocol agreement in effect with IAEA received approximately $43.2 million, or approximately 46 percent, of TC assistance in 2007. Without additional protocols in force, IAEA has limited ability to detect clandestine nuclear programs, and its inspection efforts remain focused on verifying declared nuclear material, activities, and facilities. Both State and IAEA officials have asserted that the additional protocol should become the new universal safeguards standard. Table 4 lists the states and territories without additional protocols in effect as of the end of 2007 and the amounts of TC assistance they received that year. In its annual pledge of funding to the TC program, State asks that IAEA consider whether a recipient country has in force a comprehensive safeguards agreement and an additional protocol when it allocates TC funds. However, according to IAEA officials, IAEA’s Secretariat is not in a position to take such considerations into account in the absence of a decision by its policy-making bodies. The Deputy Director General for the TC program, for example, told us that such guidelines would need to be developed by the Secretariat after consultation with and approval by the member states. IAEA officials stated that while IAEA’s statute, TC program guidance, and TC program agreements with individual member states include project- and technology-specific safeguards conditions and peaceful use obligations, these documents do not require that member states have comprehensive safeguards agreements or additional protocols in force to receive assistance. The proliferation concerns associated with the TC program are difficult for the United States to fully identify, assess, and resolve for several reasons. First, while State has implemented an interagency process to review proposed TC projects for proliferation risks, consistent with the recommendation in our 1997 report, the effectiveness of these reviews is limited because IAEA does not provide the United States with sufficient or timely information on TC proposals. Second, for TC proposals that DOE and the national laboratories have identified as having possible proliferation risks, State was unable to provide us with documentation explaining how those proliferation concerns were addressed. Finally, State lacks a formal policy that identifies countries from which the United States will not accept TC fellows, and IAEA does not systematically monitor former TC fellows to determine whether they still reside in their home country and are still involved in peaceful nuclear research related to their fellowship studies. DOE and the national laboratories began reviewing TC proposals for possible proliferation concerns and providing their findings to State as the result of a recommendation in our 1997 report on the TC program. However, this review process is deficient because DOE and the national laboratories receive limited information to conduct their proliferation assessments and have little time to complete them. According to State, DOE, and national laboratory officials, the United States has had difficulty in obtaining detailed information on proposed TC projects during the proposal development phase. The initial proposal development process is internal to IAEA’s Secretariat and information is kept confidential between the recipient country and the agency and is not releasable to third parties, including the United States. According to State, DOE, and national laboratory officials, IAEA member state representatives, including U.S. Mission staff, do not have a formal mechanism to obtain information on project proposals while they are under development. DOE and national laboratory officials told us that they attempt to make the best possible determination of TC proposal proliferation risks on the basis of all available information. However, in the vast majority of cases, the information they receive on TC proposals is very limited, according to our analysis of DOE and national laboratory data. Specifically, we found that national laboratory officials received only the title of proposed projects for 97 percent—or for 1,519 of 1,565—of proposed TC projects they reviewed from 1998 through 2006. For the remaining 3 percent, or 46 of the proposed projects, DOE and the national laboratories were able to obtain some additional information on the proposed projects. See appendix III for more specific information on the number of TC proposals reviewed by DOE and the national laboratories from 1998 through 2006. DOE and national laboratory officials told us that a TC project proposal title can occasionally raise proliferation concerns but that the title alone is generally insufficient to reliably assess proliferation risk. Moreover, proposal titles can be misleading and obscure more serious proliferation implications. For instance, the 2006 TC proposal from Iran requesting assistance for the completion of the Arak heavy water research reactor—a type of reactor that could be a source of plutonium for nuclear weapons— was entitled “Strengthening Safety Capabilities for the Construction of a Research Reactor.” Iran asserted that the reactor was intended for the production of medical isotopes, and the proposal was approved for funding by IAEA’s Secretariat. However, as a result of objections by the United States and other nations, the Board of Governors ultimately did not approve this proposal. In addition to the limited information on TC proposals available to the national laboratories, the dual-use nature of some nuclear technology also complicates efforts to assess TC proposals for proliferation risks. IAEA applies safeguards to nuclear material, equipment, and facilities provided through the TC program in four “sensitive technological areas”—uranium enrichment, spent fuel reprocessing, heavy water production, and handling of plutonium and mixed uranium-plutonium fuel. These four areas relate to the production and handling of fissile material. However, according to DOE and national laboratory officials, these four sensitive areas do not address all technologies related to the production of fissile material. For example, “nonsensitive” technology associated with the design and operation of civilian, light water power reactors might prove useful to countries seeking to design and build a plutonium production reactor. TC projects providing such technology might therefore raise proliferation concerns. Other “nonsensitive” skills and expertise that states acquire through TC assistance might provide basic knowledge useful to weapons, such as radioactive materials handling, familiarity with chemical processes and properties of nuclear materials, and use of various instruments and control systems. Even in cases where more information on TC proposals was obtained, national laboratory officials told us that they still often lacked crucial details—such as equipment specifications—to reliably assess the proliferation risks. As an example, national laboratory officials told us that some TC proposals could include requests for procurement of “hot cells” to produce isotopes—a technology with dual-use implications. However, without specific technical details of the hot cell, it would not be possible to determine the potential proliferation risks associated with such a device. In addition, DOE and national laboratory officials told us that in recent years, they have received less information about proposed TC projects. Moreover, DOE and national laboratory officials told us that such information is arriving closer to the time when such projects must be approved by the Technical Assistance and Cooperation Committee and the Board of Governors. The lack of full and timely information on TC project proposals complicates efforts by the United States and other IAEA member states to make informed decisions about TC proposals, including whether they raise proliferation concerns. State, DOE, and national laboratory officials told us that it is preferable to raise potential proliferation concerns about TC proposals with IAEA officials early in the development cycle, when such project proposals can be modified more readily. In 2004, IAEA’s Safeguards Department began reviewing TC projects for possible proliferation risks. This review process includes evaluating proliferation risks of TC project proposals and reviewing all procurement requests made to the agency under ongoing TC projects. However, IAEA officials told us that the results of the Safeguards Department reviews are confidential and are not shared with the United States or other governments. IAEA officials declined to provide us with certain basic information regarding the results of these reviews, including the total number of TC proposals that the Safeguards Department identified as having possible proliferation concerns. Under the interagency process for reviewing TC proposals for proliferation concerns, DOE and the national laboratories provide State with their assessments of the proposals. State, however, was unable to provide us with documentation describing the actions it took on the basis of DOE’s and the national laboratories’ findings or how, if at all, it raised their concerns with IAEA. According to DOE and the national laboratories’ assessment of TC proposals from 1998 through 2006, 43 of the 1,565 TC proposals reviewed had some degree of potential proliferation concern or required additional information to more clearly establish potential proliferation risk. The 43 project proposals for which the national laboratories raised potential concerns included, for example, projects to assist countries in various aspects of developing nuclear power reactors and research reactors, handling nuclear fuel, and using nuclear techniques in materials testing and other industrial practices. We found that IAEA approved at least 34 of these 43 proposals. Of the remaining 9 proposals, 4 were not approved internally by IAEA’s Secretariat or—in the case of Iran’s 2006 Arak heavy water reactor proposal—by the Board of Governors, and 5 proposals in 1998 were reviewed by ORNL in a classified assessment. We did not determine whether those 5 proposals were approved by IAEA. We requested information from State’s Office of Multilateral Nuclear and Security Affairs describing how it responded to DOE’s and the national laboratories’ findings of potential proliferation concerns among the TC proposals they reviewed. However, with the exception of documentation pertaining to U.S. objections on the Iranian heavy water reactor proposal in 2006, State was unable to provide us with any records documenting policy discussions or actions it took to address concerns in other TC proposals highlighted by DOE and the national laboratories. As a result, it is unclear what actions, if any, State took to address potential proliferation concerns of specific TC proposals identified by DOE and the national laboratories. State officials told us that records substantiating discussions within State on the DOE and national laboratory findings existed but could not be retrieved from State’s data and document management systems. State officials told us that a 2005 reorganization of the department’s arms control and nonproliferation bureaus resulted in the loss of staff in the office overseeing IAEA issues, limiting its ability to effectively monitor TC program developments. Specifically, they said that prior to the 2005 reorganization, there were 14 full-time equivalent personnel working on IAEA- and NPT-related issues, but that this number was reduced to 5 full- time equivalent personnel due to the reassignment and retirement of personnel following the reorganization. State has not developed a formal policy that identifies countries that would not be eligible to send TC fellows to the United States to study nuclear issues. In addition, IAEA does not have a systematic process in place to track and monitor former TC fellows to determine, for instance, whether they still reside in their home country and are still involved in peaceful nuclear research related to their fellowship studies. The United States accepts TC fellows and TC project participants from foreign countries. The acceptance process involves several steps. First, foreign nationals interested in a TC fellowship apply to IAEA’s TC Department, which reviews the applications and decides which candidates to accept or reject. IAEA identifies fellows who would be appropriate to place in the United States for studies. For approved applications, IAEA then sends a formal request to the U.S. Mission asking that the applicants be permitted to study in the United States at a specific institute. The U.S. Mission forwards the applications to State’s Office of Multilateral Nuclear and Security Affairs within the International Security and Nonproliferation Bureau and to the Argonne National Laboratory. The State office reviews and approves or rejects the applications, and shares them with other members of the U.S. interagency committee on IAEA TC issues. In addition, State officials told us that foreign nationals requesting TC fellowships at DOE facilities would be reviewed against requirements in DOE orders. The Argonne National Laboratory, under a contract with State, facilitates placement of fellows approved by State at the institutes proposed by IAEA or at alternative facilities. The applicants are notified by IAEA of their fellowship’s acceptance by State and placement at institutes in the United States. Once the foreign candidates confirm their acceptance, IAEA instructs them to apply for a U.S. nonimmigrant visa. State’s Bureau of Consular Affairs handles the adjudication of these visa applications, and in some cases, the consular officers will request a security advisory opinion, known as a Visas Mantis, if there are concerns that a visa applicant may engage in the illegal transfer of sensitive technology. According to State, the key role of the Visas Mantis process is to protect U.S. national security, particularly in combating the proliferation of weapons of mass destruction, their delivery systems, and conventional weapons. Data provided to us by State indicated that 1,022 TC program fellows have studied nuclear issues at universities and other organizations in the United States from 1997 through 2007. In our review of this data, we found that 23 of the 1,022 fellows were from countries that were not NPT member states, such as Israel and Pakistan, or were from U.S.-designated state sponsors of terrorism, such as Syria. The fields of study pursued by these fellows included entomology, soil and plant science, analytical nuclear physics, and nuclear medicine. We questioned State and Argonne National Laboratory officials to clarify the guidance and criteria State’s Office of Multilateral Nuclear and Security Affairs uses to approve TC fellowship applicants for the study of nuclear issues in the United States. State officials told us that there is no formal policy or set of criteria they use to accept or reject TC fellowship requests on the basis of an applicant’s country of origin. However, in response to our inquiry, State prepared a written description of the informal guidelines and preferences it uses to evaluate fellowship requests. According to this description, individuals from countries that have not signed the NPT are not eligible to pursue TC fellowships in the United States, although fellows from Israel and Pakistan were accepted by the United States as recently as 2002. Individuals from countries that have signed the NPT, however, may still “be excluded on the basis of such things as institutional affiliation or previous history or other political factors such as human rights concerns in such countries.” The lack of a formal State policy or guidance on this matter has led to differing views among U.S. officials about the countries of origin from which State will approve TC fellows. For instance, Argonne National Laboratory officials told us that they believed State’s policy was to exclude fellows from any country the United States had designated as a state sponsor of terrorism. However, the description prepared for us by State does not explicitly prohibit fellows from such countries. The most recent TC program fellow to study nuclear issues in the United States from one of the U.S.-designated state sponsors of terrorism—Syria—was in 2001. In addition, the broad nature of the criteria to exclude fellows—including “other political factors” in their home countries—could leave fellowship decisions open to State officials’ subjective interpretation. For example, State officials told us that one country in Asia would no longer be permitted to send TC fellows to the United States because it is considered a wealthy, high-income nation, even though the description of the informal guidelines provided to us by State do not indicate that economic conditions in a TC fellow’s home country are a basis for rejection. With regard to IAEA’s management of TC fellows, the agency does not have a policy to exclude individuals from certain countries from participating in the TC fellowship program, including individuals from nations about which the United States has terrorism or proliferation concerns. For example, in 2007, IAEA approved 48 fellows and scientific visitors from Cuba, 12 from Iran, 36 from Syria, and 30 from Sudan. IAEA’s data did not indicate the countries and institutes where these fellows and scientific visitors pursued their studies. We also found shortcomings in IAEA oversight of TC fellowships for potential proliferation concerns—specifically in detecting the possible involvement of former TC fellows in weapons-related research activities after they completed their studies abroad. IAEA officials told us that the agency does not have a systematic process for tracking the status, whereabouts, and activities of former TC fellows to determine, for example, if they remain involved in research related to their TC project, changed institutes, or have immigrated to other countries. In 2005, however, IAEA officials surveyed fellows from 2001 and 2002 to determine their current activities and their views on the quality and impact of the fellowship program. IAEA followed up with a more in-depth survey of a sample of former fellows from seven countries. IAEA officials told us that they hope to conduct more analysis of former TC fellows, primarily to facilitate networking between former fellows and establish lessons learned for improved implementation of the program, not to determine whether former TC fellows could be involved in nuclear weapons efforts. IAEA faces several limitations in effectively managing the TC program. Specifically, IAEA has not been able to accurately portray the TC program’s achievements in meeting the development and other needs of member states in a meaningful way because it has not updated and revised the metrics for assessing program results. In addition, the program’s impact is limited by financial resource constraints, including the failure of many member states to pay their full share of support to the TCF. Finally, the TC program’s long-term effectiveness could be undermined by shortcomings in IAEA efforts to monitor how TC projects have been sustained and in recent efforts to sustain the TC program overall by reaching out to new partners and donors. The goal of the TC program is to help member states achieve their sustainable development needs through the peaceful application of nuclear energy. However, IAEA has not updated and revised TC program performance metrics so that it can more accurately track and assess the program’s overall impact in meeting member states’ needs. Under a 2002 TC program strategy, IAEA established four strategic objectives and 12 performance metrics to assess program performance between 2002 and 2007. These four objectives were (1) establishing greater linkages between TC projects and national development plans and greater government commitment and support to projects; (2) expanding strategic partnerships to improve the TC program’s visibility in resolving development problems; (3) increasing the level of funding for technical cooperation activities; and (4) strengthening the capacity of institutions in member states using nuclear technologies to become more technically and financially self- reliant. The 12 program performance metrics included having TC projects create an unspecified number of new partnerships with development organizations and having an increasing number of member states pay their full target share of funding to the TCF. IAEA officials declined to provide us with detailed information explaining how these performance indicators were established or data substantiating how they were met. However, according to the TC program’s 2006 annual report summarizing the program’s progress against each indicator, IAEA met or exceeded 6 of the 12 performance indicators, did not meet 1, could not measure 1, and did not provide any assessment information on the remaining 4 performance goals. The metrics developed for the program in 2002 are not meaningful indicators of program results and, therefore, do not provide sufficient information on the program’s progress in meeting the sustainable development and related needs of member states. For example, the performance metric on member state contributions to the TCF conveys information on program management but does not measure fulfillment of member state needs, such as the number of additional cancer patients treated or the number of new nuclear safety regulations promulgated. Similarly, in its 2007 evaluation of TC activities, IAEA’s internal auditor— the Office of Internal Oversight Services—found that the TC program lacks a robust, consistent process for assessing the effectiveness of TC projects, particularly after projects are completed. IAEA officials acknowledged these weaknesses in the 2002 metrics, recognized they were out of date, and said that they wanted to develop more effective results-based metrics. However, to date, the TC program has not developed new program objectives or performance measures. The officials noted that a new TC information technology system—the Program Cycle Management Framework—to plan, implement, monitor, and report on TC projects will eventually collect information to assess project results against specific goals and metrics. In addition, according to the 2009-2011 TC program guidelines, the program needs to operate under results-based management principles and emphasize the importance of having program objectives and outcomes be linked to performance metrics to help measure progress in achieving results in technical cooperation. IAEA officials told us that implementing a system of results-based metrics for the TC program faces challenges—particularly in obtaining reliable baseline information from member states about the scope of the problems or needs they hope to address by participating in the TC program. Without such information, they told us, IAEA cannot establish reliable long-term performance targets. For example, according to a 2007 evaluation by IAEA’s internal auditor, almost half of the project performance metrics in the sample of projects it reviewed were not supported with baseline information and half did not indicate target values. We found that the TC program faces financial constraints and limitations due to, among other things, shortfalls in member state payments to the TCF and high-income nations receiving TC support. IAEA officials told us that the TC program is underfunded, while IAEA’s Director General has commented that program resources are insufficient to keep pace with country requests for support. Although the size of the TCF and overall level of funding paid by member states have increased in recent years, many countries that receive TC assistance still do not pay their full share of support to the TCF that IAEA expects them to contribute. Specifically, the TCF experienced a funding shortfall in 2007 of $3.5 million, or 4 percent, of the $80 million total target budget because 62 member states did not pay their full contributions. Of these 62 countries, 47 states made no payment at all. Appendix IV lists member states and the amounts they contributed to the TCF in 2007. In addition, 13 member states that the UN defined as high-income countries in 2007—including Israel, Portugal, and Saudi Arabia—received a total of approximately $3.8 million in assistance from the program, or 4 percent of the $93.3 million in total TC disbursements that year. Recognizing that the emphasis of the TC program is on providing nuclear assistance to developing countries, IAEA officials told us that it would be helpful if more developed countries shifted from TC recipients to donors, which could allow the program to provide greater support to developing countries. For example, they stated that some member states have helped ease budget pressures within the TC program by voluntarily reducing the assistance they receive and gradually becoming donors. However, IAEA has not sought to formulate guidelines or criteria for determining when countries should be graduated from further TC assistance, and IAEA officials have not reached a consensus on how to pursue this matter. According to the Deputy Director General for the TC program, IAEA does not seek to retire specific countries from TC support regardless of their financial or development status. Nevertheless, other IAEA officials told us that determining program graduation criteria is a good idea. Appendix II identifies the countries designated by the United Nations in 2007 as high- income and the amount of TCF assistance they received that year. In addition, IAEA officials told us that broader issues should be considered in graduating high-income or highly-developed countries from TC assistance. Specifically, IAEA officials said that developed nations with more experience on nuclear issues could play a helpful role in providing nuclear expertise to less-developed nations in the same region. According to IAEA officials, this could entail reducing national-level TC project support to developed member states while continuing to provide support to them through regional projects. These officials also asserted that graduating states is complicated because the benefits provided by TC assistance keep countries involved in IAEA, including the safeguards program. State and U.S. Mission officials told us that State does not have an official position on graduating member states from TC assistance. However, these officials said the idea merited consideration and suggested some countries whose economic wherewithal and level of nuclear development could justify graduation, including Brazil, China, Russia, and South Korea. IAEA efforts to sustain TC project results and the TC program overall face several significant limitations and challenges. First, at the project level, IAEA does not conduct systematic follow-up to verify that member states are sustaining the results and activities of completed TC projects. IAEA’s goal in providing technical cooperation is to help countries become technically and financially self-reliant so that they do not require future IAEA assistance to sustain peaceful nuclear skills and technologies. The Deputy Director General of the TC program stated that achieving sustainability hinges on having member states commit adequate financial support, infrastructure, and personnel once the project is completed. IAEA officials told us that the program does assess sustainability potential of projects in the proposal development phase. As projects are being developed, IAEA uses a planning tool, known as a “country programme framework,” to evaluate how TC project proposals contribute to the host country’s national development priorities and to assess the host government’s likely commitment to the project. However, we found that IAEA does not systematically review completed TC projects to verify whether the project results are being sustained by the recipient country, through government or other support. For example, the TC program does not conduct any assessments 2, 3, or 5 years past project completion, to see whether and how a country is maintaining established TC nuclear technologies and related skills. Second, IAEA faces challenges in sustaining the TC program over the long term because TC funding is distributed across 18 different technical areas—including nuclear power, nuclear security, food and agriculture, water resources, and human health—making it difficult for IAEA to set clear TC program priorities and to maximize the impact of limited program resources. Appendix V provides a complete list of all the technical areas to which TC program funding was allocated in 2007. Figure 1 shows the percentage of funds disbursed by project area. According to U.S. Mission officials, this allocation of TC funding across multiple technical areas and the absence of clear program priorities reduces overall program effectiveness. U.S. Mission officials told us that IAEA should work to consolidate these areas and identify four or five future TC program priorities. IAEA officials agreed, but told us that they have little flexibility to set TC program priorities because they must be responsive to member state needs which vary across countries and regions. Nevertheless, TC program officials said they are attempting to promote priority-setting at the project level—for example, by limiting the number of projects member states were permitted to submit in 2008, and by moving away from funding mature nuclear technologies that no longer require development or in which member states have acquired sufficient capability to sustain on their own. In addition, in 2007, IAEA initiated a fundamental review of the challenges and opportunities facing its programs to 2020 and beyond. As part of this review, IAEA’s Secretariat identified priorities for the TC program and other IAEA programs. IAEA also convened a Commission of Eminent Persons to provide recommendations on the future role and activities of the agency, including the TC program. In its background report to the commission, IAEA identified future TC priorities in three main areas— disease prevention and control, food safety and security, and sustainable management of natural resources and ecosystems—with a lesser focus on a fourth area, industrial process management. However, IAEA officials told us that the restructuring of TC priorities and implementing other recommendations from this review would be contingent on the Board of Governors’ approval. Finally, IAEA officials told us that meeting member states’ future demands for TC assistance—especially as interest in nuclear power grows—will strain program resources and pose a fundamental long-term sustainability challenge. As a result, IAEA is developing outreach strategies and has created an outreach team to attract the support and involvement of donor organizations and new partners—such as the UN Development Program— in the TC program. However, this effort faces several limitations and shortcomings. The TC program outreach effort is narrowly focused on attracting donors and partners involved in international economic and social development. Although TC program guidance encourages private sector partnerships, IAEA officials told us that the new partner outreach effort will not extend to the private sector because they believed the level of effort to establish such partnerships would outweigh the expected benefits. Furthermore, while IAEA’s internal auditors have reported on cases where member states successfully obtained private sector support to sustain TC projects—thus alleviating the need for further support from IAEA or the host government—IAEA officials told us that the TC program does not systematically assess TC proposals with respect to their commercial potential. IAEA officials told us that member states are not required to submit information in their TC proposals—such as a market analysis, a summary of business plans, or potential private sector investors in project activities—that IAEA could use to evaluate the long-term commercial prospects of a TC project. The TC program’s strategy of focusing its outreach primarily on international development organizations carries risks because IAEA is not well recognized as a development organization within the broader development community. According to the Deputy Director General of the TC Department, the development community largely perceives IAEA as a nuclear enforcement body and its development contributions are overlooked or unknown. In addition, some of the previous partnerships the TC program has built with international development organizations have been called into question. For example, a 2007 independent evaluation of the UN’s Food and Agriculture Organization (FAO) concluded that FAO’s long-standing partnership with IAEA on the use of nuclear techniques in food and agriculture has ceased to yield a high return on investment and, therefore, recommended that FAO withdraw future funding from the joint FAO-IAEA unit. Furthermore, according to the U.S. representative to the Standing Advisory Group on Technical Assistance and Cooperation, the TC program faces difficulties in building relationships with development organizations at the project and country levels because it does not have a presence in the host countries to promote the program. For example, this representative told us that the national liaison officers—who serve as intermediaries on TC projects between IAEA and the host governments and collaborating institutes— tend to be technical specialists who do not understand their country’s development needs, do not network with other development organizations, and are not involved in the governmental processes that set national development plans and priorities. The world today is dramatically different than when IAEA was created over 50 years ago. Therefore, certain IAEA policies related to the TC program, as well as the rights, expectations, and obligations of IAEA member states that are beneficiaries of the program, merit careful consideration and, as appropriate, re-examination. In our view, TC proposals should not be evaluated simply on their technical merits in isolation from political considerations concerning the countries making the requests, particularly since the assistance in question involves supplying nuclear equipment, training, and expertise, some of which is dual-use in nature. In that regard, we believe that State’s policy of not encouraging IAEA to systematically limit TC projects in countries that are U.S.-designated state sponsors of terrorism communicates a mixed message on the acceptability of transferring nuclear technologies and expertise to countries the United States has deemed inherently dangerous. We recognize that the TC program provides IAEA member states that are developing countries with many benefits and that not every project funded by the program poses a proliferation risk. However, the United States does not have the necessary information available on a timely basis to make sound judgments about the proliferation risks of many of these projects, particularly in the project proposal development phase. A better system, with more complete and timely data provided by IAEA, would help ensure that projects are fully and appropriately vetted by U.S. agencies and those that pose a potential proliferation risk are identified early in the project development process. Until that happens, we will continue to have concerns about the potential proliferation risks posed by TC projects, particularly those linked to countries of concern. With greater transparency and earlier information from IAEA on TC project proposals, the United States government and other countries could raise and address proliferation concerns with IAEA’s Secretariat before it endorses projects for approval by the Board of Governors. We are also concerned by IAEA’s refusal to share information with the United States and other member states on findings from its internal proliferation reviews of TC projects. Furthermore, deficiencies in State’s record-keeping on TC program matters is troubling because we could not determine what, if any, actions State took to address concerns identified by DOE and the national laboratories. Regarding TC fellowships, State has not established a formal policy governing the approval of TC fellows from foreign countries interested in studying nuclear issues in the United States. The absence of such a policy has allowed individuals from non-NPT countries and individuals from countries that are U.S.-designated state sponsors of terrorism who obtain visas to study in the United States and potentially acquire valuable information. We also believe IAEA should take steps to improve monitoring of individuals who have completed fellowships, to track their whereabouts and ongoing research, and to determine if the knowledge and information they obtained on TC projects is being applied to strictly peaceful purposes. Regarding our management concerns associated with the TC program, we believe that all member states receiving TC support should provide their full contribution to the TCF. We also question the need to provide TC assistance to high-income countries that have the apparent economic means to finance their nuclear research and development needs independently. In our view, IAEA could enhance the impact of its limited resources by developing and applying reasonable “means testing” criteria in future allocation of TC funding and consider ways in which high-income countries can be graduated from continued TC assistance. In addition, the metrics IAEA has used to track TC program performance do not provide the United States and other member states with sufficient information on the TC program’s overall value. Development of more meaningful results- based performance measures could allow IAEA to more effectively demonstrate the TC program’s impact. Finally, IAEA could enhance the impact of the TC program’s limited resources by formally setting priorities for future TC funding, as well as identifying areas that are less urgent because of the availability of mature nuclear technologies and other donors. In terms of IAEA’s outreach to potential new TC donors, we believe that the private sector could be a crucial partner in supporting the TC program generally and in sustaining the results of TC projects so that member states can become technically and financially less dependent on IAEA. In our view, IAEA should also assess TC proposals not only for technical feasibility and host government support, but also for potential private sector support to sustain project activities and results. If Congress wishes to make known that the United States does not support IAEA’s policy of permitting TC projects in countries that State has designated as state sponsors of terrorism, or other countries where other concerns persist, it could explicitly require—as it currently does with Cuba and has done in the past with Iran, Libya, and the Territories Under the Jurisdiction of the Palestinian Authority—that State withhold a proportionate share of the U.S. voluntary contribution to the TC program that is equivalent to the amounts of TCF funding that would otherwise be made available to these countries. Alternatively, if Congress wishes to obtain additional information before making this decision, it could require State to report to Congress explaining its rationale for not withholding a proportionate share of the U.S. contribution to the TCF for U.S.-designated state sponsors of terrorism. To address the range of proliferation and management concerns related to the TC program, we recommend that the Secretary of State, working with IAEA and member states through the Board of Governors, explore undertaking the following eight actions: Establish a formal mechanism to facilitate greater and more timely information sharing on TC project proposals between IAEA and the United States and other countries—including detailed information on the TC proposals themselves, as well as the results of IAEA’s internal proliferation reviews of the proposals—so that proliferation and other concerns can be identified and addressed early in the project development cycle. Promote a regular and systematic process for obtaining, retaining, and updating information on prior TC project fellows to better track where and how the knowledge and expertise they have obtained is being applied. Strengthen the TC program’s mechanisms for collecting member states’ contributions to the TCF to include withholding from nonpaying states a percentage of TC assistance equivalent to the percentage of their target rate that they fail to contribute to the TCF. Establish criteria for determining when member states, especially those defined as high-income countries, no longer need TC assistance in particular fields and when such states could be graduated from further TC support altogether. Seek to implement new results-based performance metrics for the TC program that establish specific national, regional, and interregional social and economic needs and measure the collective impact of TC projects in meeting those objectives. Focus the TC program on a more limited number of high-priority technical areas to maximize the impact of program resources. Encourage the TC program to reach out to private sector entities as part of its new partner and donor development strategy. Request member states to assess in their TC project proposals the prospects for commercialization of and private sector investment in the results of the projects. Such steps could include requiring information in the proposals on potential business plans, marketing strategies, and strategies for attracting commercial partners once IAEA support has concluded. Finally, to clarify and improve U.S. oversight of the TC program, we recommend that the Secretary of State undertake the following two actions: Enhance record-keeping and formally document management actions regarding the discussion, action, and disposition of TC project proposals that DOE and the national laboratories identify as having potential proliferation concerns. Issue formal guidance with well-defined criteria—such as countries designated by State as sponsors of terrorism or gross human rights violators—that State should use as the basis for approving or rejecting TC fellowship requests for nuclear studies in the United States. This guidance could include, among other things, a list of specific countries from which State would not approve TC fellows that could be updated and revised annually, or as other circumstances warrant. We provided a draft of this report to State and DOE for formal comment. We also provided IAEA with a detailed summary of facts contained in the draft report. State provided written comments on the draft report, which are presented in appendix VI. DOE and IAEA provided technical comments that we incorporated as appropriate. State strongly opposed the matter for congressional consideration to require State to withhold a proportionate share of the U.S. voluntary contribution to the TC program that is equivalent to the amounts of TCF funding that would otherwise be made available to U.S.-designated state sponsors of terrorism and or other countries of concern. State objected for a number of reasons, contending that (1) it would be counterproductive to a separate recommendation we made in the report encouraging all states to pay their full share to the TCF; (2) it would not stop TC projects in targeted countries because TCF funding is fungible; (3) Congress has exempted IAEA contributions from this type of proportionate withholding; (4) none of the TC projects in state sponsors of terrorism have been shown to have contributed to a WMD program; (5) there are adequate safeguards within IAEA’s Secretariat to prevent TC projects from contributing to a WMD program; and (6) it would negatively impact the ability of the United States to achieve other critical objectives within IAEA. We do not believe the matter for congressional consideration is unique or unprecedented. As we noted in our report, U.S. law currently requires the withholding of a proportionate share of the U.S. contribution to the TCF for certain projects in Cuba, and has required withholding in the past for Iran, Libya, and the Territories Under the Jurisdiction of the Palestinian Authority. However, in order to give Congress greater flexibility and more information, we have broadened the matter for congressional consideration to give Congress the option of requiring State to report on its rationale for not withholding a proportionate share of the U.S. contribution to the TCF for U.S.-designated state sponsors of terrorism. Notwithstanding our modification to the matter for congressional consideration, we still disagree with State’s specific objections to it for the following reasons: We do not believe the matter for congressional consideration is counterproductive to our recommendation to strengthen mechanisms for collecting member state contributions to the TCF. That recommendation is geared toward strengthening mechanisms for collecting contributions to the TCF from member states that are receiving TC assistance. The United States is the largest donor to the TC program, providing approximately 25 percent of the TCF annual budget, and is not a beneficiary of TC assistance. While contributions to the TCF are fungible, we believe there is a fundamental principle at stake. As we described in our report, the United States has applied several types of sanctions limiting foreign assistance and trade to states it has designated as sponsors of terrorism and to other countries. To avoid the appearance of an inconsistent approach and to foster greater cohesion in U.S. policy toward such nations, we believe that it is fair for Congress to consider requiring State to withhold a share of the U.S. contribution to the TCF for program activities in countries that the United States chooses not to engage directly in trade, assistance, and other forms of cooperation. We are aware that in 1994 U.S. contributions to IAEA were exempted from the law requiring State to withhold proportionate shares of funding to international organizations for programs in certain countries. However, we note that the IAEA exemption was enacted in 1994. In our view, the proliferation concerns about some countries receiving TC assistance— such as Iran and Syria—have increased rather than diminished since that time. Furthermore, we note that since the enactment of the 1994 exemption, the law has been further amended to require State to withhold a proportionate share of funding to IAEA for certain projects in Cuba and for all projects in Iran if State determines that such projects in Iran are inconsistent with U.S. nuclear nonproliferation and safety goals, will provide Iran with training or expertise relevant to the development of nuclear weapons, or are being used as a cover for the acquisition of sensitive nuclear technology. We do not believe that State can assert with confidence that TC projects have not contributed to WMD programs in state sponsors of terrorism. The absence of evidence showing that TC projects have assisted nuclear weapons development in U.S.-designated state sponsors of terrorism does not, in our view, constitute proof that such countries have not exploited TC assistance to advance possible weapons development skills and activities. Based on findings in our report—including the limited information available to DOE and the national laboratories on TC projects and the inherent dual-use nature of some nuclear expertise and technology—we believe it is difficult to say with confidence that TC projects are not contributing indirectly to weapons-related knowledge and expertise in such countries. We do not have the same level of confidence as State in the safeguards within IAEA’s Secretariat to prevent TC projects from contributing to weapons development. As we stated in the report, we were unable to assess the effectiveness of IAEA’s internal process for reviewing TC proposals and projects for proliferation concerns because IAEA’s Secretariat declined to provide us with basic information and documentation regarding the results of its reviews. Furthermore, as described in the report, IAEA’s Secretariat approved at least one TC project proposal—involving the Iranian heavy water reactor at Arak—that State later objected to. Finally, neither we nor State can conclude with certainty how other states might react to an increase in the United States’ proportionate withholding of funding to the TCF and how this would affect U.S. ability to achieve other objectives within the agency. State agreed with 7 of our 10 recommendations to improve TC program management and oversight. It neither agreed nor disagreed with the three other recommendations that called on State, working with IAEA and member states through the Board of Governors, to explore (1) establishing a formal mechanism to facilitate greater and more timely information sharing on TC proposals between IAEA, the United States, and other countries; (2) strengthening TC program mechanisms for collecting member state contributions to the TCF, including withholding a percentage of TC assistance to recipient countries that fail to pay their target contribution; and (3) establishing criteria for determining when member states no longer require TC assistance and could be graduated from further TC support. Regarding the recommendation concerning the establishment of a formal mechanism to facilitate greater and more timely information sharing on TC project proposals between IAEA and the United States and other countries, State noted that it would be difficult to implement through IAEA’s Board of Governors because TC proposals are considered confidential between IAEA and the recipient state. State commented that a more achievable goal could be to work with IAEA to ensure that it publishes a complete listing of project proposals earlier. Because TC projects can involve transfer of equipment, technology, and expertise that could potentially contribute to nuclear weapons development, we continue to believe that TC proposals demand the highest level of scrutiny, transparency, and information sharing. We question why details of TC proposals are considered confidential, and believe the United States and other major donors should have a full understanding of the proposals that they are being asked to support through their TCF contributions. Finally, as noted in the report, we found that the quantity of information about TC proposals currently available to DOE and the national laboratories is insufficient in many cases—especially in cases where DOE and the national laboratories obtained only lists of proposal titles—to make accurate determinations of potential proliferation risks. It is unclear whether State’s suggestion to work with IAEA to publish the complete listing of proposed projects earlier would result in sufficient details being provided to DOE and the national laboratories to allow them to more reliably assess proliferation risks. On our recommendation to strengthen the mechanisms for collecting member state contributions to the TCF, State commented that the rate of payment to the TCF by member states has improved in recent years. However, as we noted in the report, many states receiving assistance are still not paying their full share of contributions to the TCF. We believe there is room for continued improvement and that mechanisms should continue to be strengthened toward that end. We believe the recommendation is sound and should be implemented. Finally, concerning the recommendation to establish criteria for determining when member states no longer require further TC assistance and could be graduated from further TC support, State observed that a proposal for graduating higher-income TC recipient states based on their per capita gross national product was put forward in 1997. State noted that one member state objected to graduating countries based solely on such criteria. We recognize the political and practical challenges of implementing a graduation strategy for member states receiving TC assistance. However, as noted in our report, both State and IAEA officials supported the principle of graduating countries that no longer require TC assistance. Moreover, our recommendation does not identify specific graduation criteria or specify that a member state’s income ranking be the sole factor to serve as the basis for graduating a state from further TC support. As agreed with your office, unless you publicly announce the contents of this report earlier, we plan no further distribution until 30 days from the report date. At that time, we will send copies of this report to interested congressional committees and Members of Congress, the Secretary of State, and the Secretary of Energy. In addition, this report will be available at no charge on the GAO Web site at http://www.gao.gov. If you or your staff have any questions about this report, please contact me at (202) 512-3841 or [email protected]. Contact points for our Offices of Congressional Relations and Public Affairs may be found on the last page of this report. GAO staff who made key contributions to this report are listed in appendix VII. To review the International Atomic Energy Agency’s (IAEA) Technical Cooperation (TC) program we assessed the (1) extent to which the United States and IAEA have policies limiting member states’ participation in the TC program on the basis of nuclear proliferation and related concerns; (2) extent to which the United States and IAEA evaluate and monitor TC projects for proliferation concerns; and (3) limitations and challenges in IAEA’s management of the TC program. We employed several methodologies to address these objectives. Our review of the TC program covered the years 1997 through 2007. We chose this period because our previous report on the TC program reported on TC programmatic and financial data through 1996. We interviewed key officials and analyzed documentation, such as cables, presentations, financial information, and reports and analyses of TC program issues from the Departments of State (State) and Energy (DOE). State officials also provided us with relevant IAEA documentation and information, such as copies of IAEA’s annual “white books” identifying TC projects approved by IAEA, as well as information on specific TC projects from IAEA’s “TC- PRIDE” database. We also interviewed officials in the Nuclear Regulatory Commission’s Office of International Programs who participate in U.S. interagency meetings on IAEA TC issues. In addition, we met with representatives from five national laboratories involved in the DOE Interdiction Technical Analysis Group, a multilaboratory team providing DOE with technical analysis of proliferation-related issues, including the TC program. We also visited the Oak Ridge National Laboratory (ORNL) to obtain documentation and interview current and former ORNL staff involved in previous and ongoing assessments of TC proposals and active projects for potential proliferation concerns. In addition, we visited the Argonne National Laboratory to interview representatives who provide support and analytical services to State on TC issues, organize training seminars for foreign nationals involved in TC projects, and facilitate TC fellowships for foreign nationals to study nuclear issues in the United States. We also interviewed officials at IAEA headquarters in Vienna, Austria, including representatives from the TC Department and other IAEA departments, including the Departments of Management, Safeguards, and Nuclear Safety and Security; the Office of Internal Oversight Services; and the Office of External Relations and Policy Coordination. We reviewed and analyzed information provided by IAEA officials, including presentation slides, annual reports, internal and external auditor reports, and TC project brochures. We also reviewed speeches and other statements by IAEA officials on the TC program and related IAEA issues. IAEA officials provided us with data on the number of TC projects by year, country, and technical area, as well as financial information on the TC program over the past decade. We interviewed knowledgeable IAEA officials on the reliability of these data, including issues such as data entry, access, quality control procedures, and the accuracy and completeness of the data. We determined that the data were sufficiently reliable for the purposes of this review. Furthermore, we interviewed officials at the U.S. Mission to International Organizations in Vienna (U.S. Mission) regarding TC program policies and processes. We also met with officials from the Canadian Permanent Mission to the International Organizations in Vienna who work on IAEA issues to gain their perspectives on the TC program. We also conducted interviews with several nongovernmental experts who have monitored IAEA and developments in the TC program, and met with and obtained documentation from the U.S. representative to IAEA’s Standing Advisory Group on Technical Assistance and Cooperation. We discussed U.S. and IAEA policies and criteria with State and IAEA officials on the extent to which countries are limited from receiving TC assistance because of proliferation and related concerns. We also reviewed (1) speeches, articles, and other statements made by IAEA officials; (2) annual State reports to Congress on IAEA assistance provided to some states that the United States has identified as countries of concern; (3) speeches and statements by U.S. officials; and (4) cables between State and the U.S. Mission outlining U.S. policy toward the TC program. We obtained and analyzed the lists of countries that (1) are designated by the United States as state sponsors of terrorism, (2) are party to the Treaty on the Non-Proliferation of Nuclear Weapons (NPT), and (3) have comprehensive safeguards agreements and additional protocols in force with IAEA. We cross-referenced each of these lists against IAEA financial records to determine how much TC support has been provided to countries that the United States has listed as state sponsors of terrorism, are not party to the NPT, or do not have comprehensive safeguards or additional protocol agreements in force with IAEA. To assess the extent to which the United States and IAEA evaluate and monitor TC projects for proliferation concerns, we interviewed State and DOE officials regarding their TC program review processes. We also interviewed representatives from five of the U.S. national laboratories involved in past and current evaluations of TC proposals and projects for proliferation concerns. Through DOE, we obtained and analyzed information from ORNL and Los Alamos National Laboratory (LANL) to determine the numbers of TC proposals the national laboratories reviewed each year between 1998 and 2006. We reviewed and verified these data with DOE and the national laboratory officials, and discussed and verified the proliferation risks DOE and the national laboratory officials identified in specific TC proposals. We used IAEA records of approved TC projects to determine whether TC proposals that the national laboratories had identified as having possible proliferation risks were approved by IAEA. Because of IAEA policies that restricted our access to data and related information on TC proposal and project reviews by IAEA’s Safeguards Department, we were unable to assess the effectiveness of IAEA’s internal review of TC proposals and projects for proliferation concerns. To determine the challenges and limitations in IAEA’s management of the TC program, we interviewed officials from State, Argonne National Laboratory, and IAEA, as well as the U.S. representative to IAEA’s Standing Advisory Group on Technical Assistance and Cooperation. We obtained and reviewed relevant IAEA documentation addressing TC program metrics, such as TC program guidance and strategy documents, IAEA internal audit reports, and meeting reports by IAEA’s Technical Assistance and Cooperation Committee. To assess financial resource challenges facing the TC program, we analyzed financial data from TC program annual reports between 1997 and 2007—including annual budgets of the Technical Cooperation Fund (TCF), annual contributions by member states to the TCF, and amounts of annual TC assistance provided to recipient countries and territories—to determine the level of funding countries contributed to the TCF and the amounts some countries received from the TC program over the past decade. We used the United Nation’s (UN) annual Human Development Reports to determine country income classifications. For each country, we cross-referenced TC financial data against country income classifications to determine the amounts of funding countries designated by the UN as “high-income” contributed to and received from the TC program. Additionally, we reviewed TC program annual reports to determine the technical areas covered and funded by the program. As initially agreed with your office, we intended to assess the extent to which TC projects have contributed to the safety and security of nuclear installations around the world. Toward that end, using data provided by State from IAEA’s TC-PRIDE database, identifying all TC projects funded in the nuclear security and safety fields since 1997, we developed a judgmental sample of 22 TC projects (17 national projects and 5 regional projects) to serve as the basis for our assessment and interviews with relevant IAEA officials. We selected this judgmental sample by focusing on projects completed since 2005. Using the data provided by State, we calculated the average cost of national-level nuclear security and safety projects completed since that time and selected the 17 projects that exceeded this average cost. The 5 regional projects in our judgmental sample were selected by identifying the highest budget project in each of the five TC program regions completed since 2005. We briefed IAEA officials on our project selection methodology, and they agreed that it was fair and unbiased. However, IAEA officials declined to make additional information available to us on these projects and did not provide us with an opportunity to interview relevant IAEA officials who oversaw these projects to discuss their impact and results. As a result of these restrictive policies, we were unable to sufficiently assess the TC program’s contributions to improving the safety and security of nuclear facilities around the world. We conducted this performance audit from December 2007 to March 2009, in accordance with generally accepted government auditing standards. Those standards require that we plan and perform the audit to obtain sufficient, appropriate evidence to provide a reasonable basis for our findings and conclusions based on our audit objectives. We believe that the evidence obtained provides a reasonable basis for our findings and conclusions based on our audit objectives. IAEA member state? U.S.- designated state sponsor of terrorism? NPT state party? Comprehensive safeguards agreement in force? Additional protocol in force? IAEA member state? U.S.- designated state sponsor of terrorism? NPT state party? Comprehensive safeguards agreement in force? Additional protocol in force? IAEA member state? U.S.- designated state sponsor of terrorism? NPT state party? Comprehensive safeguards agreement in force? Additional protocol in force? IAEA member state? U.S.- designated state sponsor of terrorism? NPT state party? Comprehensive safeguards agreement in force? Additional protocol in force? IAEA member state? U.S.- designated state sponsor of terrorism? NPT state party? Comprehensive safeguards agreement in force? Additional protocol in force? As nuclear-weapon states, China and Russia are not obligated under the NPT to accept comprehensive safeguards on their nuclear activities. In addition to the contact named above, Glen Levis (Assistant Director), Eugene Gray, Simon Hirschfeld, and William Hoehn made key contributions to this report. Other technical assistance was provided by Jeffrey Phillips, Carol Herrnstadt Shulman, Jay Smale, and Jeanette Soares. | A key mission of the International Atomic Energy Agency (IAEA) is promoting the peaceful uses of nuclear energy through its Technical Cooperation (TC) program, which provides equipment, training, fellowships, and other services to its member states. The United States provides approximately 25 percent of the TC program's annual budget. This report addresses the (1) extent to which the United States and IAEA have policies limiting member states' participation in the TC program on the basis of nuclear proliferation and related concerns; (2) extent to which the United States and IAEA evaluate and monitor TC projects for proliferation concerns; and (3) any limitations and challenges in IAEA's management of the TC program. To address these issues, GAO interviewed relevant officials at the Departments of State (State) and Energy (DOE) and IAEA; analyzed IAEA, DOE, and national laboratory data; and assessed State and IAEA policies toward the TC program. Neither State nor IAEA seeks to systematically limit TC assistance to countries the United States has designated as state sponsors of terrorism--Cuba, Iran, Sudan, and Syria--even though under U.S. law these countries are subject to sanctions. Together, these four countries received more than $55 million in TC assistance from 1997 through 2007. In addition, TC funding has been provided to states that are not party to the Treaty on the Non-Proliferation of Nuclear Weapons (NPT)--India, Israel, and Pakistan--and neither the United States nor IAEA has sought to exclude these countriesfrom participating in the TC program. Finally, IAEA member statesare not required to complete comprehensive safeguards or additional protocol agreements with IAEA--which allow IAEA to monitor declared nuclear activities and detect clandestine nuclear programs--to be eligible for TC assistance, even though U.S. and IAEA officials have stressed the need for all countries to bring such arrangements into force as soon as possible. The proliferation concerns associated with the TC program are difficult for the United States to fully identify, assess, and resolve for several reasons. While State has implemented an interagency process to review proposed TC projects for proliferation risks, the effectiveness of these reviews is limited because IAEA does not provide the United States with sufficient or timely information on TC proposals. Of the 1,565 TC proposals reviewed by DOE and the U.S. national laboratories for possible proliferation risks from 1998 through 2006, information for 1,519 proposals, or 97 percent, consisted of only project titles. IAEA faces several limitations and challenges in effectively managing the TC program. First, the TC program's impact in meeting development and other needs of member states is unclear because IAEA has not updated and revised the program's performance metrics since 2002. Second, the TC program is limited by financial constraints, including the failure of many member states to pay their full share of support to the program's Technical Cooperation Fund (TCF). In 2007, the TCF experienced a shortfall of $3.5 million, or 4 percent, of the $80 million total target budget, because 62 member states did not pay their full expected contributions, including 47 states that made no payment at all. Furthermore, IAEA has not developed a policy for determining when countries should be graduated from receiving TC assistance, including those defined by the UN as high-income countries. Finally, the TC program's long-term viability is uncertain because of limitations in IAEA efforts to track how project results are sustained and because of shortcomings in strategies to develop new TC program partners and donors. |
In its April 2013 report to Congress, in response to the National Defense Authorization Act for Fiscal Year 2013 requirement that DOD provide a cost-benefit analysis and a risk-based assessment of the Aerospace Control Alert mission as it relates to expected future changes to the budget and force structure of such mission,report on any new analyses because, according to DOD officials, DOD was not weighing competing Aerospace Control Alert basing location alternatives in response to any future budget or force structure changes. DOD reported on its previous analyses that consisted of (1) three risk assessments DOD conducted to support the 2012 decision that determined which two alert basing locations could be reduced with the least amount of risk and (2) cost savings estimates DOD developed after making the 2012 decision to take two alert basing locations (one in Duluth, Minnesota, and the other in Langley, Virginia) off 24-hour alert status. DOD did not conduct or In our prior reports on the Aerospace Control Alert mission, we stated that GAO’s risk-based management framework noted that risk assessments should contain three key elements: an analysis of threat, an estimation of vulnerability, and an identification of consequences. Following a decision by DOD that two alert basing locations should be taken off 24- hour alert status, three risk assessments were conducted to support the 2012 decision of which two locations, once removed from 24-hour alert status, would have the least amount of increase in risk to the overall Aerospace Control Alert mission. DOD’s April 2013 report provided a summary of the final results of these three risk assessments. These risk assessments were performed by NORAD, the Office of the Secretary of Defense Office of Cost Assessment and Program Evaluation, and the Continental U.S. NORAD Region, which included consideration of threat, vulnerability, and consequence. All three of these assessments came to similar conclusions regarding which of the two alert locations would cause the least increase in risk if taken off of 24-hour alert status. NORAD’s risk assessment analysis was based on quantitative modeling of fighter basing and, in our February 2013 report, we noted that NORAD had improved its risk analysis by changing some of the assumptions used We also discussed the to address vulnerability and consequence.separate analysis conducted by the Office of Cost Assessment and Program Evaluation, which similarly relied on modeling to aid its evaluation of risk. Finally, in our February 2013 report, we described the analysis resulting from a panel of subject matter experts convened by Continental U.S. NORAD Region, which reached conclusions consistent with NORAD and the Cost Assessment and Program Evaluation modeling. NORAD officials stressed to us that there was an increase in risk that resulted from removing two basing locations from 24-hour alert status, but the risk assessments informed decision making as to which two bases removal would have the least increase in risk. According to DOD officials, no additional risk analysis was conducted following these three studies. According to DOD officials, DOD does not expect to make future changes to the budget and force structure of the mission beyond the decision already made to remove two sites from 24-hour alert status. In addition, the April 2013 DOD report notes that any further reductions in 24-hour alert sites would affect cross-border operations with Canada as well as mission accomplishment. Regarding the cost savings estimate, DOD’s April 2013 report states that removing the 24-hour alert status from the Duluth and Langley alert basing locations would result in an estimated savings of over $73 million over the fiscal year 2013-17 time period. The report states that these estimated cost savings are primarily from shifting personnel from full-time to part-time status at the two sites no longer on 24-hour alert status. We reported on these same cost savings estimates in February 2013 and noted that the cost savings were estimated by the Air Force after the decision was made to eliminate alert basing locations at Duluth, Minnesota, and Langley, Virginia, from 24-hour alert status. DOD has reported Air Force cost information for the Aerospace Control Alert mission in its budget displays but has not yet reported the comprehensive cost of the mission. Standards for Internal Control in the Federal Government notes that financial information is needed for periodic external reporting and, on a day-to-day basis, to make operating decisions, monitor performance, and allocate resources. Pertinent cost information should be identified, captured, and distributed in a form and time frame that permits people to perform their duties efficiently. Accurate and timely reporting of operational and financial data can assist program managers in determining whether they are meeting their agencies’ plans and meeting their goals for accountability for effective and efficient use of resources. Without comprehensive cost information, decision-makers may not know what resources are allocated and used in support of the Aerospace Control Alert mission. Pub. L. No. 110-417, § 354 (2008). weak internal controls limited DOD’s ability to accurately identify Air Sovereignty Alert mission expenditures. In addition, according to Air National Guard officials, not all National Guard Bureau costs are included in total Aerospace Control Alert mission costs. For example, the Air Force calculates the costs for each basing location based on formulas that do not consider the base’s location and the unit’s home station. However, according to Air National Guard officials, the actual costs of each basing location can vary depending on a number of factors, such as whether the personnel at the location are Air National Guard or active duty Air Force personnel or whether the assigned unit is home-based or a detachment unit—temporarily relocated from their usual duty station. The Air Force budget justification displays submitted for fiscal years 2010-14 include personnel costs for Air Force, Air National Guard, and Air Force Reserve personnel, but do not include costs, such as military personnel costs, that other military services have in conjunction with the Aerospace Control Alert mission. In addition to the 2009 requirement, the National Defense Authorization Act for Fiscal Year 2013 requires that DOD provide a consolidated budget justification display that fully identifies the Aerospace Control Alert budget for each of the military services and encompasses all programs and activities of the Aerospace Control Alert mission for each of the following: (1) procurement; (2) operations and maintenance; (3) research, development, testing, and evaluation; and (4) military construction. However, the act does not require any additional military personnel cost reporting. DOD has not yet developed a consolidated budget display in response to this new requirement. However, according to DOD officials, such a display is being developed for inclusion with the department’s fiscal year 2015 budget submission to include the four budget categories specifically identified by the act. As a result, DOD’s consolidated budget display for the fiscal year 2015 budget submission may not include military personnel costs associated with the other services, particularly the Army. The consolidated budget displays required by the Duncan Hunter National Defense Authorization Act for Fiscal Year 2009 and the National Defense Authorization Act for Fiscal Year 2013 should help provide Congress and senior DOD decision makers with a more complete picture of Aerospace Control Alert mission costs. However, in addition to Air Force, Air National Guard, and Air Force Reserve personnel costs, personnel costs from the other DOD components also support the mission—including the Army and the Army National Guard personnel providing ground-based air defense capabilities in support of the mission. Unless this additional information is included in DOD’s revised budget display, DOD decision makers will not have comprehensive cost information to make fully informed resource allocation decisions to support the Aerospace Control Alert mission. The Aerospace Control Alert mission is critical to defending U.S. airspace. Once completed, the budget justification displays required by the Duncan Hunter National Defense Authorization Act for Fiscal Year 2009 and the National Defense Authorization Act for Fiscal Year 2013 should aid in the identification of many program and activity costs for each of the military services associated with the Aerospace Control Alert mission. A comprehensive identification and reporting of all costs associated with the mission, including all military personnel costs, could aid DOD in exercising effective management of this mission and its associated resources. Comprehensive reporting of all costs of the mission would also provide the Congress with a fuller accounting of these costs to aid in its oversight of the mission. As DOD expands its cost reporting in the consolidated budget justification displays as required by section 354 of the Duncan Hunter National Defense Authorization Act for Fiscal Year 2009 and section 352 of the National Defense Authorization Act for Fiscal Year 2013, we recommend that the Secretary of Defense direct the Under Secretary of Defense (Comptroller) and responsible DOD organizations, as appropriate, to ensure that all Aerospace Control Alert program and activity costs for each of the military services are captured, including military personnel costs of the Army and Army National Guard. In written comments on a draft of this report, DOD concurred with our recommendation to ensure that all Aerospace Control Alert program and activity costs for each of the military services are captured, including those of the Army and Army National Guard. DOD stated that the Office of the Secretary of Defense (Comptroller) will include these costs in its Fiscal Year 2015 budget submission. DOD’s written comments are reprinted in their entirety in appendix I. We are sending copies of this report to the Secretaries of Defense and Homeland Security; the Commanders of NORAD, U.S. Northern Command, and U.S. Pacific Command; the Secretaries of the Army and of the Air Force; the Commandant of the Coast Guard; the Chief of the National Guard Bureau; and the Director of the Office of Management and Budget. In addition, this report will be available at no charge on our website at http://www.gao.gov. If you or your staff members have any questions about this report, please contact me at (202) 512-4523 or [email protected]. Contact points for our Offices of Congressional Relations and Public Affairs may be found on the last page of this report. GAO staff who made key contributions to this report are listed in appendix II. Brian J. Lepore, (202) 512-4523 or [email protected]. In addition to the contact named above, key contributors to this report were Mark A. Pross, Assistant Director; Adam Anguiano; Brent Helt; Mae Jones; Jeff Tessin; and Michael Willems. | To protect U.S. airspace, DOD performs the Aerospace Control Alert mission, which includes military forces arrayed in a rapid response posture to conduct both air sovereignty and air defense operations against airborne threats over the United States and Canada. The National Defense Authorization Act for Fiscal Year 2013 required that the Secretary of Defense submit a report to Congress that provides a cost-benefit analysis and risk-based assessment of the Aerospace Control Alert mission as it relates to expected future changes to the budget and force structure of the mission. The act also requires that GAO review DOD's report and submit any findings to the congressional defense committees. In response to this mandate, GAO examined (1) DOD's April 2013 reporting of a risk-based assessment and cost-benefit analysis of the Aerospace Control Alert mission as they relate to expected future changes to the budget and force structure of that mission and (2) the extent to which DOD has reported the total cost of the Aerospace Control Alert mission. GAO reviewed DOD's April 2013 report to Congress and Aerospace Control Alert budget justification displays, and interviewed knowledgeable DOD officials. In its April 2013 report to Congress, the Department of Defense (DOD) did not provide any new analyses, but provided the results of previous analyses related to the Aerospace Control Alert mission because, according to DOD officials, DOD was not expecting any future changes to the budget or force structure of the mission, including consideration of any basing location alternatives. DOD's April 2013 report summarized the results of three risk assessments that were conducted to support DOD's 2012 decision on which two alert basing locations could be removed from 24-hour alert status with the least amount of risk. The North American Aerospace Defense Command (NORAD), the Office of the Secretary of Defense Office of Cost Assessment and Program Evaluation, and the Continental U.S. NORAD Region performed these assessments and all concluded that, given the 2012 DOD decision that two alert basing locations would be removed from 24-hour alert status, the removal of the locations at Duluth, Minnesota, and Langley, Virginia, would provide the least increase in risk. DOD's April 2013 report also summarized a cost savings estimate developed after the decision to remove these basing locations from 24-hour alert status. Along with the submission of DOD's budget requests for fiscal years 2010-14, the Air Force reported cost information for components of the Aerospace Control Alert mission in budget displays required by the Duncan Hunter National Defense Authorization Act for Fiscal Year 2009, but DOD did not report the comprehensive cost of the Aerospace Control Alert mission. Standards for Internal Control in the Federal Government notes that financial information is needed for periodic external reporting and, on a day-to-day basis, to make operating decisions, monitor performance, and allocate resources. The Air Force provided budget displays containing information related to Air Force and Air National Guard military personnel costs, flying hours, and certain other costs along with DOD's budget justification materials for fiscal years 2010-14. However, DOD did not report other military service costs associated with the Aerospace Control Alert mission. The National Defense Authorization Act for Fiscal Year 2013 now requires, in addition to the Air Force cost information required by the Duncan Hunter National Defense Authorization Act for Fiscal Year 2009, that DOD provide a consolidated budget justification display that fully identifies the Aerospace Control Alert budget for each of the military services and encompasses all programs and activities of the Aerospace Control Alert mission for each of the following: procurement; operations and maintenance; research, development, testing, and evaluation; and military construction. According to DOD officials, such a display is being developed for inclusion with the fiscal year 2015 budget submission. These consolidated budget displays should help provide a more complete picture of Aerospace Control Alert mission costs. However, other military personnel costs, including those associated with the Army and the Army National Guard personnel providing ground-based air defense capabilities, support the mission as well. Inclusion of this information, in addition to the information required in the budget justification displays, could provide decision makers with more comprehensive cost information to make fully informed resource allocation decisions to support the Aerospace Control Alert mission. GAO recommends that DOD, as it expands its cost reporting in response to current reporting requirements, ensure that all personnel costs related to the Aerospace Control Alert mission, including those of the Army and Army National Guard, are included in DOD's budget displays. DOD concurred with GAO's recommendation. |
The FTZ program was created under the Foreign-Trade Zones Act of 1934, during the Great Depression, to expedite and encourage foreign commerce. Furthermore, according to CBP officials, the FTZ program aims to encourage companies to maintain and expand their operations in the United States. To encourage such expansion, FTZs provide benefits to companies that import foreign goods for distribution or for incorporation into manufactured products. In this report, we refer to these companies as FTZ operators. Goods admitted into a zone may be manufactured, assembled, exhibited, repaired, stored, or destroyed, among other processes. Companies using FTZs include both warehouse distributors and manufacturers (see fig. 1). Leading industry sectors by value of foreign and domestic goods admitted into FTZs include petroleum refining, vehicles, and consumer electronics. In addition to collecting duties, CBP also generally collects a Merchandise Processing Fee (MPF) between $25 and $485 from importers on a per- shipment basis to offset costs related to customs processing and other functions. CBP collects data on duties and fees collected from FTZs in its Automated Commercial Environment (ACE), which is the primary system through which CBP electronically collects and distributes import and export data. CBP uses it to, among other things, receive relevant data from FTZ operators and documentation required for the release of imported cargo. In 2016 there were 276 authorized FTZs across the United States, with at least 1 in each state and in Puerto Rico. Figure 2 shows the locations of FTZs in the United States and Puerto Rico. Generally, one FTZ has been approved to serve an area near each CBP port of entry. Most FTZs consist of multiple physical locations, known as sites or subzones, which include individual companies’ plants as well as multiuser facilities such as seaports or airports. The Foreign-Trade Zones Board (FTZ Board) consists of the Secretary of Commerce and the Secretary of the Treasury. The staff of the FTZ Board is located within Commerce and consists of an executive secretary and eight analysts. The FTZ Board is responsible for approving the establishment of zones and reviewing applications for production authority, among other responsibilities. Production authority, also called manufacturing authority, authorizes an FTZ operator to make transformations or changes to admitted goods. Under the FTZ Board’s revised regulations adopted in 2012, businesses applying for permission to conduct FTZ production activities must file a production notification and then may be required to file a more detailed production application if necessary. Production notification. An applicant first submits a production notification to the FTZ Board that briefly summarizes the proposed production activity and is published in the Federal Register for public comment. The FTZ Board has generally approved a company’s notification and granted production authority unless issues or concerns are raised by third parties or industry specialists within the government, according to the FTZ Board. Of the 222 production notifications submitted to the FTZ Board from January 2012 through August 2016, it reported approving 167. For the remaining 55, the FTZ Board reported denying 11 and approving 44 with some restrictions. Production application. According to the FTZ Board, businesses that have had their production notifications denied or approved with restrictions can continue to seek approval, but they must submit a more detailed production application that discusses the economic factors involved in the proposed activities. According to the FTZ Board, the applicant must demonstrate that approval would result in a net positive national economic effect and a significant public benefit, such as creating employment opportunities and encouraging the retention of domestic business activity. Of the 55 production notifications that the FTZ Board either denied or approved with restrictions, seven businesses continued to seek approval and submitted production applications. The FTZ Board reported that it has disapproved one production application and approved two others with significant restrictions based on industry-impact considerations. The four remaining production applications were pending as of May 2017. CBP is responsible for oversight and supervision of FTZ operators, including collection of duties, taxes, and fees. CBP’s principal interest and concern in overseeing FTZs is to (1) control movement of the goods in and out of the zones, (2) ensure the collection of duties and taxes owed on goods transferred from FTZs, and (3) ensure that FTZ procedures are in compliance with the FTZ Act and laws and regulations pertaining to zone use. CBP’s responsibility for overseeing goods moving into and from FTZs involves three control points: 1. CBP authorizes and supervises the admission of goods to FTZs. 2. Once the goods are admitted to FTZs, CBP delegates direct supervision of the merchandise and inventory control to the FTZ operator until the goods leave the zone. 3. CBP resumes supervision when goods are removed from zones and enter U.S. customs territory or are exported. CBP oversees FTZs through the audit-inspection method, meaning that CBP does not maintain FTZ inventory records and that CBP personnel are not physically assigned to FTZs to supervise FTZ operators. To ensure FTZs’ compliance with U.S. customs policies, laws, and regulations, CBP primarily conducts compliance reviews, which are periodic visits by CBP personnel to observe or examine FTZ transactions, records, procedures, and conditions. FTZ operators are also required to post an operator’s bond, which insures the operator’s agreement to comply with the pertinent laws and CBP regulations and delineates the particular responsibilities under the bond. As part of its oversight of FTZ operators, CBP reviews FTZ operators’ bond amounts to ensure that they are sufficient to cover duties and fees owed based on the value of merchandise held in the zone by the FTZ operator. As part of its compliance reviews, CBP assigns risk levels to FTZ operators based on violations or deficiencies found during the reviews, such as thefts, inventory control problems, or security errors. CBP guidance for conducting compliance reviews is outlined in its Foreign- Trade Zones Manual and its Compliance Review Handbook for Foreign Trade Zones. The Compliance Review Handbook specifically directs CBP officers to document the risk level associated with each compliance review. These assigned risk levels—high, medium, or low—determine the frequency of future compliance reviews, with no fewer than one review every other year. According to the Compliance Review Handbook, zones found to be not in full compliance (i.e., not low risk) will have no fewer than two compliance reviews per year. CBP considers high-risk determinations to be an unacceptable burden on CBP resources and the handbook states that Port Directors shall take enforcement actions to bring zone operators deemed high-risk into full compliance. For these high-risk zones, the Compliance Review Handbook states that compliance reviews will be performed as often as needed to ensure that the relevant zone operator is following the established improvement plan. CBP’s Office of Field Operations (OFO) manages FTZ policy and operational guidance and is primarily responsible for overseeing the FTZs, including conducting compliance reviews. OFO’s Port Directors operating within the jurisdiction of 20 field offices are responsible for overseeing the supervision of FTZs. CBP officers located at the ports conduct compliance reviews in addition to their other trade enforcement responsibilities, such as examining high-risk shipments and reviewing shipment data that arrive at U.S. ports for entry into U.S. commerce. Within CBP, the Office of Trade is CBP’s lead entity for developing trade policy and operational guidance. Within the Office of Trade, the Regulatory Audit directorate conducts audits, which may involve FTZs. Also within the Office of Trade, the Trade Transformation Office is responsible for collecting trade data from FTZs. As part of its oversight responsibilities, CBP can take a range of enforcement actions in FTZs. When CBP officials discover FTZ operator violations, the Port Director overseeing the FTZ operator can take enforcement actions depending on the violations uncovered during compliance reviews and audits including, but not limited to, warning letters, assessments of liquidated damages, fines, penalties, and seizures. CBP’s system of record for enforcement actions is the Seized Assets and Case Tracking System (SEACATS), which contains data for seizures, penalties, and liquidated damages on imports in general and not exclusive to FTZs. The FTZ program provides a range of financial benefits to FTZ operators by allowing them, in certain circumstances, to reduce, eliminate, or defer duty payments on goods manufactured or stored in FTZs. For example, FTZ operators that admit foreign components to manufacture final products for import can pay the duty rate of either the component part or the final product, whichever is lower—resulting in reduced or eliminated duty payments. In addition, companies operating FTZs can benefit from the ability to reduce the frequency of user fee payments and the opportunity to receive tax incentives in certain circumstances. Duties collected from FTZs increased as a proportion of total duties collected on all U.S. imports from 3.3 percent to 8.4 percent over the past 10 years. In addition, MPF collections from FTZs have more than doubled over the same period, though they consistently account for less than 1 percent of CBP’s MPF collections from all U.S. imports. FTZ operators that manufacture final products with a lower duty rate than their imported foreign component parts can elect to pay the duty rate on the final product rather than on the foreign status component. For example, the FTZ Board may authorize an automobile manufacturer to pay the duty rate for finished passenger motor vehicles (2.5 percent) instead of the duty rate on foreign-produced component parts, such as engines, transmissions, and other components, which have duties generally ranging from 0 percent to approximately 10 percent. This benefit provides an incentive to companies to manufacture in the United States rather than move their manufacturing operations overseas to avoid paying U.S. duties. Figure 3 shows an example of duty savings for a dietary supplement product that has a 0 percent duty rate and uses foreign status components with a 5.2 percent duty rate, representing 50 percent of the final product’s value. As the figure shows, an FTZ operator importing $1.5 million in capsules each week can save approximately $2 million in duties annually on the final product because it would be subject to a 0 percent duty. Similarly, companies operating FTZs pay no duties on goods exported from FTZs to other countries, effectively eliminating duty payments on foreign status goods brought to FTZs either for storage or incorporation into a manufactured product prior to export. For example, a foreign- headquartered power tool manufacturer may establish an FTZ in the United States in order to eliminate duty payments on foreign components in tools that it exports back to its home country. Actual business savings from duty reduction or elimination vary and depend upon the proportion and dutiable value of foreign status components that the FTZ operator incorporates into production. For example, representatives of a consumer electronics manufacturer that we interviewed stated that duty reduction or elimination resulted in the largest savings associated with FTZ status. The manufacturer reported that it admitted approximately $189 million in foreign status electronic components into its FTZ in 2015, and according to company representatives, these duty rates ranged from 2.5 to 5.8 percent. The manufacturer paid no duties on these components, however, as they were either incorporated into a duty-free final product for import into U.S. commerce or exported duty free. Company officials stated that the cost savings from duty reduction and elimination enable them to better compete for U.S. market share. For other FTZ operators, the duty savings are a less important benefit of their FTZ status. For example, representatives of a petroleum product manufacturer stated that because of the low duty rates on crude oil imports, cost savings from duty reduction amounted to less than $500,000 annually, whereas other benefits, such as tax savings (discussed below) were more significant to this manufacturer. Company officials added that the plant would probably not shut down if it lost its FTZ status, as the lost savings would not outweigh the significant cost to relocate. Among FTZ operators we interviewed, those engaged in warehousing and distribution discussed the importance of the ability to store goods in the zone indefinitely and thereby defer duty payments until the goods enter U.S. commerce. FTZ operators engaged in automobile distribution that we spoke with, for example, valued the ability to hold vehicles in the zone for quality inspection and only pay duties on those goods whose functionality has been verified. Similarly, distributors may also reduce their exposure to market variability by holding goods in the zone until seasonally advantageous market opportunities open or retailers liquidate their current inventory. Further, a zone operator that leases space to distributors of quota-restricted commodities, such as sugar and tuna, discussed with us the FTZ benefit of holding onto the stock indefinitely until import quotas are lifted. FTZ operators we met with did not attempt to quantify the associated savings of indefinite storage and duty deferral. However, as our analysis of different industries’ capital costs demonstrates, companies with higher capital costs may benefit more from deferring duty payment. Figure 4 demonstrates the potential cost savings that a company engaged in distributing four different types of goods may obtain from deferring duty payments for 1 or more 3-month periods. For companies importing electronics, for example, cost savings from deferring duty payments for an 18-month period can amount to approximately 10 percent of the value of the deferred duty. Because companies using FTZs pay duties when goods enter U.S. commerce rather than when these goods are admitted to the FTZ, they are able to reduce costs by an amount equal to the company’s cost of capital over the period the payment is deferred. FTZ operators also can benefit from the ability to file customs entries and pay associated MPFs for imported goods on a per-week rather than a per-shipment basis, which can result in a lower amount of fees paid and potentially reduce the administrative burden. Companies that import frequently and in high volumes may benefit more from FTZs than those that do not. For example, an automobile distributor not located in an FTZ that is importing 10 shipments of vehicles per week and paying the maximum MPF would make 10 MPF payments of $485 each, totaling $252,200 per year. With FTZ status, the same distributor could make one $485 MPF payment per week for a total annual payment of $25,220, resulting in annual savings of $226,980. In contrast, an FTZ operator that imports high-value items on an infrequent basis—such as a heavy machinery manufacturer that we interviewed—would be less likely to see MPF savings as significant. FTZ operators utilizing a U.S. seaport to admit merchandise to the zone also pay a Harbor Maintenance Fee (HMF) on a quarterly rather than a per-shipment basis, potentially reducing administrative work for the FTZ operator. In contrast to the MPF, however, total HMF amounts are not reduced through FTZ status and remain based upon the value of cargo admitted to the FTZ in a fiscal quarter. We previously reported on challenges that CBP faced in monitoring HMF payments associated with FTZs as a result of CBP’s use of paper payment for FTZ operators. CBP now accepts electronic payment of the HMF. The FTZ Act also exempts FTZ operators from state and local ad valorem taxation on foreign goods admitted into the zone and domestic goods held in a zone for exportation. According to CBP, some states also provide additional tax benefits to companies operating FTZs, including personal property tax reductions. For some FTZ operators we met with, the benefit of property tax waivers and exemption from state and local ad valorem taxation provided the largest source of savings associated with FTZ status. In Texas, for example, one automobile distributor estimated saving up to $3 million annually in property taxes granted by the county. To prevent possible negative impacts on local entities, the FTZ Board requires that all applications for FTZ designation contain a list of parties that would be affected by any reduction in local tax collections related to the FTZ and provide evidence that those parties concur with the proposed FTZ designation. Over the last decade, duties collected from FTZs increased as a proportion of total duties collected on all U.S. imports, as did the proportion of foreign status goods among total FTZ admissions. Duties collected from FTZs have increased from $854 million to $2.9 billion in the past 10 years, representing an increase from 3.3 percent to 8.4 percent of total CBP duty collections on all U.S. imports during the same time period (see table 1). While total duty collections on all U.S. imports grew by 34 percent over the past 10 years, collections from FTZs grew by 242 percent over the same time period. Similarly, the proportion of foreign to domestic status goods admitted to FTZs has risen, from 20 percent in 1995 to 37 percent by 2015. According to the FTZ Board, which reports annually on the extent and growth of the FTZ program to Congress, a total of approximately $659 billion in domestic and foreign goods was admitted to FTZs in 2015, of which approximately $245 billion —about 37 percent—was foreign. User fees collected by CBP from FTZs, including MPFs and HMFs, varied as a percentage of user fees collected on all U.S. imports over the past 10 years. MPF payments from FTZs approximately doubled from fiscal years 2007 to 2016, although these payments have accounted for less than 1 percent of CBP’s total MPF collections (see table 2). Many FTZ operators that we interviewed reported taking advantage of the ability to bundle a week’s worth of shipments in one entry filing, thereby paying the MPF weekly rather than on each individual shipment. HMF payments on admissions to FTZs, which FTZ operators are authorized to make quarterly rather than on a per-shipment basis, accounted for 17.4 percent of combined HMF collections from FTZs and from all U.S. imports over the same period. HMF payments from FTZs were the highest in fiscal year 2011, accounting for 20.6 percent (see table 3). While FTZs were created to provide benefits to the American public, little is known about their economic impact. For example, few economic studies have focused on FTZs, and those that have do not quantify economic impacts or address the question of what the economic activity, such as employment, would have been in the absence of companies having FTZ status. In addition, the detailed FTZ production applications filed since 2012 by seven companies seeking FTZ Board approval for manufacturing authority provided limited information on economic impact and no data to support their estimates of job creation. Public comments on these applications revealed disagreements among industry members on the anticipated economic impacts of the proposed FTZ activities. Our literature review uncovered few academic studies regarding FTZs. The studies that we reviewed did not estimate the overall economic impact of FTZs on the United States or local economies. Several academic studies we reviewed used a theoretical framework, explaining why it was profitable for companies to use a FTZ, but the assertions were not corroborated with empirical analysis of the effect on the economy. Some studies reported that limited empirical data were available to conclude that FTZs had increased employment, particularly at the national level. This finding is consistent with our prior work on FTZs. One study, for example, concluded that because the academic literature on U.S. FTZs did not look at the impact on labor costs as a factor in FTZ location decisions, it was unclear whether FTZs contributed to local employment growth. Another study, examining the effect of FTZs on the global supply chain, administered a survey to U.S. firms operating in FTZs and found that the most important benefits reported were U.S. duty waivers, potential to increase foreign sales, and relaxed need to apply for drawback. The annual FTZ Board report to Congress publishes data on FTZs, including employment data. Figure 4 presents the total number of firms that use FTZs and the associated number of employees each year from 2011 through 2015. However, the number of jobs cannot be completely attributed to the existence of FTZs because it does not address whether the companies’ hiring decisions would have taken place in the absence of the benefits provided by FTZ status. FTZ operators and representatives of the National Association of Foreign Trade Zones have attributed increased trade and employment to FTZs. For example, in 2016, an official with Hawaii’s FTZ reported that FTZ benefits have increased the advantages for refineries to operate in the state. However, it did not provide data that the FTZ status was a deciding factor in the refineries’ decisions to locate and continue operations in the state. Our analysis of the seven applications for FTZ production authority submitted from 2012 through 2016 revealed disagreements among industry members on the anticipated economic impacts of the proposed FTZ activities. All seven applications—involving primarily the textiles and industry materials sectors—stated that FTZ manufacturing would have economic benefits and anticipated increases in employment ranging from 10 to 75 new jobs. However, our analysis found that these applications provided limited data to support their estimates of job creation. They also cited other economic benefits, including increases in domestic production, exports, and capital investment but provided limited supporting data. These seven applications generated a total of 68 opposition letters and 58 support letters including from competitors, suppliers, trade associations, and other relevant entities. Opposition letters from domestic suppliers and competitors argued that the proposed FTZ manufacturing status would have negative, rather than positive, economic impacts. These opposition letters cited negative impact on employment and unfair advantage over domestic producers and suppliers, among other negative impacts. Support letters from industry members, trade associations, and local government representatives, among others, supported applicants’ assessment of increased employment and benefits to suppliers, among other positive impacts. CBP has not assessed compliance risk across the FTZ program, and its methods for collecting compliance and enforcement data impair its ability to assess and respond to program-wide risks. For example, while CBP regularly conducts compliance reviews of individual FTZ operators and considers the program to be low risk, it does not centrally compile compliance reviews and FTZ enforcement data to assess risk across the program. As a result, CBP has not reviewed compliance and enforcement information across the FTZ program to assess the frequency and significance of compliance risks and verify its assertion that the FTZ program is low risk. In addition, CBP has not taken steps to update its FTZ policies and procedures and develop best practices for FTZ compliance reviews in response to compliance risks that have been identified. According to federal internal control standards, management should obtain relevant data and assess and respond to identified risks associated with achieving agency goals. CBP assesses liquidated damages as its primary enforcement tool to bring FTZs into compliance, and CBP guidance allows for discretion in reducing the amounts assessed. CBP conducts compliance reviews of individual FTZ operators to ensure compliance with U.S. customs laws, regulations, and CBP policies. In these reviews, CBP examines operators’ records, procedures, and conditions to assess compliance with laws and regulations, such as by identifying the risk of fraud, duty evasion, or other violations that could result from noncompliance (compliance risk). These compliance reviews are managed at the field office level and conducted by CBP officers at the ports, who use the agency’s Compliance Review Handbook for Foreign Trade Zones for guidance. The Compliance Review Handbook includes a standard checklist of questions meant to identify and assess risks such as the physical security of the FTZ merchandise and the appropriateness of systems and procedures for inventory management. CBP assigns a risk level to individual zone operators based on the results of the compliance reviews and other risk factors, and the Compliance Review Handbook directs officers to document the risk level associated with each compliance review. These assigned risk levels then determine the frequency of future compliance reviews. CBP guidance states that field office personnel should conduct compliance reviews of FTZ operators at a rate that is generally determined by the magnitude of problems found from previous reviews – at a minimum, every 2 years when no problems have been found, and at least twice a year if serious problems have been found, with exceptions possible at the discretion of the Port Director. Enforcement actions taken based on violations found during the compliance review are also managed at the discretion of the Port Director. CBP officials said that their goal is to encourage compliance. According to CBP guidance, when there is reason to believe that minor problems can be corrected upon simple notification of the zone operator, the Port Director may issue a verbal warning or warning letter with the operator with no further penalty. Otherwise, the Port Director has discretion to take a corrective enforcement action commensurate with the seriousness of the violation. Enforcement actions can include liquidated damages, fines, and seizures. Liquidated damages are amounts of money that CBP assesses against FTZ operators following violations of the operator’s bond, such as violations involving FTZ inventory control and recordkeeping systems. In addition to these civil actions, CBP may also take actions, such as arrests, for violations of criminal law. CBP officials conducting compliance reviews may request support from technical experts within the agency. For example, CBP officials stated that they may reach out to CBP’s petroleum specialists when they encounter issues with tracking production at an oil refinery. CBP officials stated that they may also refer findings from compliance reviews to CBP’s Regulatory Audit officials for more comprehensive audits that include thorough reviews of FTZ operators’ inventory and financial records. Regulatory Audit officials told us that 44 audits have been conducted involving FTZs over the past 10 years and that 7 of these audits involved petroleum FTZs. These officials stated that the findings from the FTZ- focused audits typically involved deficiencies with FTZ operators’ internal controls over their inventory systems. Regulatory Audit officials stated that audits involving FTZs have been initiated based on referrals from officers conducting compliance reviews, or from other sources, but FTZs have not been a specific focus of Regulatory Audit’s planning. CBP does not centrally compile—centralize and standardize—information from its compliance reviews of individual FTZ operators. As a result, management cannot reliably obtain compliance review information in a timely manner for assessing FTZ risks and program controls, such as completion of all required compliance reviews. Instead of centrally compiling compliance review information, CBP requires Port Directors to maintain a file for each FTZ operator under their jurisdiction, which stores, among other things, various documents associated with the compliance review. CBP field offices that we visited employed varying practices for storing compliance reviews, from maintaining an updated spreadsheet containing the risk determination and compliance review documentation for each FTZ operator to maintaining paper and electronic files without centrally tracking compliance review results and status. CBP does not require compliance reviews to use a standardized template or format, such as the checklist in the Compliance Review Handbook, to summarize findings and risk level determinations. In response to our request to examine all FTZ compliance reviews conducted over the period of fiscal years (FY) 2015-2016, CBP officials estimated that it would take more than 2,600 staff hours to assemble the full set of compliance reviews and warning letters associated with violations in this time period. Because CBP could not provide us with copies of compliance reviews for all the FTZs in the program in a timely manner, we examined a generalizable random sample of compliance reviews during this time period from 174 FTZ operator sites. In conducting an analysis of this sample, we found that field offices managed and stored the compliance reviews in paper files at some locations and electronically at others. In addition, we found that the compliance review checklists appeared in at least eight different formats. The compliance review checklist questions were generally consistent, but the information was recorded in various ways, some with handwritten notes and others electronically. CBP headquarters officials stated that they were aware that some ports and field offices had developed electronic systems for storing compliance reviews that would enable more efficient access to the results than paper files and handwritten notes. However, they said that they had not examined whether these systems could be scaled across the program or whether other options existed for electronic storage of compliance reviews that would meet the needs of the FTZ program. According to federal internal control standards, management should obtain relevant data from reliable sources in a timely manner based on agency goals. With its current information management practices, however, CBP management cannot reliably obtain compliance review information in a timely manner for assessing FTZ risks and program controls. While CBP collects some FTZ enforcement data in its SEACATS database, systems limitations impair CBP’s ability to compile information on enforcement actions across the FTZ program. CBP officials stated that enforcement actions in FTZs other than warning letters and liquidated damages against FTZ bond-holders are rare, but we found that CBP cannot efficiently determine the total number or type of enforcement actions taken against FTZ operators to examine trends or to verify its assertions that such actions are in fact rare. According to CBP officials, there is no reliable way to determine which of the seizures and penalties recorded in SEACATS occurred in FTZs, although the limited information available suggests that the number of such actions is low. According to CBP officials, information about enforcement actions other than seizures, penalties, and liquidated damages is contained in the FTZ files managed by individual field offices and is not centrally compiled. We estimate that 7 percent of FTZ operators with compliance reviews in FY2015 and FY2016 have received at least one warning letter. CBP centrally compiles FTZ liquidated damages data in SEACATS, but the data are not complete. CBP can retrieve FTZ liquidated damages data because officials can search SEACATS for a statute number specific to FTZ liquidated damages. These data show that CBP assessed 1,103 liquidated damages claims in FTZs from FY2006 through FY2015. The causes of these liquidated damages, however, were difficult to determine because of limitations in the way that data on liquidated damages is categorized in SEACATS. For example, CBP officials stated that SEACATS does not specify the type of violation, such as the operator missing information on FTZ inventory, that triggered a given liquidated damages claim. While CBP officials are able to enter notes into SEACATS, CBP officials stated that notes associated with liquidated damages claims are often incomplete and contain insufficient information without retrieving additional documentation. According to CBP officials, CBP is upgrading SEACATS to modernize its capabilities, which will improve CBP’s capacity to track more specific information on enforcement actions, including on FTZ liquidated damages. For example, CBP officials stated that the SEACATS modernization will allow CBP officers to classify the specific FTZ violations that led to assessments of liquidated damages. However, CBP officials stated that these changes to SEACATS will not enhance CBP’s ability to identify seizures and other enforcement actions in FTZs, except insofar as the system improvements will require CBP officers to enter more detailed information in a standardized format. This format may provide more detail on the cause of enforcement actions and enhance CBP’s ability to perform keyword searches for seizures and penalties in FTZs. CBP officials stated that data on enforcement actions other than seizures, penalties, and liquidated damages will remain in FTZ files stored at ports and field offices. CBP officials further stated that the SEACATS modernization is scheduled to be fully implemented in September 2017. While CBP will have more data on liquidated damages from the improvements to SEACATS, and may have some additional information on seizures and penalties in FTZs, information on other enforcement actions will remain in FTZ files stored at ports and field offices along with compliance reviews. According to federal internal control standards, management should obtain relevant data from reliable sources in a timely manner based on agency goals. With its current information management policy, CBP management cannot reliably obtain enforcement information in a timely manner for assessing FTZ risks and program controls, such as completion of all required compliance reviews and associated documentation of enforcement actions. While CBP analyzes risks in individual FTZs as part of its compliance reviews, it has not conducted a program-wide risk analysis using available FTZ compliance and enforcement information. CBP officials told us that they generally consider FTZs’ security and revenue risk to be low based on regular compliance reviews of individual FTZ operators and anecdotal evidence from field office personnel. CBP officials stated that these reviews had found relatively few problems and that they had not heard of many major issues, such as fraud, occurring in FTZs. They said that any major issues would be escalated up the chain of command upon discovery by CBP officers. They also noted that the rate at which liquidated damages occur in FTZs—an average of approximately 108 out of 41,000 entries per year from FY2011 to FY2015—is very low in comparison to the rate at which similar problems occur in trade outside of FTZs. Most of the compliance reviews that we analyzed did not identify compliance problems, but many did not contain sufficient information to verify CBP’s assertion that the program is low risk. Our analysis of the FY2015 and FY2016 compliance reviews for the FTZ operators in our generalizable sample showed that CBP found compliance problems for an estimated 15 percent of these operators. Problems identified in our sample of compliance reviews included receiving and storing unauthorized merchandise in the FTZ and missing required documentation for inventory in FTZs, among other issues. FY2015 and FY2016 compliance reviews for an estimated 80 percent of FTZ operators resulted in at least one low-risk determination and no evidence of being medium or high risk during this time period. Compliance reviews of an estimated 3 percent of FTZ operators resulted in at least one medium- or high-risk determination during this time period. Because of missing and incomplete information, however, CBP’s risk determination was not clear for an estimated 16 percent of FTZ operators from these compliance reviews. CBP also was not able to provide FY2015-FY2016 compliance review checklists for an estimated 34 percent of the FTZ operators. Incomplete information on the compliance reviews may limit CBP’s ability to determine the cause of compliance violations as well as reach conclusions about the overall program risk level. Further, for an estimated 36 percent of FTZ operators, FY2015-FY2016 compliance review documentation did not provide evidence of specific transactions reviewed, which may limit the validity of conclusions reached in the compliance reviews. CBP officials said that they had not conducted a program-wide risk analysis of the FTZ program because it would be too time-consuming and costly based on how compliance review and enforcement information is currently collected and stored, and because of their assertion that the program has a low risk of noncompliance. CBP officials also stated that the agency had not studied trends in the frequency or cause of liquidated damages claims because they first developed the method for identifying FTZ-specific liquidated damages in response to our request for these data and have considered such an analysis a low priority. Without program-wide analyses of the frequency and significance of problems found during compliance reviews, risk levels determined, and enforcement actions taken, CBP cannot verify that the FTZ program is at a low risk of noncompliance or assess the effectiveness of its internal controls. Data systems improvements, such as the planned enhancements to SEACATS discussed earlier, may reduce the cost of such an analysis, and CBP could further reduce the cost by examining representative samples. According to federal internal control standards, agency managers should comprehensively identify risks and analyze them for their possible effects. Incorrect determinations about risk level may impact program effectiveness and revenue collection for the FTZ program, which accounted for 11 percent of U.S. imports in 2015. CBP last updated its Compliance Review Handbook for Foreign Trade Zones in 2008, and it has not updated the handbook to respond to compliance risks identified since then, although some ports have made improvements to their processes for conducting compliance reviews in the interval. CBP officials stated that the policies and guidance in the handbook represent a minimum standard for conducting compliance reviews, but Port Directors have discretion to incorporate additional steps into their compliance reviews. CBP field office personnel we spoke with said that they had added questions or forms to their compliance review process in response to identified problems, and they provided some examples. Our analysis of the generalizable sample of compliance reviews also found that some ports had taken steps to improve their compliance review process. For example, we found that at least some compliance reviews for an estimated 28 percent of FTZ operators included a risk assessment tool that explained the basis for their risk determination, although CBP officials stated that this was not a requirement. CBP officials stated that they were aware that some ports had developed additional questions and methods to respond to compliance risks; however, these officials said that they lacked the resources to support a working group to examine existing practices and improve the templates used by officers conducting the compliance reviews. These officials stated that they intend to update policies and procedures reflected in the handbook after they add FTZ-related features to ACE. However, CBP officials have not reached out to field offices to identify best practices or improvements or provided interim guidance to ports and field offices prior to completing the transition to ACE and formally updating the handbook. According to federal internal control standards, management should respond to identified risks according to program objectives. In doing so, management should consider risk that remains despite its current risk management efforts and design responses appropriate for these residual risks. Because CBP has not made the evaluation of the compliance review process improvements and identification of best practices a priority, CBP may be missing opportunities to reduce compliance risk and lower compliance costs through improved tools and targeting. CBP assesses FTZ liquidated damages as a primary enforcement tool to bring FTZ operators into compliance, and CBP guidance for assessing liquidated damages allows for discretion in mitigating (reducing) the amount of these assessments. Our analysis of SEACATS data on enforcement actions found that liquidated damages assessments accounted for nearly all enforcement actions we and CBP identified. CBP guidance states that assessments of liquidated damages against FTZ operators who are in breach of their bond contracts may be mitigated to a lower level if a petition for relief is submitted by the relevant FTZ operator. CBP provides additional guidance to staff for determining the appropriate mitigated amounts for liquidated damages, instructing officials to consider factors such as the frequency of the FTZ operator’s past violations, remedial actions taken, and cooperation with agency officials. CBP’s mitigation guidance also provides ranges for different types of violations. CBP officials stated that if operators are making improvements as part of a mitigation decision, then the liquidated damages have served their function even if the initial amount was mitigated to an amount lower than the range provided in mitigation guidelines. We analyzed data on the 1,103 liquidated damages claims made from FY2006 through FY2015 and found that nearly all FTZ operators who were assessed claims for liquidated damages submitted a petition for relief of the liquidated damages, resulting in significant reductions in the original assessed amount (see table 4). CBP assessed approximately $100 million in liquidated damages claims from FTZ operators from FY2006 to FY2015. CBP officials mitigated approximately 97.5 percent of the liquidated damages claims over this period, resulting in a final total liquidated collection amount of approximately $2.8 million, representing 2.9 percent of the original assessed amount. CBP officials stated that variation in the extent that liquidated damages are mitigated over time might be attributable to variation in the types of cases different ports see, such as unusually large cases, or other factors. In addition, these officials said that they are aware that some CBP officials are consistently reducing liquidated damages to the minimum of the ranges in the guidance while others may mitigate to higher levels. These officials said that, for example, some ports may be overwhelmed with cases and want to clear them by mitigating to the bottom of the range to avoid appeals. CBP officials stated that they have not reviewed or analyzed liquidated damages decisions across the FTZ program, as their focus is on reviewing FTZ liquidated damages decisions on a case-by- case basis to ensure that the mitigations are consistent with CBP policy. These officials also stated that CBP conducts periodic site surveys, which are intended to review penalties, liquidated damages and forfeiture procedures pertaining to seizure cases. According to CBP officials, while these site surveys are not specific to FTZ violations, they cover FTZ liquidated damages cases to ensure compliance with laws, regulations, and mitigation guidelines. These officials also noted that they are aware the mitigation guidance is out of date and CBP is in the process of updating the mitigation guidelines. Officials from CBP field offices conduct regular compliance reviews of individual FTZ operators and take a range of enforcement actions based on the violations found. Because of CBP’s information management practices, however, CBP officials cannot store and access compliance reviews in a manner that would allow program officials to reliably obtain compliance review and enforcement information in a timely manner for assessing FTZ risks and program controls. Although CBP officials believe that FTZs represent low risk based on individual compliance reviews, CBP has not conducted a systematic risk assessment of the FTZ program to confirm that this is the case. Without a program-wide assessment of the frequency and significance of problems identified during compliance reviews, risk levels determined, and enforcement actions taken, CBP does not have reasonable assurance that the FTZ program is at low risk of noncompliance. Some CBP field offices and ports have developed innovations for their compliance review processes, such as additional questions and methods to respond to compliance risks. However, CBP has not taken steps to update and improve its compliance review tools and procedures based on risk reviews, enforcement actions against noncompliant FTZ operators, or innovations by field office staff. As a result, the program may be missing opportunities to mitigate compliance risk and reduce compliance costs through improved tools and targeting. To strengthen CBP’s ability to assess and respond to compliance risks across the FTZ program, we recommend that the Commissioner of CBP take the following three actions: 1. Centrally compile information from FTZ compliance reviews and associated enforcement actions so that standardized data are available for assessing compliance and internal control risks across the FTZ program. 2. Conduct a risk analysis of the FTZ program using data across FTZs, including an analysis of the likelihood and significance of compliance violations and enforcement actions. 3. Utilize the results of the program-wide risk analysis to respond to identified risks, such as updating risk assessment tools and developing best practices for CBP’s FTZ compliance review and risk categorization system. We provided a draft of this report for comments to CBP and Commerce. We received written comments from CBP, which are reproduced in full in appendix II. In its comments, CBP concurred with our recommendations and identified actions it intends to take in response to the recommendations. In response to our first recommendation, CBP indicated that it intends to prepare and disseminate a summary template for compiling FTZ compliance reviews and internal control risks across the FTZ program. In response to our second recommendation, CBP indicated that it will conduct a risk analysis across the FTZ program. In response to our third recommendation, CBP responded that it will finalize a compliance review handbook for ACE that incorporated risk assessment tools and best practices for FTZ compliance review and risk categorization. CBP and Commerce also provided technical comments, which we incorporated in the report, as appropriate. As agreed with your office, unless you publicly announce the contents of this report earlier, we plan no further distribution until 30 days from the report date. At that time, we will send copies to the appropriate congressional members, the Acting Commissioner of CBP, the Secretary of Commerce, and other interested parties. In addition, the report is available at no charge on the GAO website at http://www.gao.gov. If you or your staff have any questions about this report, please contact me at (202) 512-8612 or [email protected]. Contact points for our Offices of Congressional Relations and Public Affairs may be found on the last page of this report. GAO staff who made key contributions to this report are listed in appendix III. Our objectives were to examine (1) the benefits that the Foreign Trade Zones (FTZ) program provides to companies operating FTZs and revenues that U.S. Customs and Border Protection (CBP) has collected from FTZs, (2) what is known about the economic impact of FTZs on the U.S. and local economies, and (3) CBP’s ability to assess and respond to compliance risks across the FTZ program. To examine the benefits that the FTZ program provides to companies operating FTZs and revenues that CBP has collected from FTZs, we analyzed and reported on aggregate, national-level data on goods admitted into FTZs and goods entered into U.S. commerce from FTZs. In addition, we reviewed documents from CBP headquarters and field offices and the Foreign-Trade Zones Board and interviewed CBP and FTZ Board officials. We selected five FTZs in Maryland, Texas, and Virginia for site visits based on factors including trade volume, industry sector, and FTZ activity. At these sites, we interviewed representatives of FTZ operators engaged in warehousing and manufacturing in the vehicle, oil refinery, consumer electronics, and other industries. We also characterized the types of benefits that FTZ operators received by providing illustrative examples and calculations of associated savings at the operator level, using financial and testimonial evidence obtained through interviews with FTZ operators and CBP officials and reviewing CBP data and industry publications. For example, we conducted illustrative calculations of duty and cash-flow savings using duty rates on select component and final products, annual financial data provided by FTZs to the FTZ Board, and cost-of-capital figures published by the New York University Stern School of Business. To identify trends in total government revenue collected from FTZs, including from user fees, we obtained and analyzed CBP data from the Automated Commercial Environment (ACE) for fiscal years 2007 to 2016 on total customs duties, Merchandise Processing Fee (MPF), and Harbor Maintenance Fee (HMF) collections from FTZs. We compared revenues and fees collected from FTZs to revenues and fees collected on total U.S. imports using Office of Management and Budget data from fiscal years 2007 to 2016 on duties collected on total U.S. imports, CBP data from annual budget requests on total MPF payments on total U.S. imports, and Department of the Treasury data on HMF payments on total U.S. imports. To assess the reliability of the ACE data, we held a series of meetings with CBP ACE specialists to define and refine our requests for relevant data to request from the system and to assess their reliability checks and testing of the system. We also reviewed relevant instructions and data dictionaries on the data and the system that produced them. We performed electronic testing by pairing these datasets and conducting statistical tests on portions of the data with missing information to determine that the missing data are random with respect to variables of interest. We found the ACE data to be generally reliable for the purposes of our analysis. To examine what is known about the economic impact of FTZs on the U.S. and local economies, we reviewed economic studies on FTZs published since 1990. We reviewed the studies primarily to obtain information on the range of effects on the economy, different methods and assumptions used, and insights gained from these efforts. We identified these studies through a literature search and discussions with representatives from CBP, the Foreign-Trade Zones Board, and the National Association of Foreign Trade Zones. We also reviewed and analyzed economic information found in FTZ production applications prepared by companies seeking FTZ Board approval for production authority, which allowed us to illustrate FTZs’ anticipated economic impacts at regional and local levels. We reviewed FTZ production applications since 2012, when the current regulations for FTZ production applications were adopted. We also interviewed officials from CBP, the FTZ Board, and the National Association of Foreign Trade Zones. To examine CBP’s ability to assess and respond to risk across the FTZ program, we reviewed and compared information on CBP’s oversight processes and enforcement actions against CBP requirements and federal internal control standards. We examined a generalizable random sample of compliance reviews from 174 FTZ sites out a population of 1,369 FTZ sites, from fiscal years 2015 through 2016 to determine whether control deficiencies exist in CBP’s monitoring and oversight processes. We initially requested a sample of 193 FTZ sites, but determined that 19 of the 193 FTZ sites were out of scope because they were recently established and thus had not yet received a compliance review. Our effective final sample size was thus 174. Our estimates generalize this sample of 174 to the full population of 1,369 active FTZ sites. As a result, our estimates have confidence intervals of plus or minus 8 percentage points or smaller with 95 percent confidence. Our estimates reflect documentation or compliance problems found in any of the compliance reviews for a given operator over this time period unless noted otherwise. We also examined data on FTZ enforcement actions and compared the results of these actions against criteria for when and how enforcement actions are to occur. We examined data on liquidated damages, liquidated damages mitigations, and CBP officer notes at the case file level in CBP’s Seized Assets and Case Tracking System (SEACATS). To do so, we consolidated and matched data from multiple tables within this system, consolidating information as necessary to examine at the case file level. To assess the reliability of the SEACATS data, we conducted electronic testing of required data elements to determine inconsistencies in the data; reviewed the data dictionary and associated documentation about the data and the system that produced them; and interviewed CBP officials knowledgeable about the data system. We also consolidated SEACATS tables into a single analysis file for reporting estimates on liquidated damages in FTZs. We found the SEACATS data to be generally reliable for the purposes of our analysis. We also examined warning letters and other enforcement-related information that we requested from CBP from the same FTZ operators included in our compliance review sample. We also interviewed CBP and Department of Homeland Security officials and FTZ representatives. In addition to the contact named above, Christine Broderick (Assistant Director), Jeremy Latimer (Analyst-in-Charge), Sada Aksartova, Pedro Almoguera, Debbie Chung, Neil Doherty, Andrew Kurtzman, Jill Lacey, Grace Lui, Susan Murphy, and David Wishard made key contributions to this report. | The FTZ program was established in 1934 to expedite and encourage international trade and commerce. FTZs provide benefits to companies that import foreign goods for distribution or for manufacturing in order to encourage them to maintain and expand their operations in the United States. The total value of foreign and domestic goods admitted to FTZs in 2015 was about $660 billion. CBP is responsible for oversight and enforcement in FTZs, including revenue collection and assessing risk of noncompliance with U.S. laws and regulations. GAO was asked to review CBP's oversight of FTZs and FTZs' economic impact. This report examines (1) the benefits of the FTZ program to companies operating FTZs and revenues collected from FTZs, (2) what is known about FTZs' economic impact, and (3) CBP's ability to assess and respond to compliance risks across the FTZ program. GAO analyzed CBP documents and data, interviewed agency officials and FTZ operators, and visited five FTZs based on trade volume, industry sector, and FTZ activity. The Foreign Trade Zones (FTZ) program provides a range of financial benefits to companies operating FTZs by allowing them to reduce, eliminate, or defer duty payments on goods manufactured or stored in FTZs before they enter U.S. commerce or are exported. FTZs are secure areas located throughout the United States that are treated as outside U.S. customs territory for duty assessments and other customs entry procedures. Companies using FTZs may be warehouse distributors or manufacturers (see figure). A manufacturer, for example, that admits foreign components into the FTZ can pay the duty rate on either the foreign components or the final product, whichever is lower—resulting in reduced or eliminated duty payments. Distributors can also benefit by storing goods in FTZs indefinitely and thereby deferring duty payments until the goods enter U.S. commerce. In 2016, U.S. Customs and Border Protection (CBP) collected about $3 billion in duties from FTZs. While FTZs were created to provide public benefits, little is known about FTZs' economic impact. For example, few economic studies have focused on FTZs, and those that have do not quantify FTZs' economic impacts. In addition, these studies do not address the question of what the economic activity, such as employment, would have been in the absence of companies having FTZ status. CBP has not assessed compliance risks across the FTZ program, and its methods for collecting compliance and enforcement data impair its ability to assess and respond to program-wide risks. While CBP regularly conducts compliance reviews of individual FTZ operators to ensure compliance with U.S. customs laws and regulations, it does not centrally compile FTZ compliance and enforcement information to analyze and respond to compliance and internal control risks across the program. Federal internal control standards state that management should obtain relevant data and assess and respond to identified risks associated with achieving agency goals. Without a program-wide assessment of the frequency and significance of problems identified during compliance reviews, risk levels determined, and enforcement actions taken, CBP cannot verify its assertion that the FTZ program is at low risk of noncompliance. Incorrect determinations about program risk level may impact program effectiveness and revenue collection for the FTZ program, which accounted for approximately 11 percent of U.S. imports in 2015. GAO makes three recommendations to CBP to strengthen its ability to assess and respond to compliance risks across the FTZ program, including actions to centrally compile FTZ compliance and enforcement data, and to conduct a risk analysis of the FTZ program. CBP concurred with these recommendations and identified steps it will take to address them. |
The VCCR is an agreement that governs consular relations among approximately 165 nations. Under the VCCR, countries can conduct various consular functions, such as issuing travel documents and passports to their citizens. Consular registration—the practice by which an individual may register with his or her consulate in a foreign country— may assist consular officials in performing a variety of consular services, such as locating missing citizens and determining whether citizens are safe. According to the Department of State, issuance of CID cards falls within the general scope of permissible consular functions. For more than 133 years, the government of Mexico has been issuing a CID card, the Matrícula Consular to citizens living abroad. As of June 2004, the CID cards are issued in the United States at 45 consulate office locations in 20 states and Washington, D.C. Consulate offices may occasionally issue these cards at offsite locations, such as community centers, throughout their jurisdiction. The government of Guatemala began issuing its version of a CID card, called the Tarjeta de Identificación Consular Guatemalteca, in the United States in August 2002. Guatemala maintains 8 consulate offices in 6 states and Washington, D.C., and also occasionally issues CID cards at offsite locations within the geographic area covered by the local consulate. In October 2003, Argentina began a program to make CID cards with new security features available to its citizens in the Los Angeles, California, metropolitan area. As of May 2004, Argentina had issued approximately 2,400 cards. Several other countries have expressed interest in issuing their own identification cards to their citizens living in the United States but as of late 2003 had not yet done so. These countries include Bolivia, Peru, and El Salvador; Peru has specifically cited the acceptance of the Mexican CID card in the United States as a factor contributing to its interest in issuing a CID card. CID cards are issued to help identify the citizenship of persons residing in a foreign country. While some consulates may issue CID cards, these documents have no bearing on the cardholder’s legal residence status in the host country. Thus, CID cardholders can be either undocumented aliens living in the United States or legal residents. Under the terms of the VCCR, these cardholders, regardless of their residency status, possess certain legal rights. For example, U.S. law enforcement officials and others must advise a resident alien who is arrested or otherwise detained in the United States of his or her right to request that the appropriate consular officials be notified of the detention without delay. Cardholders can, in turn, alert federal, state, and municipal law enforcement authorities of the need to notify consular officials when assistance is needed. Austin, Texas, was one of the first areas in the country where a financial institution accepted the Mexican CID card as valid identification for opening a bank account, according to Mexican embassy representatives. An official with the Austin Police Department told us that in 2000 the department became concerned about the rate of robberies committed against the Hispanic immigrant community. Members of this community, which, according to the official, includes a large number of undocumented aliens, may not report crimes to the police for fear of deportation. After meeting with representatives of the Hispanic community and the Mexican consulate, the police department determined that robberies could be reduced if community members made greater use of the U.S. banking system rather than keeping large amounts of cash at home or on their person. In November 2000, the Austin Police Department began contacting area banks to determine if they would accept the Mexican CID card as identification for opening bank accounts. According to this police department official, one bank operating in Austin agreed to accept the card as valid identification in early 2001. The Mexican embassy has reported that 160 financial institutions nationwide now accept the Mexican CID card as proof of identity for opening bank accounts. An official in the Guatemalan embassy told us that that some banks are accepting the Guatemalan CID card as well. Some reasons for financial institution acceptance of the Mexican CID, in particular, were recently stated by a state banking association. The association believes that bank acceptance of CID cards can aid law enforcement, not only for assisting immigrants who may be targeted by criminals because of their tendency to possess cash, but also for possibly combating money–laundering and terrorism. Banks, the association said, are subject to numerous layers of federal and state regulation and oversight that can assist federal officials in monitoring international money transmissions. Also, banks accept the Mexican CID in order to better serve members of the immigrant community without bank accounts, often referred to as the “unbanked.” The association said that serving the unbanked provides a new source for deposits, loans, and wire transfers, which benefit the economy at large. In addition, a Treasury official said that there are no laws prohibiting undocumented aliens from opening bank accounts in the United States and that banks are not required to determine whether their customers are present in the United States legally. The official also said that for purposes of fraud or money-laundering detection, the department would prefer to have as many people as possible active in the U.S. banking system, because their financial activities could be closely monitored. Subsequent to the acceptance of the Mexican CID card by the bank in Austin, the Austin Police Department itself decided to recognize the card as a valid form of identification. In addition, the city of Austin also began accepting the card to help Mexican citizens living in the community gain access to community courts and obtain other documents, such as library cards and copies of locally maintained medical records. A representative of the Dallas, Texas, Police Department told us that the department began accepting the CID cards primarily as a means to allow officers to properly identify all people that they came in contact with who may lack other forms of identification. According to the Mexican embassy, as of February 2004, 1,159 U.S. police departments nationwide accept the Mexican CID card as a valid identity document. In December 2001, the Mayor of San Francisco signed a policy establishing the Mexican CID as valid identification in the city and county of San Francisco; this policy included the police and sheriff’s departments. The San Francisco Office of the Mayor, in a press release, declared that this acceptance would help members of the Mexican immigrant community, who may otherwise be jailed or deported for minor offenses if they do not possess an accepted form of identification. Use of the CID card as a recognized form of identification would, in turn, help reduce police processing time spent handling these offenses. The release also cited a benefit expressed by the Austin police, that extending official acceptance to the CID card might allow immigrants to be less fearful in reporting crimes to police, since they would now possess acceptable identification. Some cities and counties have begun accepting the Mexican CID card as valid identification for obtaining city or county services. The Mexican embassy states that 363 cities and 153 counties recognize its CID card as of February 2004. An official of one county housing and community affairs department testified before Congress that county government must provide for public safety and health, education, and other basic services, and that accepting these CID cards helps to identify the people who need these services. Because CID cards contain a local address, the official testified, the county can determine whether applicants for services are residents of the county. In August 2003, according to the National Immigration Law Center (NILC), 13 states accepted the Mexican CID as one form of valid ID in issuing driver’s licenses. Representatives of immigrant advocacy groups we contacted and whose positions we reviewed have argued that accepting CID cards for driver’s licenses helps states maximize the number of licensed and potentially insured drivers on their highways. However, we found that at least 2 states have recently rescinded their prior acceptance of CID cards in issuing driver’s licenses. For example, North Carolina (1 of the 13 states mentioned above) decided that, effective February 2004, it would no longer accept foreign-issued documents (except passports) as proof of identity for driver’s license issuance. In discussing this decision, an official with the North Carolina Division of Motor Vehicles (DMV) stated that the DMV had heard concerns through the American Association of Motor Vehicle Administrators (AAMVA) that the FBI and DHS did not support public acceptance of the Mexican CID card. In addition, this official informed us that some state residents had expressed concerns over and opposition to Mexican CID card acceptance to the Office of the Governor and DMV. Among these concerns, some residents felt that CID acceptance might help people not legally present in the United States to circumvent immigration laws. The DMV Commissioner made an administrative decision that, beginning in February 2004, the DMV would only accept documents issued by state or federal governments, or federally validated international passports, as proof of identification when issuing driver’s license or state ID cards. In addition, in December 2003, the Governor of California approved a bill that repealed the provisions of a law passed in September 2003 that would have allowed driver’s license applicants to submit a Mexican CID card as proof of identity. In September 2003, a bill passed by the California Legislature (S.B.60) and signed into law by the then Governor, provided among other things, that an applicant for a driver’s license could submit an individual taxpayer identification number (ITIN) to the Department of Motor Vehicles in lieu of a Social Security number (SSN). If submitting an ITIN, the applicant must also submit an acceptable birth certificate and one of a number of other identification documents that included the Mexican CID card. These provisions were to take effect on January 1, 2004. However, in December 2003, a new bill passed by the legislature and signed into law by the new Governor repealed S.B.60. Thus, the ITIN and the CID card as an adjunct identification document were both rendered invalid for obtaining a driver’s license in California. In calling for the repeal of S.B.60, the Governor said that the bill might “invite fraud or undermine law enforcement.” He noted that the state Attorney General and California’s Sheriff’s Association had expressed security concerns over the measure. In addition, a bill analysis presented to a State Assembly committee noted that the Internal Revenue Service had informed the state that ITINs were not valid for identification outside of the tax system and that ITIN applicants were not subject to the same document verification standards as SSN applicants. A Mexican citizen residing in the United States who seeks to obtain a Mexican CID card is required to present to the Mexican consular field office, in person, three types of documents: proof of Mexican nationality, proof of identity, and proof of local address (see table 1 for types of required documentation). The consulate office then determines if the documents presented are authentic. Prior to January 2004, nationality, identity, and residency documents were examined—that is, visually inspected—by a consular official. Mexican officials reported that documents used to obtain CID cards were only verified with authorities in Mexico when the documents’ authenticity was in question. This process raised concerns for the FBI, which stated in congressional testimony in June 2003 that the Mexican CID card was not a reliable form of identification. An FBI agent cited Mexico’s lack of a centralized database to prevent multiple cards being issued to one individual and the inability of consular field offices in the United States to share information about an applicant’s identity through a database. The FBI agent cited the Mexican birth certificate, in particular, as a document that could easily be fraudulently obtained and used as proof of identity. In addition, the FBI agent said some Mexican consulates issued CID cards to individuals lacking any proof of identification, as long as they fill out a questionnaire and satisfy the consular official that they are who they claim to be. AAMVA also expressed concerns about the Mexican CID card and its issuance procedures. Specifically, members of AAMVA were concerned about the lack of (1) standardized issuance procedures, (2) uniform security features on all valid CID cards, and (3) access to a secure database to verify documents. In May 2003, AAMVA issued a resolution stating that it was premature to recommend the use of foreign-issued CID cards for identification purposes and that more information was needed to assess the verifiability of the documents. Mexican consular officials told us they wanted to strengthen the CID card issuance process, in part to provide more assurance to institutions accepting the card and to federal law enforcement agencies that the cardholder’s identity was valid. As a result, in January 2004, new issuance procedures were implemented (see fig. 1). Mexican consulates can now search a centralized CID card database containing the records of approximately 2.6 million persons registered with the 45 Mexican consulates in the United States. Mexican passport information is also maintained on this system. In addition, consulates can verify the identity of an applicant who uses a Mexican voter registration card by checking it electronically against a voter registration database in Mexico. A Mexican official in the Dallas consulate office estimated that about 50 percent of applicants seeking Mexican CID cards in the Dallas office use their voter registration cards to prove their identity. As of April 2004, this database held approximately 67 million records—representing about 94 percent of eligible Mexican voters. The new process also checks the applicant’s identity against a Mexican government “stop list”—a database containing records of persons who are not allowed to obtain documents issued by the Mexican government, including fugitives or persons who have tried to use counterfeit documents in Mexico or at consulate offices in the past. A Mexican official estimated that this database contains about 20,000 records. In January and February 2004, Mexican consulate offices issued over 63,000 CID cards under the new issuance process. However, despite these new procedures, Mexican consulate officials told us that they still rely primarily on a visual inspection—not database verification—of all applicant documents except the passports and voter registration cards. Thus, there are no safeguards to prevent some documents, such as birth certificates, from being fraudulently obtained and used as proof of nationality or identity in order to obtain a CID card. According to the FBI, the Mexican birth certificate is a component used in the fraudulent documents trade within the United States and worldwide. The Seattle, Washington, office of DHS’s Immigration and Customs Enforcement (ICE) said that in its experience, there has been an increase in both the number of counterfeit Mexican CID cards and legitimate Mexican CID cards issued with false biographical information. According to agents, almost all of those suspects apprehended with legitimate CID cards containing false biographical data had obtained the cards by getting a counterfeit Mexican birth certificate and using it to get a legitimate CID card from the Mexican consulate in Seattle. They then used this card in applying for a legitimate Washington State driver’s license or identity card. The office said that most of these individuals have done so in order to establish a new identity to conceal a previous arrest or deportation. For example, in November 2003, counterfeit Mexican CID cards were among the evidence seized by ICE agents during an authorized search at two apartments near Seattle. In addition to seizing the CID cards, agents seized a number of finished or partially finished counterfeit documents, including Mexican birth certificates and driver’s licenses; U.S. driver’s licenses from several states; U.S. immigration documents, such as resident alien and permanent resident cards; and U.S. Social Security cards. The agents also confiscated counterfeit document production materials that included computers, CD-ROMs, floppy disks, and many other supplies. As a result of this investigation, four Mexican citizens were arrested. One of the four was deported to Mexico with no criminal charges. Two of the perpetrators pled guilty to violating Section 1546 of Title 18 of the United States Code (Possession, Making, Selling Fraudulent Immigration Documents) and were sentenced on March 12, 2004, to 17 and 14 months, respectively, in federal prison. The remaining perpetrator pled guilty to violating Section 1325 (a)(2) of Title 8 of the United States Code (Eluding Examination at Entry) and was sentenced on December 19, 2003, to 5 months in federal prison. All three are to be deported following their prison sentences. According to a DHS agent, the production of these fraudulent ID documents did not involve highly sophisticated processes or equipment. Rather, the agent said that most of the equipment used could be obtained off the shelf from retail computer supply stores at an estimated cost of under $1,000. The only exceptions to this availability were counterfeit working copies of documents and counterfeit government holographic seals and stamps. These items were apparently produced elsewhere and shipped to the fraudulent ID document operation. To obtain a Guatemalan CID card, an applicant must appear in person at a consulate office and present a CID application form and a valid Guatemalan passport. An official from the Guatemalan embassy told us that the passport requires an applicant to provide, among other information, two fingerprints and a photograph and signature. During the CID card issuance procedure, an applicant’s passport number and other information are checked against records maintained in Guatemala’s central passport database system. In December 2003, over 1.3 million passport records were maintained in this system. After consular officials verify the applicant’s passport information, including the photograph and signature, by checking it against the central passport database records, the consulate approves the production and issuance of the CID card. Figure 2 illustrates the Guatemalan issuance process. The Guatemalan CID cards are produced centrally at a U.S. contractor’s facility and then mailed to the applicant or distributed to them at the consulate offices. Through December 2003, Mexico issued a laminated CID card that was valid for up to 5 years (See fig. 3.) These cards contained a unique numerical identifier, a photograph, and the signature of the cardholder. No other document security features were included in these cards. Mexican officials estimate that approximately 1.1 million of these cards were issued between 2001 and 2003, and as of June 2004, about 1 million of these CID cards remain valid and in circulation. As of June 2003, the FBI estimated that this version of the card comprised the majority of Mexican CID cards now in circulation. Prior to that assessment, in March 2002, Mexico began phasing in a new CID card that incorporates various technical security features not contained in the older version of the card (See fig. 4.) This newer card is considered by Mexican officials to be a high-security CID card, compared with the low-security CID card issued earlier. The high-security version of the Mexican CID card contains at least eight identifiable security features. (See table 2 for a list of security features.) Among other things, the new cards require a special decoder device in order to see certain data, such as the cardholder’s name and date of birth, printed on the card. A Mexican official told us that between 2002 and 2003, consulate offices distributed nearly 649,000 of these decoders to U.S. banks, police departments, airlines, and ICE. Mexican officials told us that as of April 2004, about 2 million high-security Mexican CID cards were issued to Mexican citizens in the United States. The Guatemalan CID card is produced by a U.S. contractor and has been issued in the United States since August 2002 (see fig. 5). The Guatemalan CID card contains approximately eight distinct security features (see table 2). As of April 2004, about 104,000 Guatemalan CID cards had been issued in the United States. Officials with the Forensic Document Laboratory, a division of ICE that provides forensic assistance to law enforcement agencies, told us that incorporating technologically advanced security features into an identification document does not guarantee any document’s authenticity. Much of a document’s level of security, they said, depends upon the knowledge and training of the person examining the document. Thus, if a document examiner, such as a bank official or a police officer, is not familiar with the security features contained in a document, such as microprinting, then the presence—or absence—of those features does not necessarily ensure that the examiner will be able to recognize an authentic document. Although acceptance of CID cards has grown in the United States over the past few years, a consistent federal policy regarding use and acceptance of foreign-issued CID cards has not been established. The Homeland Security Council is leading a task force of executive branch agencies examining this issue. As of June 2004, it had not issued its findings or set a date for their release. Agencies involved in this task force included the Departments of Homeland Security, State, Justice, the Treasury, Transportation, Education, and Health and Human Services and the Office of the Vice President and the General Services Administration. Participating agency officials told us the task force’s emphasis has shifted from usage and acceptance of CID cards to broader concerns about identification document security in general, with CID cards being one element of concern. The task force has not set a timetable for releasing its recommendations. Some federal agencies have expressed independent positions on the use of foreign-issued identity documents. For example, Treasury has adopted regulations that allow financial institutions to accept CID cards as valid identification. On October 26, 2001, the USA PATRIOT Act (P.L. 107-56) was adopted. Section 326 of the act required the Secretary of the Treasury to issue regulations requiring financial institutions to implement procedures for verifying the identities of possible customers, maintaining records for customers’ identities, and consulting government lists of known or suspected terrorists to ensure that customers are not on that list. The act also required the department to issue a report to Congress with recommendations for, among other things, determining the most effective way for financial institutions to require identifying information from foreign nationals. In this report, issued in October 2002, the department said that its proposed regulations would allow financial institutions to accept any foreign-issued document that provided evidence of nationality or residence and bearing a photograph. A footnote to this statement specifically declared that the proposed regulations would not discourage acceptance of the Mexican CID card. The final rule for implementing the provisions of Section 326 of the USA PATRIOT Act declared, among other things, that banks must implement a customer identification program containing risk-based procedures for verifying the identity of customers to the extent reasonable and practicable. While neither endorsing nor prohibiting acceptance of any particular foreign-issued identification, the rule reaffirmed that financial institutions could accept any such documents that they deemed reliable for establishing reasonable belief of a customer’s true identity. Then, on July 1, 2003, the department issued a notice of inquiry related to this rule, seeking additional comments on whether there may be any instance in which a financial institution should not be allowed to accept certain foreign-issued identification documents. The department received approximately 24,000 comments on this issue and after reviewing them, determined that no changes to the rule were necessary. While Treasury does not prohibit or endorse the acceptance of CID cards, an FBI official testified before Congress in June 2003 that the Mexican CID card is not a reliable form of identification. Concerns over the issuance process led the FBI to conclude that the document was unreliable and could pose criminal and even terrorist threats. First, the official testified, the Mexican CID card could be used as a breeder document, that is, a document that would allow access to other forms of legitimate identification, for establishing a false identity. For example, if a card were fraudulently obtained under a false identity, it could be then used to get a driver’s license in some states. A criminal, according to the FBI, could then establish several false identities that would greatly facilitate such crimes as money laundering or check fraud. Second, CID card unreliability can make alien smuggling easier. The FBI official testified that federal officials have arrested alien smugglers with several CID cards in their possession. The FBI has said that these would not only help conceal the smugglers’ identities, but also further entice aliens to entrust their transport to these smugglers. The FBI has also cited the threat of falsely obtained CID cards being used by terrorists to move about in the United States. The FBI official testified that individuals of various national origins have been discovered in possession of CID cards. If foreign nationals were able to create fictitious identities in the United States, they could move about the country without triggering identification from any name-based terrorist watch lists. The FBI official said that one individual from Iran was arrested in Texas in February 2003 in possession of a Mexican CID card. He obtained the card in California by using a counterfeit Mexican birth certificate and was able to obtain a California State ID card. In testimony given during the same hearing, an official from DHS’s Border and Transportation Security Directorate said that in light of the increased demand for CID cards and heightened security concerns in a post- September 11 environment, it also had concerns about the use and acceptance of CID cards. DHS believed that some individuals had obtained multiple cards under different identities. DHS also echoed the FBI’s concerns over use of a CID card as a breeder document for obtaining other forms of identification, which in turn may be used for criminal purposes. The State Department has not adopted a policy on foreign-issued identification documents or CID cards. However, in June 2003, a State Department official testified during the same hearing about the department’s involvement and interests in any CID card acceptance policy being developed. The official said that any policy developed must consider the impact on the department’s ability to carry out its responsibilities regarding consular affairs, both domestically and abroad. According to the department, under the VCCR, a foreign national arrested or detained in the United States must be advised of his or her right to request that the appropriate consular officials be notified of the detention without delay. Because a foreign CID may serve to identify an individual as a foreign national, an individual in possession of this card can alert federal, state, and municipal law enforcement authorities of the need to provide consular notification to contact consular officials from his or her nation for assistance. The State Department views CID cards as a tool that law enforcement officials may use to help facilitate observance of this obligation under the VCCR. In addition, the State Department believes that any policy developed that prohibits foreign-issued CID card acceptance within the United States could foreclose U.S. options to assist Americans overseas. The State Department may occasionally issue nonpassport identity cards or travel documents to U.S. citizens abroad in times of emergency and under other special circumstances. A State Department official told us that the United States should keep its options open for any future document issuance needs that may arise. This official said that the department has discussed the possibility of issuing special ID cards for U.S. citizens who live near the borders of Mexico or Canada and cross these borders often. It would be difficult to ask these nations to accept such a form of identification if the United States refused to accept CID cards, the official said. Under international treaty, foreign governments are allowed to issue identification documents to their citizens living in the United States, but federal agencies, state and local governments, and financial institutions must determine the advisability of accepting such documents as a basis for providing services to the document holder. Thus, for all of these institutions, acceptance of CID cards is discretionary; there is no federal guidance in place to assist state and local governments and others in determining whether a CID card presented for identification purpose is authentic; that is, that it belongs to the individual presenting the document or that it has not been fraudulently obtained. Consistent federal guidance could provide state and local governments and other entities with a basis for assessing the authenticity of CID cards, which in turn would assist them in determining whether, for what purpose, and for what duration they should accept these cards. The absence of consistent federal guidance could result in inconsistent acceptance of these cards by such institutions and consequent uncertainty on the part of aliens trying to use the cards to obtain services, as well as a heightened risk that CID cards be used to support false identities. We are recommending that the Homeland Security Council direct its task force, in consultation with key federal agencies, to complete its efforts to develop policies and implement consistent guidance that would reconcile potential conflicts among federal agencies and enable state and local governments, financial institutions, and others to assess the authenticity of CID cards issued by foreign governments. We provided a draft of this report to the Homeland Security Council, the Departments of State, Treasury, Justice, and Homeland Security for their review and comment. The Homeland Security Council and the Departments of State, Treasury, and Justice declined to comment. DHS generally agreed with the report and commended us for recognizing the critical aspects of identity document security. DHS said that developing appropriate standards for identity documents is a critical next step to reducing security vulnerabilities associated with such documents. DHS also noted that the department does not recognize CID cards as valid travel documents and does not accept them for entry into this country. DHS also said that CID cards should not be considered of greater concern than other identity documents used in the United States and that the administration’s position on CID cards is clear: they are not acceptable as proof of legal presence in the United States. We agree on both points. We focused our review on CID cards and made no judgment on the relative susceptibility to misuse of other identification documents. However, in discussing the results of a DHS investigation, we listed a number of other counterfeit documents that DHS agents had recovered, including driver’s licenses, U.S. immigration documents, and social security cards—all of which could be used to help establish a fraudulent identity. We also agree that the position of the United States, as well as that of the other nations whose officials we interviewed, is clear and consistent that CID cards issued by foreign countries do not establish or indicate lawful U.S. immigration status. Our report prominently states this position. However, the position of the United States on what constitutes prudent acceptance of CID cards for other than immigration purposes by federal, state, local, and private institutions does not appear to be so clear and consistent. Officials of some federal agencies support the continued acceptance of CID cards for some purposes, while others have expressed serious concerns about the dangers of accepting them. Individual states and local jurisdictions have developed conflicting policies regarding the acceptance of CID cards. As officials of DHS and other agencies told us, the Homeland Security Council has formed a working group to review the status and acceptable uses of CIDs in the United States, but has not yet issued its findings. For this reason, we have recommended that, as part of its review, the working group develop consistent guidance to help public and private institutions assess the authenticity of CID cards. DHS also suggested that we provide greater context for the customary and historical use of CID cards. We believe that our discussion of the legal basis for CID card issuance under international treaty; the history of CID card use, particularly Mexico’s 133-year history of CID card issuance; and the accepted and legitimate uses of CID cards sufficiently addresses this issue. See appendix IV for DHS’s comments. As agreed with your offices, unless you publicly announce its contents earlier, we plan no further distribution of this report until 30 days after its issue date. At that time, we will send copies of the report to relevant congressional committees and subcommittees, the Secretary of the Treasury, the Secretary of State, the Secretary of Homeland Security, the Attorney General, the White House Office of Homeland Security, and other interested parties. In addition, the report will be available at no charge on GAO’s Web site at http://www.gao.gov. If you have any questions, please contact me at (202) 512-8777. Key contributors to this report are acknowledged in appendix V. To determine the purpose of consular identification (CID) cards in the United States, and how Mexican and Guatemalan CID cards are being used in the United States, we reviewed provisions of the Vienna Convention on Consular Relations (VCCR), which, among other things, governs consular services. We contacted the embassies of eight countries (Bolivia, El Salvador, Guatemala, Honduras, Mexico, Nicaragua, Peru, and Poland) to learn their plans for issuing CID cards and determined that Mexico and Guatemala were issuing CID cards in the United States. We selected these countries because they were among those cited as currently issuing CID cards in the United States, or considering doing so, by federal, state, or local officials we interviewed, or who testified on the subject at congressional hearings in June 2003. We interviewed Mexican and Guatemalan embassy officials and obtained documents regarding their CID card program. We also interviewed officials from police departments in Austin and Dallas, Texas, and reviewed documents from the city of San Francisco. We contacted officials at the Office of the Mayor in the city of Lake Worth, Florida; the American Bankers Association; the American Association of Motor Vehicle Administrators; the Department of Housing and Community Affairs in Montgomery County, Maryland; and six independent advocacy and research groups to discuss their views on CID acceptance. Additionally, we reviewed testimony by the Texas Bankers Association before the Texas Legislature regarding their position on financial institutions’ acceptance of CID cards. To identify states that have recently rescinded acceptance of CID cards for driver’s license issuance or other state services, we researched the Lexis Nexis database for state legislation from 2002 through 2003 that has been passed or proposed concerning CID acceptance. From this information, we noted any states that had repealed CID acceptance. We interviewed officials in North Carolina regarding their administrative decision to revoke CID acceptance as proof of identification in driver’s license issuance. To determine steps Mexico and Guatemala have taken to verify the identities of CID card applicants and incorporate security features in CID cards, we interviewed officials from the Mexican and Guatemalan embassies and consulate offices to obtain information and documentation about their CID card programs. We also observed the Mexican consulate’s issuance of CID cards at an off–site facility. Additionally, we interviewed and obtained documentation related to issuance procedures and security features from the company that manufactures and maintains the Guatemalan CID card, passport, and consular registry programs. We did not perform an evaluation of the Mexican and Guatemalan CID card programs. We relied exclusively on information and data provided by embassy and consulate officials in describing the issuance systems and card security features utilized in their CID card programs. We also interviewed Department of Homeland Security (DHS) agents responsible for investigating the production of fraudulent identity documents, including Mexican CID cards, in Lynnwood, Washington. We interviewed officials with DHS’s Forensic Document Laboratory regarding general security standards for identity documents. To determine the positions and policies of federal agencies regarding the usage and acceptance of CID cards, we interviewed officials from the Department of the Treasury, DHS, the Department of Justice, and the Department of State, and reviewed testimony by the latter three agencies. We also reviewed regulations proposed and adopted by Treasury. We also contacted officials of the Homeland Security Council to discuss its examination of foreign-issued CID cards. As of June 2004, the Homeland Security Council had not issued its findings. We researched European Union (EU) law to determine the status of new legislation being considered by European Union members, regarding standards for secure identification documents. Through electronic searches of EU legislative databases and review of EU publications, we found that EU members proposed regulations for improving document security for visas, residence permits, and EU citizen passports. Additionally, we reviewed information from the Department of State’s Bureau of Consular Affairs and DHS related to the current status of the U.S. Visa Waiver Program. We conducted our review from July 2003 to June 2004 in accordance with generally accepted government auditing standards. European Union (EU) members are considering proposals that will require a photograph and fingerprints on visas and residence permits. In September 2001, EU member states took steps to improve the security of travel visas and residence permits for third-country nationals. Two regulations were developed and adopted in 2002, requiring member states to integrate a photograph into travel visas by June 2007 and into residence permits by August 2007. A proposal to modify the visa and residence permit regulations was introduced in September 2003. The new proposal requires (1) moving the dates for integrating photographs into visas and residence permits forward to June and August 2005, respectively, and (2) that biometric identifiers, namely a facial image and two fingerprints, be incorporated into all such documents. Members also recognized the need to incorporate biometrics into EU citizen passports. In February 2004, a proposal to establish minimum standards for biometrics and other security features was adopted by the Commission of the European Communities and sent to the Council of the European Union and European Parliament. The aim of the proposal was to enhance the security of EU passports and to reliably link the passport to its holder through biometric identifiers. The commission proposed that all passports issued by EU member states contain a facial image and that the inclusion of fingerprints be an option left to the discretion of the member states. The proposed integration of biometrics will allow EU passports to also meet the requirements of the Visa Waiver Program (VWP). To comply with these requirements, passports issued by EU member states will need to be machine-readable and comply with biometric standards established by the International Civil Aviation Organization. The VWP deadline for passports to become compliant had been October 26, 2004, but was extended for 1 year by (P.L. 108-299), which was signed into law on August 9, 2004. As part of our review of consular identification cards, we were asked to identify instances where the terms “passport” and “consular identification document” are used in federal statutes and in the statutes of selected states. Using electronic databases, we conducted a search of current federal statutes and the statutes of the seven states we selected. We found over 70 references to passport in federal statutes and a number of references in statutes of the selected states as well. Most of the statutory references we found are to what is generally considered the traditional meaning of passport—that is a document issued by the competent officer of a national state permitting the person named to travel. A passport is usually a formal document establishing the holder’s identity and citizenship, permitting that person to leave and reenter the state, and requesting protection for him or her abroad. A U.S. passport, for example, requests, in the name of the Secretary of State, that the holder be permitted “safely and freely to pass” and in case of need be given “all lawful aid and protection.” In addition, we also found statutes that ascribe other meanings to passport. For example, the U.S. Department of the Interior and the states of Virginia and Indiana initiated passport programs for admission to national and state parks, respectively. Also, California has created a health and education passport system in Los Angeles County, and Indiana has created a medical passport system in that state. We found no references to matricula or consular identification card in either federal statutes or in the statutes of the selected states. Matricula or consular identification cards are a form of identification for foreign nationals who are present in the United States. These cards certify the nationality of the cardholder but not his or her legal residency status in the United States. 8 U.S.C. § 1101(a)(30) Passport defined in the Immigration Nationality Act as “any travel document issued by competent authority showing the bearer’s origin, identity, and nationality if any, which is valid for the admission of the bearer into a foreign country.” 8 U.S.C. § 1102 Diplomats required to show passports as a means of documentation and identification necessary to establish their qualifications. 8 U.S.C. § 1104(c) Powers and duties of Secretary of State; establishment of a passport office within the Department of State 8 U.S.C. § 1181 Valid unexpired passport may be required for admission of immigrants into the United States, except for refugees. Attorney General has discretion not to require valid unexpired passport for returning resident immigrants. 8 U.S.C. § 1182(a)(7)(A) Any immigrant who is not in possession of a valid entry document and a valid unexpired passport or other suitable travel document is inadmissible. 8 U.S.C. § 1185(b) Travel control of citizens and aliens; citizen generally required to bear valid U.S. passport for departure and entry into United States. 8 U.S.C. § 1187(a)(3) Visa waiver program for certain visitors; valid unexpired machine-readable passport may be required. 8 U.S.C. § 1201(f) Issuance of visas; surrender of documents; alien crewman not in possession of any individual documents other than a passport may be admitted under certain circumstances. 8 U.S.C. § 1202(b) Application for visas; required documentary evidence for immigrant visa may include valid unexpired passport. 8 U.S.C. § 1221(c) Lists of alien and citizen passengers arriving and departing to include passport number and country of issuance of each person listed. 8 U.S.C. § 1231(c)(3) Detention and removal of aliens ordered removed; owner of a vessel or aircraft bringing an alien to the United States not required to pay costs of detention where individual claims to be a national of the United States and has a U.S. passport. 8 U.S.C. § 1253(a)(3) Penalty for failure to depart; suspension of sentence where U.S. Government unable to secure passport from the country to which alien has been ordered removed. 8 U.S.C. § 1323 Unlawful bringing of aliens into United States; persons liable if alien does not have a valid passport; remission of fine in certain circumstances. 8 U.S.C. § 1324a In order for an employer to avoid liability for employing an unauthorized alien, he must examine documentation in order to verify employment eligibility. Documents establishing both employment authorization and identity include an individual’s U.S. passport. 8 U.S.C. § 1504 Cancellation of illegally, fraudulently, or erroneously obtained U.S. passports and Consular Reports of Birth. 8 U.S.C. § 1713(c) Machine-readable visa fees; surcharge for issuing a machine-readable visa in a nonmachine-readable passport. 8 U.S.C. § 1731 Implementation of an integrated entry and exit data system including establishing a database containing data from machine-readable visas and passports. 8 U.S.C. 1732 Machine-readable, tamper-resistant entry and exit documents; technology standards, equipment, and software for passports of aliens applying for admission under the visa waiver program. 8 U.S.C. § 1737 Tracking system for stolen passports. 10 U.S.C. § 2602(c) No fee charged for passport issued to employee of American National Red Cross for travel outside United States under certain circumstances. 10 U.S.C. § 2604 United Seamen’s Service: cooperation and assistance; no fee may be charged for a passport to an employee of the United Seamen’s Service under certain circumstances. 16 U.S. C. § 460l-6a Admission and special recreation use fees for National Parks, Monuments, etc.; Golden Eagle passports and Golden Age passports. 16 U.S.C. § 3911(a)(1)(A) Secretary of the Interior authorized to sell Golden Eagle passports and Golden Age passports at units of the National Wildlife Refuge System. 16 U.S.C. § 5982 Distribution of Golden Eagle passport sales among Departments of Interior and Agriculture. 16 U.S.C. § 5991 National park passport program; purposes. 16 U.S.C. § 5992 Secretary of the Interior to establish national park passport program. 16 U.S.C. § 5993 Administration of national park passport program, including sale of passports and use of proceeds. 16 U.S.C. § 5994 Foreign sales of Golden Eagle passports. 16 U.S.C. § 5995 Effect of national park passport program on other laws and programs. 18 U.S.C. § 9829(a)(6) Criminal forfeiture in connection with illegal activity involving passport issuance or use. 18 U.S.C. § 1028 Fraud and related activity in connection with identification document; identification document includes passport. 18 U.S.C. § 1541 Issuance of passports without authority. 18 U.S.C. § 1542 False statement in application and use of passport. 18 U.S.C. § 1543 Forgery or false use of passport. 18 U.S.C. § 1544 Misuse of passport. 18 U.S.C. § 1545 Safe conduct or passport violation. 18 U.S.C. § 1546 Fraud and misuse of passports, visas, and other documents. 18 U.S.C. § 1547 Alternative imprisonment maximum for certain passport offenses committed to facilitate drug trafficking or international terrorism. 18 U.S.C. § 1592 Unlawful conduct with respect to passports or other immigration documents in furtherance of peonage, slavery, or trafficking in persons. 18 U.S.C. § 1961(1) Definition of racketeering activity includes an act indictable under 18 U.S.C. § 1546, fraud and misuse of passports. 18 U.S.C. § 2516(1)(c) Authorization for interception of wire, oral, or electronic communications when interception may provide evidence of a violation of 18 U.S.C. §§ 1541-1546. 18 U.S.C. § 3291 Ten year statute of limitations on prosecution for violation of certain nationality, citizenship, and passport statutes. U.S. Sentencing Guidelines, § 2L2.1 Trafficking in a document relating to naturalization, citizenship, or legal resident status, or a U. S. passport. U.S. Sentencing Guidelines, § 2L2.2 Fraudulently acquiring documents relating to naturalization, citizenship, or legal resident status for own use; fraudulently acquiring or improperly using a U.S. passport. 22 U.S.C. § 211a Authorities to grant, issue, and verify passports. 22 U.S.C. § 212 Persons entitled to passport. 22 U.S.C. § 213 Application for passport; verification of application by oath required for initial passport. 22 U.S.C. § 214 Fees for execution and issuance of passports; persons excused from payment. 22 U.S.C. § 214a Refund of fees for passport erroneously charged and paid; refund. 22 U.S.C. § 217a Time limitation for validity of passport. 22 U.S.C. § 218 Returns as to passports issued to be provided to Secretary of State. 22 U.S.C. § 2504(h) Peace Corps volunteers excused from payment of passport fees. 22 U.S.C. § 2670(m) Secretary of State is authorized to establish and operate passport agencies. 22 U.S.C. § 2671(d)(3) Issuance or renewal of passports barred for individuals in default on a repatriation loan made by the Secretary of State. 22. U.S.C. § 2705(1) Passport as proof of U.S. citizenship. 22 U.S.C. § 2709(a)(1) Special agents of the Department of State and the Foreign Service may conduct investigations concerning illegal passport or visa issuance or use. 22 U.S.C. § 2714 Denial of passports to certain convicted drug traffickers. 22 U. S.C. § 2721 Activity protected by the First Amendment may not be the basis for denial of passports. 22 U.S.C. § 4024(d) Functions of Secretary of State; provide training for employees performing consular functions, including the adjudication of passport applications. 22 U.S.C. § 4802(a)(2)(B)(x) Security responsibilities of Secretary of State include conduct of investigations relating to illegal passport and visa issuance or use. 22 U.S.C. § 5711(5) Bilateral ties between United States and Hong Kong; recognition of passports issued by the Hong Kong Special Administrative Region. 26 U.S.C. § 6039E Information concerning resident status required when making application for passport or renewal. 42. U.S.C. § 652(k) Passport may not be issued to individual in arrears on child support obligations and previously issued passport may be revoked, restricted, or limited. 42 U.S.C. § 1436a(d)(1)(a) Restriction on use of assisted housing by nonresident aliens; passport may be used to verify citizenship where individual claims to be a citizen. 48 U.S.C. § 1406h Passport, immigration, and naturalization fees collected in the Virgin Island held in account for benefit of municipalities. 48 U.S.C. § 1421h Passport, immigration, and naturalization fees collected in Guam held in account for benefit of Guam. Use of certain proceeds, including passport, immigration, and naturalization fees collected in the Virgin Islands, as provided by the legislature of the Virgin Islands. 48 U.S.C. § 1921c(b)(2) Approval and implementation of compacts with Micronesia and Marshall Islands; grant assistance for immigration and passport security. 49 U.S.C. § 44909(a)(2)(B) Air carrier passenger manifests to include passport number of each passenger if required for travel. 49 U.S.C. § 44939(a)(1)(B) Providers of training to operate certain aircraft must submit to Secretary of Homeland Security the passport and visa information of certain applicants for training. 50 App. U.S.C. § 2407(a)(2)(E) Regulations prohibiting participation in certain foreign boycotts shall provide exceptions for compliance with the boycotting countries’ immigration or passport requirements. Ariz. Rev. Stat. Ann. Const. § 19, Refs & Annos. The Gadsden Treaty between the United States and Mexico. Passports not required of persons not remaining in the country. Ariz. Rev. Stat. Ann. § 4-241 A valid unexpired passport is an acceptable type of identification to determine whether person purchasing liquor is under the legal drinking age. Ariz. Rev. Stat. Ann. § 13-3403.02 A valid passport is an acceptable type of identification to verify that the purchaser of nitrous oxide is over 18. Ariz. Rev. Stat. Ann. § 16-548 An early voter who is overseas may complete the affidavit to accompany a ballot before a U.S. citizen who provides his or her signature and passport number, if available. Ariz. Rev. Stat. Ann. § 32-1236 Dentist triennial licensure; submission of a passport size photograph. Cal. State Bar Rules and Regs, Art. I, § 1 Registration of members; passport is acceptable document to establish identity. Cal. Bus. & Prof. Code § 21628 In order to satisfy tangible personal property reporting requirements, a secondhand dealer or coin dealer may use a passport from a foreign country in addition to another item of identification bearing an address. Cal. Bus. & Prof. Code § 22430 Manufacture or sale of a deceptive identification document, that is a document not issued by a governmental agency, which purports to be a document issued by such an agency, is prohibited. A deceptive identification document includes a passport. See Cal. Penal Code § 483.5 for penalties for violation of this provision. Cal. Bus. & Prof. Code § 22443 Immigration consultant shall return documents to client (including passports). Cal. Bus. & Prof. Code § 22963 A passport is a valid form of government identification to verify the age of the purchaser of tobacco products. Cal. Civ. Code § 1185 Acknowledgments; requisites; passport is satisfactory evidence of identity of individual making acknowledgment of instrument. Cal. Civ. Code § 1798.80 Customer records include passport number and state identification card number. Cal. Educ. Code § 48002 Passport may be used as evidence of minimum age required to enter kindergarten or first grade. Cal. Educ. Code § 49133 Minor may use passport to apply for permit to work full–time. Cal. Elec. Code § 3004 Potential absentee voters; notice required at passport and recruiting offices to inform potential absentee voters of their right to an absentee ballot. Cal. Elec. Code § 3302 Right to register for and vote by absentee ballot; requirements include possession of a valid passport or card of identity and registration. Cal. Fam. Code § 3048 Required contents for custody or visitation orders; applying for passport a factor in determination of risk of child abduction; court may require surrender of passport to prevent abduction Cal. Fam. Code § 6228 A person requesting copies of domestic violence incident reports can present a passport for identification purposes. Cal. Fam. Code § 6752 Contracts in art, entertainment, and professional sports; set aside in trust for benefit of minor; passport may be used to prove identity of beneficiary. Cal. Fin. Code § 17331 Fidelity corporation certificates; persons who must apply; nature of certificate; application may include passport-size pictures. Cal. Govt. § 12179.1 Ten-dollar fee charged for attesting each commission, passport, or other document signed by Governor. Cal. Govt. Code § 16649.80 Prohibited business arrangements; legislative finding that Arab League countries refuse to accept certain passports. Cal. Penal Code § 112 For the purposes of manufacturing or sale of false government documents, a government document includes any passport. Cal. Penal Code § 483.5 Deceptive identification documents (including passports), requirements for manufacture, sale or transport, punishment for violations. Cal. Penal Code § 530.5 In the context of false personation, the term “personal identifying information” includes a government passport number. Cal. Penal Code § 4017.1 Certain offenders (confined in county jails and camps) are ineligible for work providing access to personal information pertaining to private individuals. This information includes state–or government–issued driver’s license or identification numbers and government passport numbers. Cal. Penal Code § 5071 Certain offenders (convicted of particular offenses) are ineligible for work providing access to personal information pertaining to private individuals. This information includes state– or government–issued driver’s license or identification numbers and government passport numbers. Cal. Prob. Code § 13104 Passport is reasonable proof of identity in affidavit procedure for collection of personal property. Cal. Unemp. Ins. Code § 9601.5 Public agencies or contracted private organizations; passport may be used to prove legal status or authorization to work. Cal. Veh. Code § 4466 Duplicate or substitute certificate of title or license plate; different address; passport may be used for verification of identity. Cal. Veh. Code § 6700.1 Foreign residents purchasing vehicles made in United States; in-transit permits; passport may be used to prove residency in foreign country. Cal. Wel. & Inst. Code § 219.5 Certain offenders (wards of juvenile court) are ineligible for work providing access to personal information pertaining to private individuals. This information includes state–or government–issued driver’s license or identification numbers and government passport numbers. Cal. Wel. & Inst. Code § 401 Advocates’ responsibilities to assist children in foster care include locating a pupil’s records for inclusion in pupil’s health and education passport. Cal. Wel & Inst. Code § 1500 Minors under 18 years of age crossing the Mexican border; necessity of written parental consent or passport. Cal. Wel. & Inst. Code § 16010 Foster care placement; summary of health and education records of minor may be maintained in health and education passport or comparable format. Cal. Wel. & Inst. Code § 16010.4 Information provided to foster parents and other caregivers includes birth certificates, passport, or other identifying document of age. Cal. Wel. & Inst. Code § 16010.5 Medication, information, and documentation to be provided to foster parents and other caregivers includes birth certificate or passport. Cal. Wel. & Inst. Code § 16011 Development of pilot Internet-based health and education passport system for Los Angeles County. Cal. Wel. & Inst. Code § 16501.6 Child Welfare services case management system; information concerning foster child; study shall examine county health passport systems for possible replication. Ind. Code Ann. § 12-17-11-2 Medical passport program for children who receive foster care. Ind. Code Ann. § 12-17-11-3 Issuance and maintenance of medical passport. Ind. Code Ann. § 12-17-11-4 Administrative rules for medical passport program. Ind. Code Ann. § 14-19-3-4 Golden Hoosier Passports for state parks and recreation areas; fees. Ind. Code Ann. § 24-3-5.2-4 A passport is valid government–issued identification for the verification of age of customer purchasing cigarettes by mail. Ind. Code Ann. § 28-8-5-16 A passport number can be used to identify a customer to meet check cashing requirements where check is at least $3,000. Ind. Code Ann. § 31-14-13-6.7 Applying for passport is a factor for court to consider in making a security, bond, or guarantee determination in custody proceedings following determination of paternity. Ind. Code Ann. § 31-14-13-11 Party to a custody order who applies for passport for a child following determination of paternity must notify court and other party to the order. Ind. Code Ann. § 31-17-2-21.7 Applying for passport is a factor for court to consider in making a security, bond, or guarantee determination in child custody actions and modification of child custody orders. Ind. Code Ann. § 31-17-2-24 Party to a custody order who applies for passport for a child must notify court and other party to the order. Ind. Code Ann. § 35-47-2.5-5 A passport maybe used as documentation of residence for sale of handguns. N.Y. Alco. Bev. Cont. Law § 65-b Offense for one under age of 21 years to purchase or attempt to purchase an alcoholic beverage through fraudulent means. Licensee may accept passport as written evidence of age. N.Y. Dom. Rel. Law § 15 Town and city clerks may use passport for verification purposes when processing application for a marriage license. N.Y. Econ. Dev. § 100 General powers of department of economic development include establishing a New York hall of fame passport for admission to recognized halls of fame. N.Y. Educ. Law § 3218 Passport may be presented as evidence of age for compulsory education purposes. N.Y. Elec. Law § 11-200 Passport may be used to establish qualifications for special federal voters. N.Y. Gen. Bus. Law § 72 Application for certain licenses including private investigator, security, guard, and bail enforcement licenses to include passport–size photograph. N.Y. Pub. Health Law § 1399-cc Sale of tobacco products or herbal cigarettes, rolling papers or pipes to minors prohibited. Purchaser may prove age through a passport. N.Y. Pub. Health Law § 3429 Passport or any other similar form of photo identification issued by a governmental entity may be used by funeral directors providing continuing education to identify persons taking instruction. Va. Code Ann. § 10.1-202.1 Golden passport established authorizing free entry into state parks for certain persons. Va. Code Ann. § 18.2-186.5 Expunction of false identity information from police and court records; issuance of an Identity Theft Passport noting expunction. Va. Code Ann. § 18.2-204.2 Manufacture, sale or possession of fictitious, facsimile or simulated official license or identification, including a passport, is a Class 1 misdemeanor. Va. Code Ann. § 18.2-308 Person carrying concealed weapon is required to display permit and a photo–identification or passport upon demand by a law-enforcement officer. Va. Code Ann. § 18.2-308.2:2 Purchaser of certain firearms may present a passport as documentation of residence. Va. Code Ann. § 19.2-152.1:4 For periodic statements of value of property, bail bondsmen may present a U.S. passport as a form of identification. Va. Code Ann. § 19.2-389 Dissemination of criminal history record information to the appropriate authority for purpose of issuing passports. Va. Code Ann. § 22.1-253.13:3 Standards of quality in education include Literacy Passport test. Va. Code Ann. § 46.2-347 Fraudulent use of driver’s license, Department of Motor Vehicles identification card, U.S. passport, or other form of official identification listed to obtain alcoholic beverages is a Class 3 misdemeanor. Va. Code Ann. § 47.1-14 A notary may use a U.S. or unexpired foreign passport to ascertain the identity of any person whose identity is the subject of a notarial act. Va. Code Ann. § 63.2-1220 An admission stamp in an adopted child’s passport may be used as evidence that a child adopted in a foreign country was admitted to the United States with an immediate relative immigrant visa for the purpose of seeking a birth certificate. Va. Bankr. E.D. LBR R. 3011-1 A creditor/claimant may present an unexpired passport to establish identity for the purpose of claiming funds. Wash. Rev. Code § 9A.56.280 In the context of statutes relating to credit cards and checks, “personal identification” includes passport. Wash. Rev. Code § 13.34.340 Release of records (including child welfare services passport containing all known and available health and educational information) to treating physician. Wash. Rev. Code § 36.18.016 Various fees (including execution fees collected for preparation of a passport application)— not subject to division. Wash. Rev. Code § 46.20.035 U.S. passport may be used to meet identification requirements for driver’s licenses. Wash. Rev. Code § 66.16.040 Sales of liquor by employees—passport is included as officially issued card of identification that may be used to demonstrate age. Wash. Rev. Code § 70.155.090 Purchaser of tobacco products may present a passport to show purchaser’s age. Wash. Rev. Code §70.155.105 Passport may be used to satisfy requirement that person who mails, ships, or otherwise delivers cigarettes must verify the age of the receiver of the cigarettes upon delivery. Wash. Rev. Code § 74.13.031 Duties of department—Child welfare services must report annually to the governor and the legislature on its success in implementing and operating the children’s services passport program. Wash. Rev. Code § 74.13.285 Child welfare department is required to prepare children’s service passport to be provided to foster parents. Wis. Stat. Ann. § 134.695 Antiques dealer may not knowingly purchase or receive used home furnishings from a person without recording one of the identification numbers listed therein. The list includes a person’s U.S. passport number. Wis. Stat. Ann. § 134.71 Pawnbrokers and secondhand article and jewelry dealers shall require the customer to present one of the types of identification listed. The list includes a valid passport. Wis. Stat. Ann. § 343.125 Endorsements to a commercial drivers license for transporting certain hazardous materials. Applicant may submit a U.S. passport as documentary proof of U.S. citizenship. In addition to the contact above, Amy Bernstein, John Brummet, John Cooney, Adam Couvillion, Jeanette Espinola, Ann Finley, Evan Gilman, Marvin McGill, Ramon Rodriguez, and Robert White made key contributions to this report. | Several state and local government agencies and financial institutions accept consular identification (CID) cards, which are issued by foreign governments to their citizens living abroad. Mexico issued more than 2.2 million CID cards in 2002-2003 and Guatemala issued approximately 89,000 from mid-2002 to 2003. Critics of CID cards say their acceptance facilitates the unlawful stay within the United States of undocumented aliens and may provide opportunities for terrorists to remain undetected in this country. GAO examined (1) the purpose of a CID card and how Mexican and Guatemalan CID cards are being used in the United States, (2) steps Mexico and Guatemala have taken to verify the identities of CID card applicants and incorporate security features in CID cards now used in the United States, and (3) the positions and policies of federal agencies regarding CID cards. Consular identification cards are issued by some governments to help identify their citizens living in a foreign country. The cards do not certify legal residence within a country; thus, cardholders may be either legal or undocumented aliens. CID cards benefit the bearers by enabling them, in some instances, to use this form of identification to obtain driver's licenses, open bank accounts, show proof of identity to police, and gain access to other services. Mexico and Guatemala each take multiple steps to help ensure that the process for qualifying applicants seeking to obtain CID cards verifies the applicants' identities. After receiving criticism about the reliability of its CID card, Mexico took steps to improve identity verification procedures for its CID card issuance process. However, the Mexican issuance policy still relies on visual, rather than computer-based, verification of some documents used to obtain CID cards, including birth certificates that the Federal Bureau of Investigation (FBI) says may be fraudulently obtained. Both Mexico and Guatemala incorporate a variety of security features in their CID cards, such as holographic imagery. However, officials of the Department of Homeland Security's (DHS) Bureau of Immigration and Customs Enforcement warn that incorporating technical security features into identification documents such as CID cards does not guarantee their authenticity. Federal agencies hold different and, in some cases, conflicting views on the usage and acceptance of CID cards, and no executive branch guidance is yet available. A Homeland Security Council task force of executive branch agencies is reviewing identification document security but had not issued its findings at the time of GAO's review. The Department of the Treasury adopted a regulation in 2003 that, in effect, allows CID card acceptance, while an FBI official has stated that the Mexican CID card, in particular, is not a reliable form of identification and that its acceptance could support false identities. DHS expressed security concerns as well. The State Department has publicly expressed concerns about the impact restricting CID card use might have on U.S. citizens abroad, for example, if the United States had to issue its own CID cards in an emergency. |
In our past work on performance management, we have identified the alignment of individual performance expectations with organizational goals as a key practice for effective performance management systems. Having a performance management system that creates a “line of sight” showing how unit and individual performance can contribute to overall organizational goals helps individuals understand the connection between their daily activities and the organization’s success. According to OPM, agency systems do not yet place sufficient emphasis on achieving measurable results. OPM has said that the criterion for alignment with organizational results is often the hardest of the certification criteria for agencies to meet. While many agencies are doing a good job of clarifying the alignment of executive performance plans with agency mission and goals, some of the plans often still fall short of identifying the measures used to determine whether the results are achieved, according to OPM. This challenge of explicitly linking senior executive expectations to results-oriented organizational goals is consistent with findings from our past work on performance management. To help hold senior executives accountable for organizational results, beginning in 2007, OPM required agencies to demonstrate that at least 60 percent of each senior executive’s performance plan is focused on achieving results and has clear measures associated with those results to show whether the goals have been achieved in order to receive certification of their SES appraisal systems. The selected agencies in our review have designed their appraisal systems to address OPM’s requirement of aligning individual expectations with organizational goals. For example, in setting expectations for the individual performance plans, DOE requires the senior executives and supervisors to identify three to five key performance requirements with metrics that the executive must accomplish in order for the agency to achieve its strategic goals. Weighted at 60 percent of the summary rating, the performance requirements are to be specific to the executive’s position and described in terms of specific results with clear, credible measures (e.g., quality, quantity, timeliness, cost-effectiveness) of performance, rather than activities. For each performance requirement, the executive is to identify the applicable strategic goal in the performance plan. To ensure that agencies are implementing their policies for alignment of performance expectations with organizational goals, OPM requires agencies as part of their certification submissions to provide a sample of executive performance plans, the strategic plan or other organizational performance documents for establishing alignment, and a description of the appraisal system outlining the linkage of executive performance with organizational goals. Further, OPM requires agencies to consider organizational performance in appraising senior executive performance to receive certification of their SES appraisal systems. According to OPM and OMB officials, the main sources of organizational performance that agencies use are the performance and accountability reports (PAR) and Program Assessment Rating Tool (PART) summaries, which capture agencywide as well as program- or office-specific performance. While identifying appropriate assessments of organizational performance to be used in appraisal decisions, agencies are also to communicate the organizational performance to the senior executives, PRB members, and other reviewing officials—including supervisors who complete the ratings—involved in appraisal decisions prior to the completion of individual performance ratings. In its certification regulations, OPM does not specify the format in which agencies need to communicate organizational performance; however, OPM has emphasized the importance of communicating to individuals involved in appraisal decisions the effect organizational performance can have on individual ratings and overall rating distributions through briefings or other communications. All of the selected agencies have policies in place for factoring organizational performance into senior executive appraisal decisions. While the agencies identified common organizational assessments, such as the President’s Management Agenda (PMA), PAR, or PART results for consideration in senior executive appraisal decisions, several agencies identified other types of tools to assess performance at different levels of the organization, such as the bureau, office, or program levels. For example, NRC provides summary reports capturing office-level performance to rating and reviewing officials for appraising senior executive performance. Twice a year, NRC’s senior performance officials (SPO)—two top-level executives responsible for assessing organizational performance—conduct assessments for each office that take into account quarterly office performance reports on their operating plans, an interoffice survey completed by the other directors as identified by NRC on the office’s performance, as well as the office director’s self-assessment of the office’s performance. According to an NRC official, the resulting SPO summary reports are used in the midyear feedback by senior executives and their supervisors to identify areas for improvement for the remainder of the appraisal cycle. At the end of the appraisal cycle, rating officials and PRB members are to consider the SPO summary reports in appraising senior executive performance. To assess bureau-level performance, Treasury uses a departmentwide organizational assessment tool that provides a “snapshot” of each bureau’s performance across various indicators of organizational performance, such as the PAR, PART results, PMA areas, OPM’s Federal Human Capital Survey results, budget data, and information on material weaknesses. The performance information is provided to PRB members and reviewing officials to help inform their senior executive appraisal recommendations. The selected agencies varied in how they provided and communicated organizational performance assessments to PRB members and other reviewing officials to help inform senior executive appraisal recommendations. Several of the selected agencies shared the organizational performance assessments and communicated the importance of considering organizational performance through briefings, training, or document packages for the PRB meetings, while one agency did not provide or communicate any information regarding organizational performance. For example, at Treasury, all the PRBs across the department were briefed on the tool used to assess organizational performance and the importance of considering organizational performance in appraising senior executive performance. DOD provided the heads of its components with a departmentwide organizational assessment to be used in appraising senior executive performance and, as a check across the components, asked for copies of the training given to the PRB members and other reviewing officials on factoring organizational performance into senior executive appraisal recommendations. Through the office of the Deputy Secretary for Defense, DOD developed an assessment of the department’s overall performance against its overall priorities for fiscal year 2007. According to a DOD official, the components had the flexibility to develop their own organizational assessments using the department’s assessment as a guide and to consider other indicators of organizational performance. Having the components provide the department with their communications of organizational performance helps provide a check in the process across the components and ensures that the spirit and policies of the performance management system are being followed, according to a senior DOD official. As part of the documents received prior to the meeting, NRC provides PRB members with various indicators of organizational performance, such as the SPO summary reports, PAR, and PART information. As part of communicating the organizational assessments, NRC instructs the PRB members to review the summary of proposed ratings and scores for consistency with SPO reports, PAR, and PART outcomes, with rankings of executives recommended by office directors, and across offices and programs. Similarly, DOE provides its PRB members snapshots of the Consolidated Quarterly Performance Reports relevant to the senior executives that measure how each departmental element performed respective to the goals and targets in its annual performance plan. According to the Director of the Office of Human Capital Management, the Deputy Secretary also verbally briefed the PRB members on the importance of considering organizational performance in appraising executive performance. On the other hand, State did not provide its PRB members and other reviewers with any specific information on organizational performance to help inform their senior executive appraisal recommendations for the most recently completed appraisal cycle. According to State officials, PRB members received packages of information to help inform their decisions, including senior executives’ performance plans and appraisals, the performance management policy, and the memo from the Director General of the Foreign Service and Director of Human Resources on performance bonuses and pay adjustment amounts and distributions for that cycle. While a senior State human resources official said that the PRB was made aware of a variety of organizational performance assessments that could be readily accessible, if needed, the PRB members did not receive any specific assessments of organizational performance. Effective performance management systems make meaningful distinctions between acceptable and outstanding performance of individuals and appropriately reward those who perform at the highest level. In order to receive certification of their SES systems from OPM with OMB concurrence, agencies are to design and administer performance appraisal systems that make meaningful distinctions based on relative performance through performance rating and resulting performance payouts (e.g., bonuses and pay adjustments). Specifically, agencies are to use multiple rating levels—four or five levels—and reward the highest-performing executives with the highest ratings and largest pay adjustments and bonuses, among other things. Several of the agencies designed their appraisal systems to help allow for differentiations when assessing and rewarding executive performance by establishing tier structures or prescribed performance payout ranges based on the resulting performance rating. For example, NRC uses three tiers called position groups to differentiate its senior executives’ basic pay and the resulting bonus amounts based on ratings received at the end of the appraisal cycle. NRC divides its executives into three groups (A, B, and C) based on difficulty of assignment and scope of responsibilities of the positions and annually sets basic pay ceilings for each of the groups tied to the levels of the Executive Schedule (EX), as shown in table 1. Pay ceilings within each group allow NRC to reserve pay above EX-III for executives who demonstrate the highest levels of performance, including the greatest contribution to organizational performance as determined through the appraisal system. NRC uses the position groups and resulting performance ratings as the basis for its bonus structure to help ensure that executives in the higher position groups with the higher performance ratings receive the larger bonuses. For example, for fiscal year 2007, an executive in the highest position group (A) that received an outstanding rating was to receive $30,000, while an executive in the lowest group (C) with the same rating was to receive a $20,000 bonus. According to an NRC official, the bonus range for executives in group C with excellent ratings was intended to help allow for meaningful distinctions in performance to be made within that group, as well as to give the agency flexibility in the amount of bonuses to be awarded. State also uses a structure with six tiers to help differentiate executive performance based on the ratings and bonuses and allocate pay adjustment amounts for its senior executives, with executives who are placed in the highest tier (I) receiving a larger percentage pay adjustment than executives in a lower tier (V) who received the annual percentage adjustment to the EX pay schedule, which was 2.5 percent in 2008. DOE sets prescribed ranges tied to performance ratings prior to finalizing ratings to help create a greater distinction between bonus amounts for the top and middle performers and differentiate pay adjustment caps. Specifically, for fiscal year 2007, DOE required that all executives receiving an outstanding rating receive a bonus of 12 to 20 percent of base pay, while executives receiving a meets expectations rating were eligible to receive a bonus of 5 to 9 percent, but at management’s discretion. For pay adjustments, executives were eligible to receive a discretionary increase of up to 5 or 7 percent of basic pay if rated at meets expectations or outstanding, respectively. Executives who receive the other two rating levels—needs improvement or unsatisfactory—cannot receive any bonuses or pay increases. We have reported that using multiple rating levels provides a useful framework for making distinctions in performance by allowing an agency to differentiate among individuals’ performance. All of the selected agencies have four or five rating levels in place for assessing senior executive performance. While the selected agencies designed their appraisal and pay systems to help make meaningful distinctions in performance through ratings, our analysis shows that the senior executives were concentrated at the top two rating levels for the most recently completed appraisal cycle, as shown in figure 1. At State and USAID, about 69 percent and 60 percent of senior executives, respectively, received the top performance rating. At the other four agencies, the largest percentage of executives received the second highest rating—ranging from about 65 percent at NRC to 45 percent at Treasury. Conversely, less than 1 percent of senior executives across the selected agencies received a rating below fully successful (level 3). As a point of comparison, about 43 percent of career SES governmentwide received the top performance rating for fiscal year 2006, the most recent governmentwide data available as reported by OPM. Similar to the selected agencies, less than 1 percent of career SES governmentwide received a rating below fully successful in fiscal year 2006. According to State’s Deputy Assistant Secretary for the Bureau of Human Resources, historically, the vast majority of senior executives have received the highest rating of outstanding, including for fiscal year 2007. Since the implementation of performance-based pay, this official said State has struggled with changing the culture and general perception among senior executives that any rating less than outstanding is a failure. DOD is communicating the message that a fully successful or equivalent rating is a valued and quality rating to help change its culture and make more meaningful distinctions in ratings. Part of this communication is developing common benchmark descriptors for the performance elements at the five, four, and three rating levels. The Principal Deputy Under Secretary of Defense for Civilian Personnel Policy said she hopes that developing common definitions for the performance elements at all three levels will aid the development of a common understanding and in turn make more meaningful distinctions in ratings. The agency official recognizes that this shift to giving fully successful ratings is a significant cultural change and it will take some time to fully transform the culture. The percentage of eligible executives that received bonuses or pay adjustments varied across the selected agencies for fiscal year 2007, as shown in table 2. The percentage of eligible senior executives that received bonuses ranged from about 92 percent at DOD to about 30 percent at USAID, with the average dollar amount ranging from $11,034 at State to about $17,917 at NRC. For pay adjustments, all eligible executives at State received pay adjustments, while about 88 percent of eligible executives at DOE received adjustments, with the average dollar amount ranging from about $5,414 at NRC to about $6,243 at DOE. As a point of comparison, about 67 percent of career SES members received bonuses with an average dollar amount of $13,292 for fiscal year 2006, according to governmentwide data reported by OPM. The governmentwide percentage of career SES receiving pay adjustments and average dollar amount of the adjustments in the aggregate are not available from OPM’s governmentwide data report for fiscal year 2006. The selected agencies have policies in place where only senior executives who receive a rating of fully successful (level 3) or higher are eligible to receive bonuses or pay increases. Also affecting executives’ bonus eligibility are the agencies’ policies on awarding bonuses to executives who also received Presidential Rank Awards that year, which varied among the selected agencies. NRC, State, and Treasury do not allow executives to receive both awards in the same year, while DOD, DOE, and USAID allow the practice. According to OPM regulations, agencies are to reward the highest- performing executives with the highest ratings and largest bonuses and pay adjustments. At almost all of the agencies, the highest-performing executives (rated at level 5) made up the greatest percentage of eligible executives receiving bonuses, with the exception of NRC where all the eligible executives rated at the top two levels received a bonus. Similarly, the executives rated at the highest level received the largest bonuses on average—about $23,333 at NRC compared to about $11,034 at State. State only awarded bonuses to executives receiving the top rating of outstanding for fiscal year 2007. In addition, senior executives at NRC and USAID rated at fully successful (level 3) did not receive bonuses. (See fig. 2.) In a memo to agencies on the certification process, OPM stated that senior executives who receive a fully successful or higher rating and are paid at a level consistent with their current responsibilities should receive a pay increase. According to an OPM official, agencies are not required to give these executives pay increases, but OPM considers fully successful to be a good rating and encourages agencies to recognize and reward executives performing at this rating level. At the selected agencies, the majority of eligible senior executives rated at fully successful received pay adjustments for fiscal year 2007, as shown in figure 3. Unlike the bonus distributions by rating level, at some of the agencies, the highest- performing executives who received a rating of level 5 did not make up the greatest percentage of executives receiving pay adjustments with the largest increases on average. For example, at USAID, all eligible executives who received a level 3 rating received a pay adjustment, while about 92 percent of eligible executives rated at level 5 received an adjustment. For all the agencies except Treasury, the executives rated at the highest level received the largest pay adjustments on average—about $7,473 at USAID compared to about $6,133 at NRC. At Treasury, executives rated at levels five, four, and three on average received about the same pay adjustment amounts primarily due to pay cap issues. The governmentwide results of the 2008 OPM SES survey show that the majority of senior executives responded that their bonus or salary increase was linked to their performance rating to a very great or great extent. However, less than a third of senior executives strongly agreed or agreed that bonus amounts or pay distinctions were meaningfully different among the executives. These results show that making meaningful distinctions in bonuses and pay can be a challenge. We have reported that agencies need to have modern, effective, credible, and, as appropriate, validated performance management systems in place with adequate safeguards to ensure fairness and prevent politicization and abuse. All of the selected agencies have built safeguards into their senior executive performance appraisal and pay systems—such as predecisional checks of performance appraisal recommendations through higher-level reviews and PRBs as well as transparency in communicating the aggregate results—to help enhance the credibility, fairness, and transparency of their systems, although they varied in how the safeguards have been implemented. Our preliminary results show that there are opportunities for improvement in the communication of aggregate appraisal results to all senior executives. By law, as part of their SES appraisal systems, all agencies must provide their senior executives with an opportunity to view their appraisals and ratings and to request a review of the recommended performance ratings by higher-level officials, before the ratings become final. The higher-level reviewer cannot change the initial summary rating given by the supervisor, but may recommend a different rating in writing to the PRB that is shared with the senior executive and the supervisor. For example, according to State’s policy, an executive may request a higher-level review of the initial rating in writing prior to the PRB convening at which time the initial summary rating, the executive’s request, and the higher-level reviewing official’s written findings and recommendations are considered. The PRB is to provide a written recommendation on the executive’s summary rating to State’s Director General of the Foreign Service and Director of Human Resources, who makes the final appraisal decisions. Further, all agencies must establish one or more PRBs to help ensure that performance appraisals reflect both individual and organizational performance and that rating, bonus, and pay adjustment recommendations are consistently made. The PRB is to review senior executives’ initial summary performance ratings and other relevant documents and make written recommendations on the performance of the senior executives to the agency head or appointing authority. The selected agencies varied in their PRB structures and in who provided the final approval of the appraisal decisions. For example, given its small number of senior executives, USAID has one PRB that is responsible for making recommendations to the Administrator for his/her final approval on all rated career executives for their annual summary ratings, bonuses, performance-based pay adjustments, and Presidential Rank Award nominations. On the other hand, DOD has multiple PRBs within and across its components and agencies with separate authorizing officials who give the final approval of rating and performance payout recommendations. According to a DOD official, there is not a central PRB that oversees all the PRBs within the department responsible for recommending approval of the final appraisal decisions for all senior executives. To help ensure consistency in appraisal recommendations across the department and between the various authorizing officials, the components are to provide their final rating and performance payout distributions to the Under Secretary of Defense for Personnel and Readiness to be validated prior to executives receiving the bonuses and pay adjustments. As part of the validation process, the Under Secretary of Defense for Personnel and Readiness checks to ensure that meaningful distinctions were made and ratings, bonuses, and pay adjustments reflect organizational and individual performance, among other things, before performance bonuses and pay increases are made effective. To help enhance the transparency of the system, agencies can communicate the overall aggregate results of the performance appraisal decisions—ratings, bonuses, and pay adjustment distributions—to senior executives while protecting individual confidentiality, and as a result, let executives know where they stand in the organization. Further, OPM has recognized the importance of communicating the overall rating distributions and performance payout averages through its guidance for certifying agencies’ SES systems, and factors it into certification decisions. OPM asks agencies to brief their SES members on the results of the completed appraisal process to make sure that the dynamics of the general distribution of ratings and accompanying rewards are fully understood. The results of the OPM survey of senior executives show that the communication of overall performance appraisal results is not widely practiced throughout the government. Specifically, 65 percent of respondents said that they were not given a summary of their agency’s SES performance ratings, bonuses, and pay adjustments. The selected agencies communicated the aggregate results in varying ways. For example, Treasury and DOD posted the aggregate rating, bonus, and pay adjustment distributions for senior executives on their Web sites with comparison of data across previous fiscal years. In communicating the results of the most recent appraisal cycle, NRC sent an e-mail to all senior executives sharing the percentage of executives at each rating level and the percentages receiving bonuses and pay adjustments as well as the average dollar amounts. According to an NRC official, the agency periodically holds agencywide “all hands” SES meetings where the results of the appraisal cycle, among other topics, are communicated to executives. Similarly, the Deputy Secretary of DOE provides a memo to all senior executives summarizing the percentage of executives at the top two rating levels and the average bonus and pay adjustment amounts. DOE also includes governmentwide results as reported by OPM as a point of comparison. Further, in that memo, the Deputy Secretary stated his concern with the negligible difference in bonuses and pay adjustments among executives receiving the top two rating levels and stressed the importance of making meaningful distinctions in the allocation of compensation tied to performance ratings in the upcoming appraisal cycle. While USAID shares an individual’s appraisal results with that executive, agency officials said that they do not communicate aggregate results to all senior executives. Communicating an executive’s individual rating conveys information about how well the executive has performed against the expectations in the performance plan, but is not sufficient to provide a clear picture of how the executive’s performance compares with that of other executives in the agency. Further, USAID communicated to all SES members the pay adjustment distributions in ranges by rating level, but not the aggregate results showing the percentage of executives receiving the pay adjustments in total or by rating level. There are opportunities for further refinements in how the aggregate appraisal results are communicated to all senior executives. Mr. Chairman, Senator Voinovich, and Members of the Subcommittee, this completes my prepared statement. I would be pleased to respond to any questions that you may have. For further information regarding this statement, please contact J. Christopher Mihm, Managing Director, Strategic Issues, at (202) 512- 6806 or [email protected] or Robert N. Goldenkoff, Director, Strategic Issues, at (202) 512-6806 or [email protected]. Contact points for our Offices of Congressional Relations and Public Affairs may be found on the last page of this testimony. Individuals making key contributions to this statement include Belva Martin, Assistant Director; Amber Edwards; Janice Latimer; Meredith Moore; Mary Robison; Sabrina Streagle; and Greg Wilmoth. In November 2003, Congress authorized a new performance-based pay system for members of the Senior Executive Service (SES). With the performance-based pay system, senior executives are to no longer receive annual across-the-board or locality pay adjustments. Agencies are to base pay adjustments for senior executives on individual performance and contributions to the agency’s performance by considering the individual’s accomplishments and such things as unique skills, qualifications, or competencies of the individual and the individual’s significance to the agency’s mission and performance, as well as the individual’s current responsibilities. The system, which took effect in January 2004, also replaced the six SES pay levels with a single, open-range pay band and raised the cap on base pay and total compensation. For 2008, the caps are $158,500 for base pay (Level III of the Executive Schedule) with a senior executive’s total compensation not to exceed $191,300 (Level I of the Executive Schedule). If an agency’s senior executive performance appraisal system is certified by the Office of Personnel Management (OPM) and the Office of Management and Budget (OMB) concurs, the caps are increased to $172,200 for base pay (Level II of the Executive Schedule) and $221,100 for total compensation (the total annual compensation payable to the Vice President). To qualify for senior executive pay flexibilities, agencies’ performance appraisal systems are evaluated against nine certification criteria and any additional information that OPM and OMB may require to make determinations regarding certification. As shown in table 3, the certification criteria jointly developed by OPM and OMB are broad principles that position agencies to use their pay systems strategically to support the development of a stronger performance culture and the attainment of the agency’s mission, goals, and objectives. Appendix II: Highlights of Selected GAO Products This is a work of the U.S. government and is not subject to copyright protection in the United States. It may be reproduced and distributed in its entirety without further permission from GAO. However, because this work may contain copyrighted images or other material, permission from the copyright holder may be necessary if you wish to reproduce this material separately. | In 2003, Congress and the administration established a performance-based pay system for Senior Executive Service (SES) members that requires a link between individual and organizational performance and pay. Specifically, agencies are allowed to raise SES pay caps if their systems are certified by the Office of Personnel Management (OPM) with concurrence by the Office of Management and Budget (OMB) as meeting specified criteria. GAO was asked to testify on preliminary results of ongoing work analyzing selected executive branch agencies' policies and procedures for their SES performance-based pay systems in the following areas: (1) factoring organizational performance into senior executive performance appraisal decisions, (2) making meaningful distinctions in senior executive performance, and (3) building safeguards into senior executive performance appraisal and pay systems. GAO selected the U.S. Departments of Defense (DOD), Energy (DOE), State, and the Treasury; the U.S. Nuclear Regulatory Commission (NRC); and the United States Agency for International Development (USAID) based on variations in agency mission, organizational structure, and size of their career SES workforces. To date, GAO has analyzed agencies' SES performance management policies and guidance and analyzed aggregate SES performance appraisal data as provided by the agencies for fiscal year 2007. Overall, the selected agencies are making positive steps toward three key areas related to OPM and OMB's certification criteria, with some opportunities for refinements in these areas: (1) Factoring organizational performance into senior executive performance appraisal decisions: -all of the selected agencies have policies in place that require senior executives' performance expectations to be aligned with organizational results and organizational performance to be factored into appraisal decisions. Improvements in communicating organizational performance to reviewing officials could be made. (2) Making meaningful distinctions in senior executive performance: -while all of the selected agencies have multiple rating levels in place for assessing senior executive performance, senior executives were concentrated at the top two rating levels in the fiscal year 2007 appraisal cycle. (3) Building safeguards into senior executive performance appraisal and pay systems: -the selected agencies varied in how they implemented predecisional checks of appraisal recommendations through higher-level reviews and Performance Review Boards as well as transparency in the aggregate results with opportunities to improve communication of aggregate appraisal results to all senior executives. |
State is the lead agency responsible for implementing American foreign policy and representing the United States abroad. It staffs over 270 embassies, consulates, and other posts worldwide. Figure 1 shows the number and share of State’s Foreign Service, Civil Service, and Locally Employed staff. According to State, about two-thirds of the Foreign Service serves overseas at a given point in time, whereas almost all Civil Service employees serve domestically. Locally Employed staff serve overseas. Foreign Service employees serving abroad fall into two broad categories—generalists and specialists. Generalists help formulate and implement the foreign policy of the United States and are grouped into five career tracks: consular, economic, management, political, and public diplomacy. Specialists serve in 18 different skill groups to support overseas posts worldwide or in Washington, D.C. These skill groups are grouped into eight major categories: Administration, Construction Engineering, Facility Management, Information Technology, International Information and English Language Programs, Medical and Health, Office Management, and Security. State typically hires Foreign Service employees at the entry level. Among Foreign Service generalists, the entry-level consists of three position grades—06, 05, and 04. Midlevel positions include grades 03, 02, and 01, and senior-level positions include career minister, minister counselor, and counselor positions. Officers compete annually for promotion to the next higher grade. It typically takes about 4 to 5 years for an officer to move through the entry-level grades to a midlevel grade. The levels associated with Foreign Service specialist position grades vary across specialist function. For example, a senior-level office management specialist position is a 04 grade, whereas a senior-level medical technician position is a 02 grade. State requires its Foreign Service employees to be available for service anywhere in the world and reserves the ability to direct officers to any of its posts overseas or to its Washington headquarters. However, the department does not generally use this authority, preferring other means of filling high-priority positions, according to State officials. The process of assigning Foreign Service employees to their positions typically begins when they receive a list of upcoming vacancies for which they may compete. Foreign Service employees then submit a list of positions for which they want to be considered, or “bids,” to the Office of Career Development and Assignments and consult with their career development officer. The process varies depending on an officer’s grade and functional specialty, and State uses a variety of incentives to encourage Foreign Service employees to bid on hardship posts, including the high-priority posts in AIP countries. State has a Five Year Workforce Plan, which it updates annually. This document describes State’s strategic workforce planning process, which includes the following five elements: Establish strategic alignment: links human resources to strategic goals. Identify gaps by analysis of requirements and talent pool: compares estimated staffing requirements to projected workforce levels to identify workforce gaps and strength. Develop management plans: develop plans related to recruitment, hiring, promotion, training, and career development. Implement management plans: implement plans related to recruitment, hiring, promotion, training, and career development. Evaluate strategies: evaluate plans, strategies, programs, and initiatives. State uses an Overseas Staffing Model, which it updates every 2 years, to ensure that the department’s personnel resources are aligned with its strategic priorities and foreign policy objectives. The model uses a variety of inputs—such as the priority level of overseas posts, visa processing requirements, and security needs—to estimate the required Foreign Service staffing levels at each overseas location. The model includes seven categories of embassies based primarily on the level and type of work required to pursue the U.S. government’s diplomatic relations with the host country. For example, the lowest-level category includes special- purpose small embassies with limited requirements for advocacy, liaison, and coordination in the host country’s capital. The highest-level category includes the largest, most comprehensive full-service posts where the host country’s regional and global role requires extensive U.S. personnel resources. State has sought to rebuild the size of its Foreign Service after a period of hiring below attrition levels during the 1990s that contributed to staffing gaps overseas and endangered diplomatic readiness, according to the department. To address these gaps, State implemented the “Diplomatic Readiness Initiative,” which resulted in hiring over 1,000 new employees above attrition from 2002 to 2004. However, as we previously reported, most of this increase was absorbed by the demand for personnel in Afghanistan and Iraq. In 2009, State began another hiring effort called Diplomacy 3.0 to increase its Foreign Service workforce by 25 percent by 2013. However, due to emerging budgetary constraints, State now anticipates this goal will not be met until 2023. In 2009, we reported that State faced persistent staffing and experience gaps at overseas posts, particularly at the midlevel. The report’s analysis of State’s personnel data, as of September 2008, found that posts with the greatest hardship levels had higher vacancy rates than posts with no or low hardship levels. Posts with the greatest hardship also were more likely to fill positions through “upstretch” assignments—assignments in which the position’s grade is at least one grade higher than that of the officer assigned to it. The report also found that these staffing and experience gaps can compromise posts’ diplomatic readiness in a variety of ways. For example, gaps can lead to decreased reporting coverage; loss of institutional knowledge; and increased supervisory requirements for senior staff, detracting from other critical diplomatic responsibilities. In addition, we reported on a variety of measures and incentives that State used to help ensure that Foreign Service employees bid on hardship posts. These ranged from monetary benefits to changes in service and bidding requirements. In response to our recommendation, State evaluated these measures and incentives in 2011. According to State officials, this evaluation found that officers used the entire range of incentives available—financial and nonfinancial—based on preferences and priorities and that career stage and family status were key to affecting the officers’ decisions. State increased the size of the Foreign Service by about 17 percent in fiscal years 2009 and 2010, but overseas experience gaps—the percentage of positions that are vacant or filled with upstretch assignments—have not declined since 2008 because State increased the total number of overseas positions in response to increased needs and emerging diplomatic priorities. These gaps are largest at the midlevels and in hardship posts. According to State officials, the department takes special measures to fill high-priority positions. State made substantial progress in fiscal years 2009 and 2010 toward the Diplomacy 3.0 goal of increasing the size of the Foreign Service by 25 percent by 2013. In those years, State hired about 1,900 Foreign Service employees above attrition, increasing the total size of the Foreign Service by about 17 percent, or over two-thirds of its total 5-year goal. According to State, in addition to expanding overseas staffing, the increase in hiring allowed the department to double the size of the training complement, which provides flexibility to enroll Foreign Service employees in language courses—some of which require up to 2 years of training—without increasing the size of overseas gaps. However, due to budget constraints, hiring has slowed significantly, and State only added 38 new Foreign Service positions above attrition in fiscal year 2011. In that year, it also modified its hiring projections to reflect a downward revision of future budget estimates for fiscal year 2012 and beyond. State now projects it will add 150 new Foreign Service positions above attrition in fiscal year 2012 and 82 new Foreign Service positions above attrition in each of the following 6 years. As a result, State revised its estimate for when it will complete the Diplomacy 3.0 hiring initiative. In April 2011, State estimated it would complete the increased hiring called for in Diplomacy 3.0 in fiscal year 2018; however, State now estimates it will not complete the hiring initiative until fiscal year 2023. State officials noted that these estimates may be revised again based on future budget environments. Our analysis of State staffing data shows that State faces experience gaps in over one-quarter of Foreign Service positions at overseas posts, a proportion that has not changed since 2008. The largest gaps are in midlevel positions, while hardship posts and some position categories, such as Office Management Specialist positions, also have large gaps. According to our analysis of State staffing data as of October 31, 2011, State faces experience gaps in 28 percent of overseas Foreign Service positions. Specifically, 14 percent of overseas Foreign Service positions are vacant and an additional 14 percent of positions are filled through upstretch assignments. Both percentages, as well as the total percentage of positions facing experience gaps, are unchanged since 2008. Our analysis indicates that State has not met its goal for reducing the overseas vacancy rate. In its fiscal year 2013 Bureau Strategic and Resource Plan (BSRP), State’s Bureau of Human Resources established a goal of reducing the vacancy rate for overseas positions to 8 percent by the end of fiscal year 2011. However, we found that State had an overseas vacancy rate of 14 percent 1 month after the end of that fiscal year. Further, our comparison of data from 2008 and 2011 shows that, while the number of officers serving overseas increased following the Diplomacy 3.0 hiring surge, the number of authorized positions overseas has also increased. Consequently, the overall vacancy rates have not declined. In 2008, approximately 7,000 of about 8,100 total Foreign Service positions were filled. Comparatively, in 2011, nearly 7,800 Foreign Service positions were filled—or 11 percent more positions than in 2008—but the total number of positions increased to over 9,000, resulting in the same vacancy rate. The BSRP also set overseas vacancy rate targets of 10 percent in 2010 and 6 percent in 2012. The BSRP stated that the department did not meet its 2010 target with an actual vacancy rate of 16.7 percent. does not consider an entry-level officer in a ceded position to be in an upstretch assignment. However, officials at overseas posts and in regional bureaus noted that these positions may still suffer from experience gaps. Figure 2 shows that the number of authorized positions and Foreign Service employees serving overseas has increased, but the proportion of positions with experience gaps has not changed. State officials noted that AIP posts—State’s highest-priority posts—account for much of the increase in new positions. As figure 3 shows, regionally, the largest share of new positions is in the Bureau of South and Central Asian Affairs, primarily because of increases in Afghanistan and Pakistan, and the majority of new positions are in a small number of countries where State has high levels of engagement. Specifically, about 40 percent of all new positions are in AIP countries and an additional 20 percent are in 5 other countries: Mexico, Brazil, China, India, and Russia. State officials noted that this distribution of new positions reflects the department’s changing foreign policy priorities. For example, positions were added in Brazil and China in response to presidential directives to expand consular capacity in those countries. According to State officials, the department has also created positions to address emerging diplomatic priorities, such as climate change and global health. Additionally, State officials noted that most Foreign Service employees hired in fiscal year 2010 would not have been placed in overseas assignments as of October 31, 2011, when we acquired staffing data. State anticipates that overall vacancy rates will drop to approximately 9 percent as officers hired in recent years are fully deployed by the end of 2012. Although State intended to eliminate gaps in midlevel Foreign Service positions by the end of fiscal year 2012, these gaps have only diminished slightly since 2008. Specifically, experience gaps currently exist in about 26 percent of midlevel Foreign Service positions—only 2 percent lower than in 2008. About 60 percent of all vacancies and upstretch assignments are in midlevel positions because they make up the largest share of all overseas positions. Figure 4 shows the numbers and percentages of positions filled at grade, filled with upstretch assignments, and vacant for the various position levels. State has acknowledged that midlevel gaps are a persistent problem. State has faced midlevel gaps for years and, according to the August 2011 Five Year Workforce Plan, the midlevel gap grew from 2010 to 2011. According to State officials, midlevel gaps have grown in recent years because most of the new positions created under Diplomacy 3.0 were midlevel positions and State only hires entry-level Foreign Service employees. In prior reports, we found that midlevel experience gaps compromise diplomatic readiness, and State officials confirmed that these gaps continue to impact overseas operations. State officials noted that midlevel gaps will decrease as recent hires are promoted. According to State’s Five Year Workforce Plan, officers hired in fiscal years 2009 and 2010 under the first wave of Diplomacy 3.0 hiring will begin to be eligible for promotion to the midlevels in fiscal years 2014 or 2015. In recent years, State has accelerated the average time it takes for officers to be promoted into the midlevels, in part to fill gaps. However, officials from State’s regional bureaus and AFSA expressed concerns that this creates a different form of experience gap, as some officers may be promoted before they are fully prepared to assume new responsibilities. Our analysis shows that a post’s hardship level continues to be one of the most significant factors for predicting whether a position is filled, remains vacant, or is filled with an upstretch assignment. We found that over 35 percent of all positions in posts of greatest hardship are vacant or filled with upstretch assignments compared to about 22 percent for posts with low or no hardship differentials. Further, our analysis of the likelihood of positions being vacant or filled with an upstretch assignment shows that— controlling for other factors, such as a position’s level, type, or regional location—a post’s hardship level is one of the most consistent factors for predicting where experience gaps will occur. Specifically, we found that positions in posts of greatest hardship are 44 percent more likely to be vacant than positions at posts with low or no hardship differentials. Additionally, when positions are filled, posts of greatest hardship are 81 percent more likely to use an upstretch candidate than posts with low or no hardship differentials. This is consistent with our findings in prior work, which found that hardship posts faced larger gaps than posts with low or no hardship differential. Appendix II describes our analysis of the likelihood of various positions being vacant or filled with an upstretch assignment in further detail. We found no significant difference between the rates at which generalist and specialist positions are filled. However, the likelihood of generalist positions being filled with upstretch assignments is somewhat higher than for specialist positions. We also found that there are differences in vacancy and upstretch rates for specific functions within both the generalist and specialist fields and that some position categories are more difficult to fill. Among generalists, the consular section has the largest gaps, in terms of the total number of positions that are vacant or filled with upstretch assignments, because it is the largest generalist section. According to our analysis, about 170 consular positions were vacant as of October 31, 2011, and about 250 consular positions were filled with upstretch assignments. State officials noted that demand is high for entry-level consular officers to adjudicate visas, particularly in countries that have seen dramatic increases in demand for visas in recent years. In addition, the Public Diplomacy section has a relatively high upstretch rate, with nearly one-quarter of all Public Diplomacy positions filled with upstretch assignments. State officials noted that gaps within the Public Diplomacy section, particularly at the midlevels, have persisted since the late 1990s, when the U.S. Information Agency—which had responsibility for public diplomacy—was integrated into State. Figure 5 shows the proportion of positions that are filled at grade or better, filled with upstretch assignments, or are vacant for generalist positions. Within specialist skill groups, Office Management Specialist (OMS) positions have the largest overall gaps, both in terms of the number of positions and the relative percentage of the gap. Over one-third of all OMS positions, or nearly 300 positions, are either vacant or filled with upstretch assignments. Regional bureau and post officials cited OMS positions as being among the most difficult to fill. For example, officials in Brazil noted that both the embassy in Brasilia and the consulate in Sao Paulo had OMS positions that were vacant for 2 years. Security specialist skill groups also face substantial gaps. The Security Technician and Security Engineer fields have fewer positions than some of the larger specialist fields, but about 30 percent of positions in both fields are vacant or filled with upstretch assignments. Further, security officers have one of the highest vacancy rates among specialist fields, with about 17 percent of those positions unfilled. Figure 6 shows the proportion of positions that are filled at grade, filled with upstretch assignments, or vacant for the 10 largest specialist skill groups. According to State officials, the department takes a number of steps to help fill high-priority positions. State staggers the assignments process over several months and seeks bids for high-priority areas—including Chiefs of Mission, Deputy Chiefs of Mission, and positions in AIP—before the regular bid cycle. Officials noted that in the most recent cycle for assignments starting in the summer of 2012, State filled about three- quarters of all positions in AIP posts before the regular bid round began. Regional bureau officials noted that this should have a positive effect on staffing elsewhere because it limits the number of people pulled from other assignments. State continues to fill AIP positions year-round and often uses people from other posts on temporary assignments in AIP posts. According to State, as of February 2012, approximately 91 percent of AIP positions were filled. State also holds an “urgent vacancies” bid round in the spring to fill positions that were not filled in earlier cycles. State uses a decentralized process for prioritizing and filling overseas positions, which officials stated helps ensure important positions are filled. While AIP posts are the only official department priority for staffing, State officials said regional bureaus informally set their own priorities by determining which of the positions within the bureau that are up for bid are most critical and actively recruiting candidates for those positions. Officials from State’s Office of Career Development and Assignments stated that the regional bureaus are in the best position to assess the needs across posts and prioritize positions accordingly. Regional bureau officials stated that, in order to minimize the impact of experience gaps, they will consider factors such as the size of the post or the availability of upper-level support in addition to the needs of the position itself when determining whether a position can remain vacant or be filled through an upstretch assignment. For example, officials stated they may prefer to fill a single position in a small, difficult-to-fill post ahead of multiple positions in a much larger post. Similarly, they may be more likely to allow an upstretch assignment for a lower midlevel position in a large post because larger posts are likely to have more layers of upper management support. As we reported in 2009, State has created a wide range of measures and financial and nonfinancial incentives to encourage officers to bid on assignments at hardship posts. For example, Foreign Service employees may receive favorable consideration for promotion for service in hardship posts. Additionally, State uses Fair Share bidding rules, which require employees who have not served in a hardship location within the last 8 years to bid on at least three positions in hardship posts. Officials in the bureaus of Near Eastern Affairs and South and Central Asian Affairs stated that they regularly collect feedback on the impact of incentives in encouraging officers to bid on positions in AIP posts. One official noted that, in addition to financial incentives, nonfinancial incentives, such as additional opportunities or the feeling that they are doing something important, often help to attract bidders. According to State officials, through this system of incentives and bidding rules, State has always been able to find volunteers to fill critical needs. While the department has the authority to direct Foreign Service employees to specific assignments if it does not have adequate bidders for a position, according to State officials, the department has not used these directed assignments— outside of assigning Foreign Service employees in their first or second rotation. State officials noted that use of directed assignments could potentially result in a less motivated or productive workforce. State has taken steps to implement goals highlighted in the QDDR to increase its reliance on Civil Service employees and retirees, and expand mentoring to help address midlevel experience gaps overseas. To expand the limited number of Civil Service employees filling overseas positions, State began a pilot program to offer additional opportunities for overseas assignments and eased requirements for conversions from Civil Service to Foreign Service. State also hires retirees on a limited basis to help fill gaps overseas. In addition, State began a pilot program offering a workshop with mentoring for first-time supervisors overseas. However, State’s Five Year Workforce Plan does not include a specific strategy to guide efforts to address midlevel gaps. State’s first QDDR, released in 2010, highlighted the goal of expanding the use of Civil Service employees to help close the midlevel experience gap. The QDDR noted that State has a base of Civil Service employees with significant experience and called for increasing opportunities for Civil Service employees to fill overseas Foreign Service assignments and increasing the number of Civil Service conversions to the Foreign Service. A February 2011 report by the American Academy of Diplomacy and the Stimson Center also recommended expanded use of Civil Service employees to fill midlevel gaps.conducted a survey of its Civil Service employees and found a high level of interest in serving overseas. About 75 percent of respondents expressed interest in serving in some type of overseas assignment in their careers and about 25 percent expressed interest in eventually converting to Foreign Service, according to State officials. As a first step, State recently The extent to which State currently draws on its pool of Civil Service employees for overseas assignments is limited. From fiscal years 2009 through 2011, State placed 159 Civil Service employees in overseas Foreign Service positions in temporary assignments. These are known as “Limited Non-Career Appointments” (LNA). According to State officials, many of these assignments fill midlevel positions. State’s human capital rules enable Civil Service employees (and other non-Foreign Service employees) to serve as LNAs, normally for up to 5 years. duration of these assignments typically ranges from 1 to 3 years, according to State officials. Many of these LNA assignments are for positions that the department has identified as “hard-to-fill,” meaning they lack sufficient qualified bidders from among the ranks of the Foreign Service. In an announcement to the department each May, State identifies hard-to-fill positions for which Civil Service employees may apply. Most of these positions are at the midlevel. State listed 36 hard-to-fill positions in 2009, 74 in 2010, and 55 in 2011. Other common types of overseas LNA assignments for Civil Service employees include positions in AIP countries, developmental opportunities, and positions requiring specific expertise. Rules governing LNAs are covered in the Foreign Affairs Manual (3 FAM 2290) and federal law (22 U.S.C. §§ 3943, 3949). positions Civil Service employees leave behind. Affected bureaus must guarantee that applicants will be placed into permanent Civil Service positions within the same bureau when they return from their overseas assignments. This requirement creates some reluctance on the part of bureaus to approve applications for overseas assignments, according to State officials. In addition, department officials noted that Civil Service employees have concerns about losing future opportunities for desirable Civil Service positions while serving overseas. Another challenge is that State cannot always identify a sufficient number of qualified Civil Service employees to apply for the overseas vacancies it seeks to fill. State officials noted that hard-to-fill positions are typically not in the more desirable locations, which they said contributes to limited interest among qualified Civil Servants. In addition, it can often be difficult to match Civil Service employees’ qualifications with the needs of the open positions. The Human Resources Bureau began a pilot program in November 2011 to expand opportunities for Civil Service employees to serve in overseas positions. It was intended to support goals highlighted in the QDDR to enhance career development for midlevel Civil Service employees and ease Foreign Service midlevel staffing gaps. The department identified 11 overseas positions at various posts to which qualified Civil Service employees could apply. Most of these assignments are for midlevel positions. The assignments in the pilot differ from the hard-to-fill assignments in two key ways. First, these are not positions that Foreign Service bidders initially passed over. Second, the re-employment rules are more flexible, according to Human Resources Bureau officials; affected bureaus do not have to hold a position for the Civil Service employees who participate in the pilot. Instead, returning Civil Service employees can be placed in a bureau different from the one they vacated. According to State officials, the department has agreed with AFSA to limit the total to about 20 assignments at any one time during the pilot to ensure that the program does not limit career development opportunities for Foreign Service employees. The officials noted that Foreign Service employees operate in an “up-or-out” personnel system, which requires them to have sufficient experience and responsibilities to progress in their careers. In addition, efforts to increase the number of Civil Service assignments to Foreign Service positions must be consistent with State’s human capital rules, which state that the department’s goal is to fill Foreign Service positions with Foreign Service employees except under special circumstances. The overseas positions in the pilot program continue to be designated as Foreign Service positions and can be filled by Foreign Service employees after the Civil Service employees complete their assignments. Human Resources Bureau officials stated that they expect this pilot program to help the department assess its ability to identify overseas positions that match the skills and experience of potential Civil Service applicants. It will also identify potential staffing impacts on affected bureaus and posts, as well as career development needs of the Foreign Service. However, according to the officials, the department has not finalized plans for evaluating the results of the pilot program. They also noted that it will be more than 2 years before the first set of assignments is completed and they can begin to survey participants and stakeholders to assess results of the pilot program. State’s QDDR also included a goal of expanding opportunities for Civil Service employees to convert to the Foreign Service to help fill experience gaps overseas. The QDDR stated that, while all State personnel can apply to enter the Foreign Service through the traditional selection process, it is in the department’s interest to offer more and quicker pathways for qualified and interested Civil Service employees to join the Foreign Service. However, State’s Foreign Service Conversion Program has strict eligibility requirements, which limit the number of conversions. The program’s application and review process resulted in only three Civil Service applicants recommended for conversion in 2010 and four in 2011. State only opens positions for conversion that it projects to be in deficit or otherwise approved by the Director General and lists them in an annual cable that it circulates throughout the department. The department convenes a review panel to confirm that applicants meet minimum qualifications, which include 24 months in Foreign Service positions abroad out of the previous 6 years; and 30 months of service— domestically or overseas—in the desired skill code in the previous 6 years. The panel then determines if applicants have the skills and experience necessary to perform successfully in the positions for which they are applying. Applicants offered an opportunity to convert based on the panel review must then submit a proctored writing sample, which must earn a passing grade from the Foreign Service Board of Examiners to be recommended for conversion. According to Human Resources Bureau officials, in 2011, State identified 88 Foreign Service generalist positions as open for conversion from Civil Service, as well as Foreign Service generalist and specialist. Twenty-six Civil Service applicants applied. Ultimately, the process resulted in seven applicants given the opportunity to convert and four of the seven passing the writing test requirement. Table 1 shows the number of applicants who qualified at key stages in the process in 2010 and 2011. Human Resources Bureau officials noted that in 2011, the department sought to ease the qualification requirements somewhat, including reducing the number of months served overseas from 30 months to 24 months; however, the number of qualified applicants actually dropped from 30 in 2010 to 26 in 2011. Beginning in 2012, the assessment process will include a structured interview, along with the writing test, to give candidates an additional means of demonstrating their skills and competencies. Retirees can fill key roles at overseas posts, bringing with them a high level of skills and experience, according to State officials. The department has limited authority to hire retirees for full-time positions and also for temporary assignments. State’s QDDR noted that the department should draw on its pool of retirees to help address its overseas midlevel gap. In addition, the Stimson Center and American Academy of Diplomacy report also recommended that State increase reliance on retirees. State hires retired Foreign Service and Civil Service employees to work full-time with waivers from federal dual compensation rules, under certain circumstances, to help fill workforce gaps overseas. In calendar year 2011, State approved 57 dual compensation waivers for 35 Foreign Service retirees and 22 Civil Service retirees for overseas assignments. Federal law requires that payment of a retiree’s annuity terminates on the date of re-employment except under circumstances in which State has the authority to grant a dual compensation waiver. These circumstances include staffing needs in AIP countries and emergency situations involving a direct threat to life or property, or other unusual circumstances. State officials stated that they would make greater use of dual compensation waivers to draw from the pool of retirees to fill experience gaps if their legal authority were expanded. However, other than State’s Office of Inspector General, the department has not formally sought expanded congressional authority to offer waivers to hire Foreign Service retirees. The Office of Inspector General is seeking separate congressional authority for additional dual compensation waivers to help meet its staffing needs, including filling positions at its overseas posts in hardship locations, such as Amman, Jordan; Cairo, Egypt; and Kabul, Afghanistan. State hires many more Foreign Service retirees for temporary, part-time work than it does for full-time assignments. These retirees work on a “When Actually Employed” schedule and are commonly referred to as “WAEs.” WAEs do not fill vacant positions overseas but are an important means of addressing workforce gaps, according to State officials. For example, posts often rely on WAEs to fill staffing gaps during summer rotations of Foreign Service employees, according to State officials. Officials also noted that WAEs can be particularly helpful when short-term needs arise requiring special skills and expertise, such as helping posts prepare for a presidential visit or evacuating an embassy during a crisis. Newer staff also can benefit from the experience and expertise that WAEs share during their assignments. Federal rules, and high salary and travel costs, limit the extent to which State uses WAEs. State bureaus typically hire them for short assignments of 1 to 3 months. Federal law enables Foreign Service retirees to earn a salary while continuing to receive their retirement annuity as long as their total earnings do not exceed the greater of an amount equal to the basic pay they earned when they retired or the highest annual rate of basic pay for full-time employment in the position for which they have been re- employed. This limits the amount of time they can work in a calendar year. According to State officials, WAEs also have a cap of 1,040 hours of employment per calendar year. In addition to rules in federal statute that limit their use, WAEs are also a relatively expensive option because of their high salaries and travel costs, according to State officials from the geographic bureaus and the Bureau of Consular Affairs—the primary users of WAEs. Table 2 shows the number of WAE appointments these bureaus used in 2011 and the average duration of each appointment. Individual bureaus maintain their own lists of retirees and hire them as WAEs from their own budgets. State has no initiatives currently under way to expand its use of WAEs. As part of its effort to address Foreign Service experience gaps, State’s QDDR included the goal of expanding existing mentoring programs and piloting a new mentoring program for first-time supervisors. State currently offers mentoring for entry-level Foreign Service employees and situational mentoring, which offers advice for any State employee on a specific activity or issue. In addition, State officials noted that less experienced Foreign Service employees are increasingly being asked to fill supervisory roles earlier in their careers than in the past, which raises the need for targeting this group for additional mentoring. In September 2011, the Human Resources Bureau began a pilot program offering training workshops designed to improve the skills of first-time supervisors overseas. Mentoring, both at and following the training, is a key component of the pilot workshops, according to bureau officials. The pilot involved two 5-day workshops—one in Fort Lauderdale, Florida, and another in Frankfurt, Germany, delivered to a total of 49 first-time supervisors from three of the department’s geographic regions. The workshops focused on performance management and basic leadership skills. Retirees served as class mentors and established relationships with the participants at the sessions. The mentors are expected to follow up with the attendees for 1 year, with the possibility to travel to their overseas posts, if warranted. According to Human Resources Bureau officials, the program included follow-up surveys of attendees and their supervisors to assess the usefulness of the workshops in improving participants’ management style and skills. The officials noted that the response among the participants and their supervisors has been positive. State plans to conduct two more sessions in September 2012 for first-time supervisors from the department’s other three geographic regions. State officials noted that the pilot needs to be completed before they can determine the effectiveness of the program. A potential constraint is the cost of sending officers to these workshops. Although State has undertaken efforts to carry out QDDR goals to address midlevel gaps, the department has not developed a strategic approach to guide these efforts. We have found in prior work that developing a strategy to address staffing gaps and evaluating its success contribute to effective workforce plans. State’s Five Year Workforce Plan outlines its human capital strategies; however, the plan lacks a specific strategy for addressing midlevel experience gaps. In our prior work, we developed a workforce planning model that suggests that, when considering a strategy to address workforce gaps, agencies consider the full range of flexibilities available under current authorities, as well as flexibilities that might require additional legislation before they can be adopted. State’s efforts to draw on its pool of retirees and Civil Service employees to fill midlevel gaps are examples of the use of such flexibilities; however, it is not clear that State has developed a strategy to take full advantage of its authority to use them. In addition, our workforce planning model suggests that, to evaluate human capital strategies, agencies develop performance measures that can be used to gauge progress toward reaching human capital goals. State’s Five Year Workforce Plan does not indicate how it will evaluate efforts under way to address midlevel gaps. State plans to assess its two pilot programs, but it has not developed performance measures to gauge the potential impact of these efforts on midlevel gaps. State faces persistent Foreign Service experience gaps at overseas posts, particularly at the midlevels, and these gaps put its diplomatic readiness at risk. State has traditionally relied on hiring new Foreign Service employees to fill overseas gaps and significantly increased hiring in fiscal years 2009 and 2010. However, those new hires will not be eligible for promotion to the midlevels until at least fiscal year 2014 and projections for future annual hiring increases have been reduced due to budgetary constraints. As a result, State likely will continue to face staffing and experience gaps for the foreseeable future. These gaps will continue to affect diplomatic readiness as positions remain unfilled or are staffed by Foreign Service employees whose experience does not match the position requirements. In the meantime, State has taken steps to implement goals highlighted in the QDDR to address midlevel overseas gaps, including developing pilot programs for increasing the use of Civil Service employees overseas and providing new workshops with mentoring for first-time supervisors overseas. Although these efforts are currently small in relation to the size of the overall gaps, their impact and the extent to which they can be expanded in the future have yet to be analyzed by State and are, therefore, unclear. Since State has not developed a specific strategy for addressing midlevel gaps, it can neither fully assess the success of its efforts to close these gaps nor determine the optimal course of action for enhancing diplomatic readiness. To help guide State’s efforts to address midlevel gaps in the Foreign Service, we recommend that the Secretary of State direct the Bureau of Human Resources to update its Five Year Workforce Plan to include a strategy to address these gaps and a plan to evaluate the success of this strategy. We provided a draft of this report to State for comment. In its written comments, reproduced in appendix III, State agreed with our recommendation. State also provided technical comments, which we incorporated throughout the report, as appropriate. As agreed with your office, unless you publicly announce the contents of this report earlier, we plan no further distribution until 30 days from the report’s date. At that time, we will send copies to the Secretary of State and other interested congressional committees. In addition, the report is available at no charge on the GAO website at http://www.gao.gov. If you or your staff have any questions about this report, please contact me at (202) 512-8980 or [email protected]. Contact points for our Offices of Congressional Relations and Public Affairs may be found on the last page of this report. GAO staff who made key contributions to this report are listed in appendix IV. In this report, we assess: (1) the extent to which the Department of State’s (State) overseas midlevel Foreign Service experience gaps have changed since 2008 and (2) State’s efforts to address these gaps. To assess the extent of the State’s overseas midlevel Foreign Service experience gaps and how these gaps have changed since 2008, we reviewed GAO and State Office of Inspector General reports, as well as State workforce planning and budget documents and its Diplomacy 3.0 initiative; collected and analyzed staffing data on all overseas Foreign Service positions from State’s Global Employees Management System (GEMS) as of September 30, 2008, and October 31, 2011; and interviewed officials in State’s Bureau of Human Resources, Bureau of Consular Affairs, and six regional bureaus regarding overseas experience gaps. To determine the extent of overseas Foreign Service experience gaps, we analyzed State staffing data. We compared the number of positions that were vacant, filled with upstretch assignments, and filled at grade or higher with the total number of authorized overseas positions. We did not validate whether the total number of authorized overseas positions was appropriate or met State’s needs. We calculated total vacancy and upstretch rates across all overseas Foreign Service positions for both the 2008 and 2011 data. We also calculated vacancy and upstretch rates for both data sets by each of the following characteristics: level (i.e., entry-, mid-, or senior-level); type (i.e., generalist or specialist); and function (e.g., consular or information management). For 2011 data only, we supplemented the GEMS data with additional State data on hardship differentials and embassy and nonembassy rankings from State’s Overseas Staffing Models and also calculated vacancy and upstretch rates by each of these characteristics. To calculate vacancy rates, we divided the total number of positions by the number of vacant positions. To calculate upstretch rates, we divided the total number of positions by the number of upstretch assignments. We considered any assignment in which the grade of incumbent was at least one grade lower than that of the position as an upstretch assignment, with one exception: According to State officials, tenured Foreign Service generalists with a position grade of 04 are not considered in an upstretch assignment if they encumber a position with an 03 grade because tenured 04 grade officers are expected to fill positions with an 03 grade, if possible. We, therefore, did not consider tenured 04 grade officers to be in an upstretch assignment when they filled positions graded as 03. We considered senior-level positions at the Career Minister, Minister Counselor, and Counselor level to be of a comparable grade and, therefore, did not consider officers with any of these grades to be in an upstretch assignment. According to State officials, the department does not consider any employee in an entry-level position to be in an upstretch assignment. However, for the purposes of our analysis, we defined any assignment in which the position’s grade is higher than the incumbent’s grade to be an upstretch assignment. Therefore, because State assigns different grades to positions within the entry levels, we considered entry- level assignments where a position’s grade was higher than the employee’s grade to be upstretch assignments. We eliminated a small number of positions from our analysis of each data set because we could not clearly or completely identify where the positions were located. We also eliminated 57 Security Protective Specialist positions from the 2011 data because, according to State officials, it was a new job category and was not intended for permanent Foreign Service Officers, but rather employees hired under short-term limited noncareer appointments. In total, we did not use 88 positions, or about 1 percent of the total, from the September 30, 2008, data and 207 positions, or about 2 percent of the total, from the October 31, 2011, data, which we determined did not substantially affect our findings. We also conducted an analysis of the likelihood of overseas positions being vacant or filled through upstretch assignments based on the various characteristics described above. For a detailed discussion of the methodology and results of that analysis, see appendix II. We obtained staffing and position data from State’s GEMS database. Since we have previously checked the reliability of this database, we inquired if State had made any major changes to the database since our 2009 report. State indicated that it had not made major changes to the system. We also tested the data for completeness, confirmed the general accuracy of the data with select overseas posts, and interviewed knowledgeable officials from the Office of Resource Management and Organizational Analysis concerning the reliability of the data. Data from Afghanistan, Iraq, and Pakistan (AIP) posts often show higher vacancy rates than actually exist at the post; however, it does so because State relies heavily on short-term assignments to fill positions in these locations. These short-term assignments do not show up in GEMS, and the position, therefore, appears vacant. Positions in GEMS represent a need for full-time, permanent Foreign Service employees, and, therefore, we determined that the GEMS data accurately reflect State’s ability to fill positions in these locations with full-time, permanent Foreign Service employees. Additionally, because State often pulls staff from other overseas assignments to fill short-term temporary assignments in AIP countries, the vacancy rate for all overseas positions is most accurately captured when all posts are included. Therefore, based on our analysis of the data and discussions with the officials, we determined the data to be sufficiently reliable for our purposes. However, when referring specifically to vacancy rates in AIP countries, we reference other State sources, which include positions filled through both permanent and temporary assignments. To assess State’s approach to addressing midlevel Foreign Service gaps through expanded use of Civil Service employees, retirees, and mentoring, we reviewed GAO and State Office of Inspector General reports; reviewed relevant State documents, such as State’s Quadrennial Diplomacy and Development Review (QDDR), State’s Five Year Workforce Plan, and the Bureau of Human Resources’ Bureau Strategic and Resource Plan; reviewed federal laws, policies, and regulations governing Limited Non-Career Appointments (LNA) of Civil Service Employees, conversion from Civil Service to Foreign Service, and hiring of retired Foreign Service and Civil Service annuitants; and interviewed officials in State’s Bureau of Human Resources, Bureau of Consular Affairs, and six regional bureaus, the American Foreign Service Association, and the American Academy of Diplomacy regarding overseas experience gaps and the potential to address gaps through the use of Civil Service, retirees, and mentoring. We collected and analyzed data on the retirees hired with dual compensation waivers in calendar year 2011. We also collected and analyzed data on the use of retirees hired for temporary, short-term assignments, referred to as “When Actually Employed” (WAE) in fiscal year 2011 from each of the six regional bureaus and the Bureau of Consular Affairs. We analyzed that data based on the number of assignments made, rather than the number of retirees used, as State officials noted that some individuals may be used in multiple assignments. In addition, we collected and analyzed data on overseas LNA assignments of Civil Service employees for fiscal years 2009 through 2011 from State’s Bureau of Human Resources. Because these assignments may be for multiple years, the number of assignments made does not necessarily reflect the number of Civil Service employees serving overseas at any one time. We also collected data on the results of State’s 2010 and 2011 Foreign Service Conversion Program, including the number of positions available, the number of Civil Service applicants, and the number offered conversion opportunities. We found the data on the use of retirees and Civil Service employees overseas to be sufficiently reliable for our purposes. We focused only on efforts related to expanding the use of Civil Service employees, retirees, and mentoring because they were highlighted in State’s QDDR as key means of addressing overseas midlevel gaps. To supplement our other analysis, we met with officials in Amman, Jordan; Kyiv, Ukraine; New Delhi, India; Santo Domingo, Dominican Republic; and Sao Paulo and Brasilia, Brazil, to obtain firsthand knowledge about experience gaps and use of Civil Service, retirees, and mentoring at overseas posts. We conducted this work in conjunction with a separate study on visa fraud and selected posts that met criteria established for both studies, including the size of staffing gaps and the level of visa fraud. We conducted this performance audit from June 2011 to June 2012 in accordance with generally accepted government auditing standards. Those standards require that we plan and perform the audit to obtain sufficient, appropriate evidence to provide a reasonable basis for our findings and conclusions based on our audit objectives. We believe that the evidence obtained provides a reasonable basis for our findings and conclusions based on our audit objectives. In this appendix, we describe the methods we used to determine what factors were related to whether positions at the State Department were vacant as of October 2011 and those that were filled by upstretch assignments—employees whose grades were lower than the grades of the positions filled. We first considered a set of bivariate tables (or two- way cross-classifications) that indicated what percentage of positions were filled and left vacant, across categories that reflected the level of the position (entry level, midlevel, and upper level); the hardship category associated with the position (least, medium, and greatest); the type of position (generalist versus specialist); the Overseas Staffing Model ranking and type of post where the position was located (embassies ranked 1 or 2 were combined and contrasted with embassies ranked 3, 3+, 4, 5, 5+, and nonembassies of any rank); region (Africa, East Asia and the Pacific, Europe and Eurasia, Near East, South and Central Asia, and Western Hemisphere); and whether the position was in Afghanistan, Iraq, or Pakistan (collectively referred to as AIP) or elsewhere (non-AIP). We then calculated odds and odds ratios from the observed percentages in these tables, which allowed us to summarize the differences in the likelihoods of positions remaining vacant across the different types of positions, and conducted a series of bivariate and multivariate regression analyses to estimate the significance of those differences when we considered each of these six factors one at a time, when we considered five of them simultaneously (all but AIP), and finally when we considered all six of them simultaneously. Finally, we conducted parallel analyses that involved looking at the same types of two-way tables and estimating the same bivariate and multivariate regression models to determine, among those positions that were filled, whether they were filled by upstretch assignments as opposed to officers at or above grade. We describe these analyses as follows. The first three columns of numbers in table 3 show the percentage of positions that were filled and vacant across the categories of the six factors just described, and the numbers of positions in each category on which those percentages were based. A slightly smaller percentage of upper-level positions than entry-level positions were vacant (12.6 percent versus 14.9 percent), and a much larger percentage of the positions in the greatest hardship category (20.5 percent) than in the least hardship category (10.4 percent) were left vacant. While there was little difference between generalist positions and specialist positions, there were some sizable differences across different posts with different rankings, with positions in the highest-ranked embassies (20.9 percent) and in nonembassies (16.4 percent) showing the highest percentages of vacancies. Higher percentages of positions in the Near East (22.3 percent) and South and Central Asia (24.2 percent) were left vacant compared with other regions, and positions in AIP countries were much more likely to be vacant than those in non-AIP locations (39.5 percent vs. 11.4 percent). In the last two columns of table 3, we show the odds on positions being vacant, and odds ratios that indicate the proportional differences in those odds across the different categories of positions. The odds on positions being vacant are calculated by dividing the percentage of positions that are vacant by the percentages that are filled, within each of the categories of the different positions. For entry-level positions, for example, we divide 14.9 by 85.1 to obtain 0.18, which indicates that 0.18 positions were vacant for every one that was filled or, alternatively, that 18 were vacant for every 100 that were filled. Similar calculations for midlevel and upper- level positions yield slightly smaller odds (equal to 0.17 and 0.14, respectively), and odds that differ quite substantially across other categories of positions, such as those with the greatest hardship (0.26) versus least hardship (0.12), and those in South and Central Asia (0.32) versus the Western Hemisphere (0.13). The odds ratios in the final column of table 3 indicate the proportional differences in the odds of positions remaining vacant across the categories of each of the position characteristics. To estimate these odds ratios, we choose one category of each characteristic as the referent category (indicated by REF in the table), and divide the odds for the other categories by the odds for the referent category. For example, we chose midlevel positions as the referent category with respect to position level, divided 0.18 and 0.14 by 0.17, and the resultant odds ratios indicate that entry-level positions had slightly higher odds of remaining vacant than midlevel positions, by a factor of 1.04, while upper-level positions had slightly lower odds than midlevel positions of remaining vacant, by a factor of 0.86. Similar calculations using the different categories of the other position characteristics reveal that positions with greatest and medium hardship were more likely to be vacant than those with least hardship, by factors of 2.22 and 1.36, respectively, while specialist positions had only slightly higher odds than generalist positions of remaining vacant, by a factor of 1.07. Also, all of the lower-ranked embassies had roughly half or less than half the odds of embassies ranked 5+ of remaining vacant, and nonembassies had odds that were lower than the highest-ranked embassies by a factor of 0.74. Finally, positions in Africa had lower odds on remaining vacant than positions in the Western Hemisphere (by a factor of 0.78), positions in East Asia and the Pacific and in Europe had odds that were very similar, and positions in the Near East and South and Central Asia had higher odds on remaining vacant than positions in the Western Hemisphere, by factors of 2.25 and 2.51, respectively. As the final multivariate model in table 4 shows, some of these regional differences were because AIP countries were more than five times as likely as those in other areas to be vacant. Odds ratios identical to those just discussed, apart from slight rounding error, are shown in the first column of table 4. The unadjusted odds ratios in the first column of table 4, however, were estimated using a series of bivariate logistic regression models, which allow us to test whether the different contrasts specified by the various odds ratios are significantly different than 1. Significant odds ratios are bolded in the table, and we can see the unadjusted ratios reflecting the differences in the odds on positions remaining vacant across position level categories and between generalist and specialist positions are not significant; in addition, the differences between positions in the East Asia and Pacific region, Europe, and the Western hemisphere are not significant. All of the other unadjusted (or bivariate) odds ratios are significant, though our judgment about both the size and significance of these differences is only tentative since they are unadjusted and fail to take into account that the different position characteristics—for example, hardship level and region—may be related to one another and, as such, the estimated unadjusted effect of one characteristic may be accounted for by the effect of another. In the middle column of the table, we show the results of re-estimating these odds ratios using a multivariate model that estimates the effects on positions remaining vacant of all of these factors simultaneously, except for the AIP indicator. Under this model, most of the effects remain significant, though the difference between nonembassy positions and embassy positions is diminished and insignificant, and the difference between entry- level and midlevel positions increases and becomes significant. In the final column, we show the results of re-estimating these odds ratios using a multivariate model that estimates the effects of all six factors simultaneously, including the war zone indicator. As can be seen, the adjusted difference between AIP and non-AIP positions is sizable (OR = 4.12), and allowing for that difference accounts for all of the differences between embassies of different ranks and nonembassies, and most of the differences between regions (the exception being the difference between positions in Africa and the Western Hemisphere). In summary, when all factors are considered simultaneously and the associations between characteristics are taken into account, the differences that are statistically significant are as follows: entry-level positions have higher odds of remaining vacant than midlevel positions, by a factor of 1.36; positions in the greatest hardship and medium hardship categories are more likely than those in the least hardship category to remain vacant, by factors of 1.44 and 1.22, respectively; positions in Africa are less likely to remain vacant than those in the Western hemisphere, by a factor of 0.67; and AIP positions are slightly more than four times as likely to remain vacant as non-AIP positions. Table 5 shows similar bivariate results in which these six characteristics are cross-classified by whether the position was filled by employees whose grades were lower than the grades of the position they filled, and table 6 shows the significant and insignificant odds ratios from bivariate and multivariate models used to estimate the effects of those characteristics on this outcome. While there is no need to labor over a discussion of all of the percentages and odds and odds ratios in table 5, which show the unadjusted and sometimes sizable differences across categories of position in the likelihood of being filled by a lower-graded employee, they are there for the reader to see. Our bottom-line findings, from the multivariate model coefficients in the final column of table 6 in which all position characteristics are considered simultaneously and the effect of each is estimated net of the others, are as follows: Upper-level positions are more than twice as likely as midlevel positions to be filled by upstretch assignments. Positions in the greatest hardship and medium hardship categories are more likely than those in the least hardship category to be filled by lower-level employees, by factors of 1.81 and 1.47, respectively. Specialist positions are less likely than generalist positions to be filled by employees whose grades are lower than the positions, by a factor of 0.75. Positions in East Asia and the Pacific and Europe are less likely to be filled by upstretch assignments than those in the Western hemisphere, by factors of 0.80 and 0.72, respectively. The lowest-ranked embassies (ranks 1 and 2) are only about half as likely as the embassies ranked 5+ to be filled by upstretch assignments, while embassies with other ranks and nonembasssies are not significantly different from embassies ranked 5+. AIP positions are half as likely to be filled by upstretch assignments as non-AIP positions. In addition to the contact named above, Anthony Moran, Assistant Director; Howard Cott; Kara Marshall; Grant Mallie; Doug Sloane; Martin De Alteriis; Karen Deans; and Grace Lui provided significant contributions to the work. | In 2009, GAO reported on challenges that State faced in filling its increasing overseas staffing needs with sufficiently experienced personnel and noted that persistent Foreign Service staffing and experience gaps put diplomatic readiness at risk. State is currently undertaking a new hiring plan, known as Diplomacy 3.0, to increase the size of the Foreign Service by 25 percent to close staffing gaps and respond to new diplomatic priorities. However, fiscal constraints are likely to delay the plans full implementation well beyond its intended target for completion in 2013. In addition, States first Quadrennial Diplomacy and Development Review highlighted the need to find ways to close overseas gaps. GAO was asked to assess (1) the extent to which States overseas midlevel experience gaps in the Foreign Service have changed since 2008 and (2) States efforts to address these gaps. GAO analyzed States personnel data; reviewed key planning documents, including the Five Year Workforce Plan; and interviewed State officials in Washington, D.C., and at selected posts. The Department of State (State) faces persistent experience gaps in overseas Foreign Service positions, particularly at the midlevels, and these gaps have not diminished since 2008. In fiscal years 2009 and 2010, State increased the size of the Foreign Service by 17 percent. However, these new hires will not have the experience to reach midlevels until fiscal years 2014 and 2015. GAO found that 28 percent of overseas Foreign Service positions were either vacant or filled by upstretch candidatesofficers serving in positions above their gradeas of October 2011, a percentage that has not changed since 2008. Midlevel positions represent the largest share of these gaps. According to State officials, the gaps have not diminished because State increased the total number of overseas positions in response to increased needs and emerging priorities. State officials noted the department takes special measures to fill high-priority positions, including those in Afghanistan, Iraq, and Pakistan. State has taken steps to increase its reliance on Civil Service employees and retirees, as well as expand mentoring, to help address midlevel experience gaps overseas; however, State lacks a strategy to guide these efforts. State is currently implementing a pilot program to expand overseas assignments for Civil Service employees. Efforts to expand the limited number of these assignments must overcome some key challenges, such as addressing new gaps when Civil Service employees leave their headquarters positions and identifying qualified Civil Service applicants to fill overseas vacancies. State also hires retirees on a limited basis for both full-time and short-term positions. For example, State used limited congressional authority to offer dual compensation waivers to hire 57 retirees in 2011. As a step toward mitigating experience gaps overseas, State began a pilot program offering workshops that include mentoring for first-time supervisors. State acknowledges the need to close midlevel Foreign Service gaps, but it has not developed a strategy to help ensure that the department is taking full advantage of available human capital flexibilities and evaluating the success of its efforts to address these gaps. GAO recommends that State update its Five Year Workforce Plan to include a strategy to address midlevel Foreign Service gaps and a plan to evaluate the success of this strategy. State reviewed a draft of this report and agreed with GAOs recommendation. |
Operation Desert Storm revealed many weaknesses in medical capabilities of U.S. forces. Subsequent studies conducted by us and the DOD Inspector General revealed shortcomings in DOD’s ability to provide adequate, timely medical support during contingencies and problems with the planning and execution of these efforts. The Joint Staff also identified problems with the current design of DOD’s wartime medical system. In response to these problems, DOD and the services embarked on initiatives to correct shortfalls in wartime medical capabilities and improve medical readiness. The decisions that emanate from these efforts over the next few years will determine how wartime medical care will be provided for the foreseeable future. In March 1995, DOD published MRSP to serve as a road map for attaining and sustaining military medical readiness into the 21st century. The Office of the Assistant Secretary of Defense for Health Affairs is responsible for managing MRSP. In developing its MRSP, Health Affairs convened panels of both military and civilian experts to assess medical capability shortfalls in nine functional areas: planning; requirements, capabilities, and assessment; command, control, communications, computers, and information management; logistics; medical evacuation; personnel; training; blood supply; and readiness oversight. For each functional area, the expert panels developed strategic objectives to support the continuum of military operations envisioned in the defense planning guidance for fiscal years 1996-2001. A total of 42 action plans were developed to address shortfalls in the 9 functional areas. In assessing these shortfalls, the panels relied heavily on the reports that we and the DOD Inspector General prepared on the medical reponse during Operation Desert Storm. The panels also identified the offices to be responsible for developing and executing detailed implementation plans. DOD is engaged in other efforts related to the wartime medical care system. Each service initiated a reengineering program to reassess and reconfigure its wartime medical capabilities to be more compatible with plans for two major regional conflicts and operations other than war. DOD is also trying to forecast the wartime medical demands in the year 2020 and design a military health services system that will be responsive to those demands (known as the MHSS 2020 project). In a separate effort, DOD is also updating an April 1994 study (known as the 733 update) to determine wartime medical personnel requirements for the year 2001. To respond to the new national military strategy resulting from the end of the Cold War and problems that we, the Joint Staff, and the DOD Inspector General identified, DOD initiated efforts to improve its wartime medical capabilities. Defense planning guidance, modified in May 1994, requires DOD to be ready to engage in two nearly simultaneous major regional conflicts and prepare for smaller scale operations other than war. DOD assumed that future operations would have far shorter warning times and durations than Cold War scenarios. The transition to the current defense planning guidance, particularly the projected shorter warning times, increased DOD’s emphasis on joint service operations and the need to react quickly to a major regional conflict or an operation other than war. This transition has also underscored the need for the services to redesign their wartime medical systems to reduce transportation demands because of limited lift capacity. Medical systems must compete with the movement of combat troops and other war-fighting materials to the theater. On the basis of war games conducted in December 1994, the Joint Staff determined that the commanders in chief were unable to provide adequate lift capability to move medical logistics and deployable hospitals to support two nearly simultaneous major regional conflicts. The Joint Staff recommended that the services investigate the possibility of evacuating casualties more quickly to the United States for treatment. The Joint Staff believed anticipated conflicts might be of such short duration that it would be unlikely that the soldiers would be well enough to return to duty after treatment in the theater. On the basis of war games completed in March 1995, the Joint Staff also recommended that the services approach medical operations from a joint perspective and redesign their medical systems assuming smaller and lighter deployable hospitals and quicker evacuation of patients to the United States for treatment. On September 30, 1993, the DOD Inspector General issued a report outlining several wartime medical problems that were consistent with Joint Staff observations. The Inspector General criticized DOD for a lack of joint medical planning. The report stated that DOD could not ensure the deployability of medical personnel during contingencies for several reasons, including outdated methods for determining personnel requirements, assignment of personnel to incorrect skill areas, and inadequate training of medical personnel. The report also stated that DOD’s deployable hospitals lacked sufficient mobility and had incompatible communication capability that limited their ability to prepare for incoming casualties. We have issued a series of reports that describe problems in DOD’s wartime medical planning and capability to provide wartime medical care. We found that understaffed and inadequately supplied and equipped medical units in Operation Desert Storm might not have been able to provide adequate care if the predicted number of casualties had occurred. Also, the medical units were not staffed and equipped to provide noncombat care and were unable to support the evacuation of casualties from the combat theater or receive large numbers of chemically contaminated casualties. Other medical force problems included (1) large numbers of nondeployable medical personnel due to unacceptable physical conditions, lack of required skills, and mismatches in medical specialties; (2) a widespread lack of training for the wartime missions; and (3) inadequate or missing equipment and supplies. In addition, we testified in March 1995 that several key factors, such as the population at risk and wounded-in-action rates, that affect the demand for wartime medical care were still being debated. We also stated that reaching agreement on the key factors was critical to arriving at the best wartime medical care system for the future, as it would allow decisionmakers to direct their attention to optimizing the medical care system for that demand. We reported in June 1996 that DOD was still having difficulty reaching agreement on such factors. Our comparison of problems highlighted by MRSP with those we, the Joint Staff, and the DOD Inspector General had previously identified shows that MRSP appropriately describes medical readiness problems needing resolution. The problems outlined in MRSP are also consistent with the recent changes in the Defense Planning Guidance. For example, MRSP points out that current medical planning is based on Cold War assumptions in which the services planned to fight the former Soviet Union individually rather than jointly. This lack of a joint approach made the DOD medical system unresponsive to the full continuum of anticipated contingencies, including major regional conflicts, peacemaking, and disaster relief. Accordingly, MRSP lists specific tasks Health Affairs, the services, the Joint Staff, and other DOD activities should take to ensure that joint medical planning becomes standard throughout DOD. MRSP also identifies the need for the services to modernize their deployable hospitals to reduce their weight and size. This reduction will decrease transportation demands and improve the mobility and transportability of such hospitals. It lists steps, such as incorporating technological advancements and equipment modernization, to correct these problems. Similarly, MRSP describes many factors that inhibit the deployability of medical personnel and lists steps to improve the training and certification of medical personnel to ensure they are adequately prepared to perform functions expected of them while deployed. MRSP outlines corrective actions to address problems in the communications area such as ensuring interoperability and adaptability of individual service medical communication with global communications systems. It also requires specific DOD offices to ensure the availability of critical medical materials needed for a conflict. MRSP also stresses the need for DOD and the services to reexamine and validate the key factors that affect the demand for wartime medical care. Three additional areas are currently being added to MRSP: nuclear, biological, and chemical warfare; operations other than war; and research and development. For each area, an expert panel identified capability shortfalls and developed corrective actions. Health Affairs plans to add these new areas to MRSP by December 31, 1996. Health Affairs got off to a slow start in monitoring progress being made in correcting medical readiness problems. The primary tool Health Affairs uses to monitor progress is its review of periodic updates of implementation plans submitted by the responsible offices. These plans summarize how and when a responsible office intends to correct a particular medical readiness problem described in MRSP. Although the implementation plans do not indicate the amount of funding involved, they describe whether specific corrective actions are fully or partially funded or unfunded. MRSP requires 400 implementation plans because of the multiple tasks and multiple offices responsible for carrying out needed actions. Initially, Health Affairs had difficulty obtaining complete implementation plans in a consistent format from the responsible offices. Although the offices were to submit the plans by the end of June 1995, Health Affairs had not obtained 19 (5 percent) of the required implementation plans as of April 30, 1996. The Joint Staff was responsible for six (32 percent) of the missing plans. A Joint Staff official said that staff turnover and competing priorities delayed the submission of the implementation plans but that they would be completed by the fall of 1996. The other offices responsible for the missing plans were Health Affairs, the Defense Modeling and Simulation Office, and the Office of the Assistant Secretary of Defense for Reserve Affairs. In commenting on our draft report, Health Affairs reported that it had obtained an additional 10 implementation plans, including all of the missing plans from the Joint Staff. Health Affairs also had difficulty collecting and analyzing the initial submissions because of the volume of information. Health Affairs corrected this situation by developing computer software to facilitate the quarterly updating and analysis of the implementation plans and sharing it with the responsible offices. In addition, Health Affairs entered into a contract with an outside firm to put the implementation plans on a computerized network so the responsible offices could continually keep them updated. This project is expected to be accomplished in December 1996. As a part of its monitoring efforts, in February 1996, Health Affairs convened most of the experts that helped develop MRSP to determine whether (1) the individual offices given responsibility for correcting medical readiness problems in MRSP were still appropriate and (2) the anticipated corrective actions described by those offices were responsive to the current readiness problems. These panels recommended several changes in both responsibilities and needed corrective actions. If approved, the changes are expected to be made to MRSP in October 1996. Our analysis of the 1,362 specific tasks included in 400 MRSP implementation plans shows that the responsible offices are making progress in correcting medical readiness problems but that some tasks are behind schedule. More specifically, 604 (44.3 percent) of the 1,362 tasks were reported as completed, but 94 (6.9 percent) were reported as behind schedule as of April 30, 1996. Milestones for completing the remaining 664 tasks have not yet occurred. During the summer of 1995, the Assistant Secretary of Defense for Health Affairs and the Surgeons General of the services identified the following six plans for priority monitoring: joint medical planning, information management, joint medical logistics and planning, medical evacuation, deployability of medical personnel, and medical readiness oversight. The tasks for the six priority plans and their implementation status are shown in table 1. Our analysis is meant to provide a general overview of how the responsible DOD activities view their attempts to correct the medical readiness problems assigned to them without regard to whether one task is more critical than another. Also, the corrective actions may not be directly attributable to the MRSP process; some of the DOD offices responsible for such issues had already undertaken corrective actions. (MRSP does not duplicate these efforts but attempts to consolidate their oversight.) Although progress is being made in implementing MRSP, some potential obstacles may hamper the timely correction of problems noted in the plan. One of these obstacles involves the three offices (Health Affairs, the Defense Modeling and Simulation Office, and the Office of the Assistant Secretary of Defense for Reserve Affairs) that have not yet submitted detailed implementation plans for corrective actions, which raises questions about whether problems are being addressed. Some DOD officials told us that they were concerned that those offices outside the control of Health Affairs have not given implementation of MRSP the level of attention it deserves. In this regard, the officials believe that MRSP would have been given higher visibility and priority for implementation if it had been published with the signature of the Secretary of Defense or Deputy Secretary of Defense rather than the Assistant Secretary of Defense for Health Affairs. Lack of funding may also hamper implementation of MRSP. When MRSP was published, no additional funding was given to responsible program offices for implementing the plan. Although the offices were expected to fund the corrective actions from their ongoing appropriations, many corrective actions were not funded or were only partially funded as of April 30, 1996. Health Affairs officials did not know the amount of these funding shortfalls, but they were planning to assess the impact of the shortfalls in 1997. Moreover, Health Affairs has limited knowledge regarding the extent to which problems noted in MRSP have been resolved by the corrective actions identified in the implementation plans. Health Affairs is in the process of developing a methodology for making this assessment and plans to begin using it shortly after its completion in March 1997. Each service has initiated a medical reengineering program to address shortfalls in medical capabilities. Each reengineering program is at a different stage of development but all are expected to yield enhancements to current system capabilities by making organizational changes, reconfiguring deployable systems, and adapting clinical capabilities to different mission requirements. The services anticipate that these programs will meet their reengineering goals of developing smaller and more mobile systems. In early 1994, the Army’s Surgeon General initiated a medical reengineering program to reconfigure the Army’s combat health support operations. This program was to incorporate the lessons learned from Operation Desert Storm and other operations and reflect the types of combat operations anticipated for the 21st century. In assessing how its combat health support system should be reconfigured, the Army Medical Command assembled panels of experts for 10 functional areas, such as hospitalization, medical evacuation, and medical logistics. The panels assessed current medical capabilities and proposed organizational and operational changes. The proposed changes are designed to make medical systems modular and more mobile and flexible. Also, the changes are intended to make the systems capable of effectively operating simultaneously in multiple locations and tailored to accommodate missions ranging from intense combat to peacekeeping and humanitarian operations. Significant changes are proposed for hospital care, which is currently provided in three types of facilities: the Combat Support Hospital, Field Hospital, and General Hospital. The Army is moving toward smaller hospital modules that can provide a full range of services and be self-sufficient and ready for rapid response. One reconfigured 248-bed hospital will replace the 3 current types of hospitals. This new hospital will consist of two self-supporting modules: a mobile 84-bed module and a larger 164-bed module. The 84-bed module will provide increased flexibility because 3 of the modules can be prepositioned aboard a ship and later deployed in separate units if needed. The current Combat Support Hospital must be deployed as a single unit. The Mobile Army Surgical Hospitals are being phased out. Their mission of providing urgent resuscitative surgery will be assumed by the mobile forward surgical teams, which will perform surgery at locations deeper in the battlefield or closer to the place of wounding. To provide increased flexibility, a medical detachment will be available to augment capability at hospitals throughout the theater. Specialty augmentation teams using the same equipment will be consolidated, and another team will be added to provide capabilities for operations other than war. The proposal also includes improved communications technology, information systems, and use of telemedicine. In December 1995, the Army’s Surgeon General approved the proposed reengineering changes, and they are currently under review by the Army’s Training and Doctrine Command, the commanders in chief, and major commands. The changes are expected to be submitted to the Army’s Chief of Staff for approval in September 1996. If approved, implementation of the proposals will begin in fiscal year 2000 and be completed by fiscal year 2005. The Air Force Surgeon General initiated a project in January 1994 to reengineer approaches for delivering medical care during conflicts or other kinds of operations. The initiative consists of three phases: concept development, determination of feasibility, and implementation. In June 1995, the Air Force Surgeon General approved a new concept that envisions small deployable medical systems to allow commanders more flexibility to tailor their medical care response to a specific mission. Currently, the Air Force generally deploys a 50-bed, surgically intensive, air transportable hospital to a conflict. Under the new concept, more than 40 clinical modules, including general surgery, primary care, intensive care, and dental services, can be deployed individually or in various combinations. According to Air Force officials, the use of a more tailored approach requires less airlift capacity and provides the types of services that are appropriate for a specific mission. To provide additional mobility and flexibility, the standard air transportable hospital can be scaled down to 25 beds, with an option of deploying a 10-bed trauma clinic to stabilize trauma patients and provide outpatient care. The concept also uses telemedicine to give forward deployed medical personnel the capability to obtain remote consultations in several disciplines, including radiology, dermatology, and pathology. To evacuate patients more quickly from the theater, the Air Force plans to use critical care aeromedical transport teams to stabilize and evacuate critically ill patients to the United States or other locations for treatment. Each team can be tailored to meet the needs of specific patients, but the teams generally consist of a physician, nurse, and respiratory therapist. The Air Force is testing this concept and has formed seven teams that have transported critically ill patients from Bosnia and Saudi Arabia. During the summer of 1996, the Air Force realized that its proposed reengineering changes were feasible. As a result, officials have initiated the implementation phase. In addition, the officials were trying to obtain funding through the 1998-2002 Program Objective Memorandum cycle so that the changes could be fully implemented by the end of fiscal year 2002. The Navy’s fleet hospital reconfiguration project began in the fall of 1995 with the goal of making fleet hospitals lighter and more mobile and mission flexible. Two working groups are involved in the study; one is focusing on reconfiguring fleet hospitals until the year 2010, and the other is focusing on changes in 2010 and beyond. The first working group developed a preliminary design of a small hospital, but the design has not been approved by Navy leaders. The proposed design, called the Naval Expeditionary Medical Support System, focuses wartime medical capability around a core unit with a capacity of 20 to 130 beds. Although the current 500-bed fleet hospital will be maintained, Navy officials envision that either the 130- or the 500-bed hospital will be set up in a given theater, but not both. In addition, the concept includes an option to extract a 100-bed unit from the standard 500-bed fleet hospital to use during an operation other than war. Under this concept, the Navy will not maintain any duplicate equipment. If the new concept is approved, the fleet hospitals will be repackaged as they are brought in for their periodic modernizing, beginning as early as 1998. The Navy is also revising its procedures for staffing hospitals. The Navy’s requirement for fleet hospitals has decreased from 17 to 12. Six of these hospitals will be staffed primarily by active duty personnel and six will be staffed by reserve personnel. To increase staffing efficiency and productivity, the Navy will now staff its active duty deployable hospitals with personnel from specific medical treatment facilities. In the past, fleet hospitals were staffed by pulling medical personnel from any location, but this approach did not work particularly well in Operation Desert Storm. The revised concept presumes that medical personnel who work together on a day-to-day basis will perform better than staff who are taken from different locations within the system. Similarly, the Navy plans to designate specific reserve units to staff the six reserve component fleet hospitals. Other reserve medical units will be designated to replace active duty staff taken from specific medical treatment facilities. To ensure that active duty medical personnel earmarked for deployment get the periodic readiness training they need, the Navy designated the executive officers of medical treatment facilities as the commanding officers of the fleet hospitals when they deploy. For reserve medical personnel in units designated to staff fleet hospitals, Navy officials anticipate that the units will train together at a fleet hospital every 2 years. When the reservists do not train at a fleet hospital, they will complete their annual 2-week training session at a Navy medical treatment facility or at their units’ designated hospital. In late 1993, the Marine Corps began to reassess the reconfiguration of its medical battalions, which are part of its combat units. The need to reconfigure these battalions grew out of lessons learned from Desert Storm showing that the battalions were too heavy to keep pace with and support the movement of the ground combat units. The Marine Corps found that the capabilities of the medical battalions had been expanded during the Vietnam War era to compensate for the lack of deployable hospitals at higher echelons of care. However, these expanded capabilities were beyond the battalions’ mission. The medical supplies and equipment included in each battalion, which should have been assigned to a higher echelon of care, had greatly increased the battalion’s weight and size, and hampered its mobility. The restructuring of the medical battalion essentially reduced those specialty care capabilities that were beyond the mission requirements. This restructuring also placed more reliance on evacuating patients needing such specialty care to higher echelons of care provided by the Navy or other services. In addition, the restructuring reduced the number of cots by 52 percent, from 540 to 260, and reduced the weight of the medical battalion by 20 percent. The new surgical companies within the battalion are staffed with general surgeons and trauma care providers and no longer contain orthopedic and other surgical subspecialties, such as thoracic surgeons. Patients requiring specialty care will be evacuated to other facilities where such care is available. Marine Corps officials believe that the restructured medical battalion, with its decreased lift requirement and smaller footprint, will allow the battalion to move with the combat maneuver elements and provide direct resuscitative health service support to the combat forces. The Commandant of the Marine Corps approved the restructured medical battalion in November 1995. Two of the four Marine Corps medical battalions have begun implementing the restructuring, and the others will begin reconfiguration by October 1996. Full implementation of the restructuring is expected by the year 2000, assuming funding is available from the Program Objective Memorandum process. In February 1996, Health Affairs began its MHSS 2020 project to forecast changes in health care delivery, with the goal of facilitating the integration of these future health care practices into the design of the military health services system. The project is designed to identify 25-year trends and breakthroughs in both clinical and nonclinical technologies; determine how to apply these technologies across DOD health care responsibilities, which range from personal fitness to treatment of war zone casualties; and identify how the military health services system should be funded and staffed to transition to the year 2020. Participants in the project include practitioners, researchers, and academicians from several disciplines in the federal and private sectors. The project will involve three stages. First, about 200 experts—organized into 20 specialized working groups concentrating on clinical, administrative, and information management issues—will identify future trends in their fields. Second, 10 multidisciplinary groups will develop strategic planning scenarios for specific areas of military health from the trend information. Third, teams will identify general and specific proposals to help transition the current military health services system from today to the year 2020. DOD expects the future scenarios to be finalized in December 1996. The MHSS 2020 project could serve as the mechanism for identifying future medical system requirements against which MRSP and the services’ reengineering programs should be focused. However, the extent to which MRSP and these reengineering programs will be compatible with future medical system requirements will not be known until the MHSS 2020 project is completed. We recommend that the Secretary of Defense direct Health Affairs, the Defense Modeling and Simulation Office, and the Office of the Assistant Secretary of Defense for Reserve Affairs to develop and begin implementing plans to correct the medical capability problems noted in MRSP. Without such direction, these offices might continue to give low priority to medical readiness. We also recommend that the Secretary of Defense direct the Assistant Secretary of Defense for Health Affairs to (1) assess the extent to which actions taken in response to MRSP have corrected medical capability problems, (2) take steps to resolve other unsettled problems, and (3) use the results of the MHSS 2020 project to guide the focus of MRSP and service reengineering initiatives. In commenting on a draft of this report, DOD concurred with our recommendations and agreed with the accuracy of the report. DOD stated that it was aggressively pursuing resolution of the problems described in our report. For example, through Health Affairs/Joint Staff coordination, all of the missing Joint Staff implementation plans have been developed. DOD also commented that Health Affairs has begun the process of assessing the extent to which actions taken in response to MRSP have corrected medical capability problems. From these assessments, DOD will develop strategies for resolution of unresolved problems. DOD provided some technical comments to our report and we incorporated them into the text of our report where appropriate. DOD’s comments appear in appendix I. To obtain information for the report, we reviewed documents, reports, and information relevant to the development and implementation of MRSP, services’ medical reengineering programs, and MHSS 2020 project. We interviewed officials from the Office of the Assistant Secretary of Defense for Health Affairs, Joint Staff and Office of the Assistant Secretary of Defense for Reserve Affairs in Washington, D.C; and the Offices of the Surgeons General at Navy and Air Force Headquarters in Washington, D.C., and at the Army Medical Command in San Antonio, Texas. We also interviewed officials from the U.S. Central Command, Tampa, Florida; U.S. Transportation Command, Scott Air Force Base, Illinois; U.S. Atlantic Command, Norfolk, Virginia; Defense Medical Standardization Board, Fort Detrick, Maryland; and the Marine Corps Combat Development Command, Quantico, Virginia. We reviewed the methodology used to develop MRSP and discussed its reasonableness with several DOD officials. We compared the content of MRSP with the medical capability problem areas identified in our work on Operation Desert Storm and with similar work conducted by the DOD Inspector General. We reviewed the detailed implementation plans prepared by the primary action offices and identified the extent to which tasks in the plans were reported to be completed, on schedule, or delayed. We did not weigh the relative importance of one task against another. We used the funding status information provided by the primary action offices. We discussed potential obstacles in implementing MRSP with officials at the locations we visited. We obtained briefings from all of the services on their medical reengineering programs and reviewed documentation concerning the factors that led to the reengineering efforts, process used to identify needed changes, extent to which the programs address common goals for future medical capabilities, and current status of the reengineering programs. We interviewed agency officials regarding any overlaps or inconsistencies among the services’ reengineering programs. We examined the content of each services’ reengineering program to learn whether proposed changes were responsive to the problems we and the DOD Inspector General had previously reported for wartime medical capabilities. We conducted our review from July 1995 to August 1996 in accordance with generally accepted government auditing standards. We are sending copies of this report to other interested congressional committees; the Secretaries of Defense, the Army, the Navy, and the Air Force; the Commandant of the Marine Corps; and the Director of the Office of Management and Budget. We will also send copies to others on request. If you or your staff have any questions about this report, please call me on (202)512-5140. Major contributors to this report are listed in appendix II. Steve J. Fox Lynn C. Johnson William L. Mathers Dawn R. Godfrey The first copy of each GAO report and testimony is free. Additional copies are $2 each. Orders should be sent to the following address, accompanied by a check or money order made out to the Superintendent of Documents, when necessary. VISA and MasterCard credit cards are accepted, also. Orders for 100 or more copies to be mailed to a single address are discounted 25 percent. U.S. General Accounting Office P.O. Box 6015 Gaithersburg, MD 20884-6015 Room 1100 700 4th St. NW (corner of 4th and G Sts. NW) U.S. General Accounting Office Washington, DC Orders may also be placed by calling (202) 512-6000 or by using fax number (301) 258-4066, or TDD (301) 413-0006. Each day, GAO issues a list of newly available reports and testimony. To receive facsimile copies of the daily list or any list from the past 30 days, please call (202) 512-6000 using a touchtone phone. A recorded menu will provide information on how to obtain these lists. | Pursuant to a congressional request, GAO reviewed the Department of Defense's (DOD) efforts to reassess and improve its medical capabilities, focusing on: (1) DOD implementation of its Medical Readiness Strategic Plan (MRSP); (2) the services' medical reengineering efforts; and (3) the Military Health Services System (MHSS) 2020 project to identify future wartime medical system requirements. GAO found that: (1) DOD and the services are making progress to correct the medical capability problems that have hampered recent military operations; (2) MRSP appropriately focuses on problems that GAO and DOD have identified; (3) DOD is placing increased emphasis on implementing MRSP, after a slow start; (4) many key MRSP tasks are unfunded or partially funded; (5) the services are reconfiguring their combat hospitals into smaller components and undertaking efforts to significantly enhance their current medical system capabilities; (6) the MHSS 2020 Project has not yet identified how military health capabilities should be funded and staffed in the future; and (7) until MHSS 2020 is completed, DOD cannot determine how compatible MRSP and service reengineering programs will be with future requirements. |
The United States Housing Act of 1937 established the Public Housing Program to provide decent, safe, and sanitary housing for low-income families. For many years, this act was interpreted to exclude Native Americans living in or near tribal areas. In 1961, however, HUD and the Bureau of Indian Affairs (BIA) determined that Native Americans could legally participate in the rental assistance for low-income families authorized by the 1937 act and issued regulations to implement this determination. In 1988, the Indian Housing Act established a separate Indian housing program and prompted HUD to issue regulations specific to this program. With the recently enacted Native American Housing Assistance and Self-Determination Act of 1996 (whose regulations are scheduled to take effect on Oct. 1, 1997), the Congress completed the process of separating Indian housing from public housing. According to the May 1996 report by the Urban Institute, the housing needs of Native Americans are growing. Their population rose sixfold over the past four decades to over 2 million in 1990, 60 percent of whom live in tribal areas or in the surrounding counties. And, compared to non-Indians, Native Americans are more family-oriented—37 percent of Native American households are married couples with children versus 28 percent of non-Indian households. Compared to non-Indians, Native Americans have a higher unemployment rate (14 percent versus 6 percent), a smaller number of workers in “for-profit” firms per thousand people (255 versus 362), and a higher share of households with very low incomes (33 percent versus 24 percent). Moreover, Indian housing conditions are much worse than housing conditions in other areas of the country: 40 percent of Native Americans in tribal areas live in overcrowded or physically inadequate housing compared with 6 percent of the U.S. population. Through its Native American Programs headquarters office and its six field offices, and with the help of approximately 189 Indian housing authorities, HUD administers the majority of the housing programs that benefit Native American families in or near tribal areas. Several significant differences exist, however, between HUD’s assistance to these families and to families (non-Indian and Indian) living in urban and other areas. First, HUD’s support for Native Americans derives, in part, from the nation’s recognition of special obligations to the Native American population and is reflected in treaties, legislation, and executive orders. Second, the federal government deals with recognized tribes directly in a sovereign-to-sovereign relationship, rather than through the general system of state and local government. This status allows tribes to establish their own system of laws and courts. Third, the Bureau of Indian Affairs often holds in trust a considerable amount of land for a tribe as a whole; thus, this land is not subdivided into many private holdings as occurs in the rest of the country. This trust arrangement has frustrated the development of private housing markets in tribal areas and has long been seen as a special justification for federal assistance in housing production. Under current regulations, IHAs administer most of the low-income housing assistance that HUD provides to Native Americans. But HUD also provides some housing assistance directly to tribes and individuals. Funding provided through housing authorities is used to develop housing for eventual ownership by individual families through the Mutual Help Program under which families lease and then buy their homes by making payments to the IHA of approximately 15 percent of their adjusted income and must cover their own routine operating and maintenance expenses; develop and maintain rental housing for low-income families through the Rental Housing Program which, like the public housing program, makes low-income rental housing available to families from an IHA at a cost of 30 percent of their adjusted income; modernize and rehabilitate established low-income housing through the public housing modernization program; and subsidize IHAs to defray operating expenses that rental income does not cover and provide rental vouchers for low-income families. Funding available to tribes and individuals includes loan guarantees for home mortgages, block grants through the HOME program for tribes to develop affordable housing in tribal areas, and community development block grants to enhance infrastructure and other economic development activities. As shown in table 1, over the past decade HUD provided a total of $4.3 billion for these programs, which have produced or are expected to produce a total of 24,542 housing units. HUD and IHAs encounter unique challenges and costly conditions in administering and providing housing programs for Native Americans. Because of the over 550 separate Indian nations, cultures, and traditions, not all of these conditions are equally prevalent throughout tribal areas, nor do they have a common impact on developing and maintaining housing. Among the challenges and conditions highlighted in our discussions with officials of HUD and several IHAs, as well as in the May 1996 study by the Urban Institute, are the remoteness and limited human resources of many IHAs and the Native American communities they serve; the lack of suitable land and the severity of the climate; the difficulty contractors and IHAs have in complying with statutory requirements to give hiring preference to Native Americans; and the pressure that vandalism, tenants’ neglect, and unpaid rent put on scarce maintenance funds. The extent and pattern of the lands held by Native Americans are very different today from what they were at the beginning of the 19th century. During that century, the land area over which Indians had sovereignty and which was available for creating reservations was often reduced to small pieces in isolated areas. The remoteness of some of these tribal areas has created significant problems for housing development. In contrast to metropolitan areas, where basic infrastructure systems (including sewers, landfills, electricity, water supply and treatment, and paved roads) are already in place, remote tribal areas may require a large capital investment to create these systems to support new housing. The remoteness of many of the tribal areas also increases the cost of transporting the supplies, raises labor costs, and reduces the availability of supplies and of an “institutional infrastructure” of developers and governmental and private entities. For example, transporting a drilling rig over many miles and hours into the desert to a tribal area in California is far more costly than if the well had been needed in a less remote area. In addition, as the Urban Institute found in its study of Native American housing needs, private housing developers, contractors, and suppliers; governmental planners and building inspectors; private financial institutions; and nonprofit groups are all less available in remote tribal areas. The limited human resources of many IHAs also contributes to the high cost of developing and maintaining housing. HUD’s Deputy Assistant Secretary for Native American Programs told us that housing authorities that recruit their staff from a small tribal population often have difficulty finding qualified managers to administer multimillion-dollar housing grants. This problem is made worse when coupled with the statutory requirement to give Indians first consideration for such jobs. Because many Indian applicants have incomplete formal educations, they often need more time to become familiar with HUD’s assisted housing program and regulations than applicants from the larger pool enjoyed by a public housing authority in an urban area, according to the Deputy Assistant Secretary. The executive director at the Gila River Housing Authority in Sacaton, Arizona, echoed these views when he described his inability to hire skilled and dependable tribal members. He pointed out that many skilled members have personal problems associated with drugs and alcohol, causing the housing authority to search outside the tribal area for much of its labor force. He also said that because members of the available semiskilled work force need a significant amount of training before they are employable, he cannot afford to hire them. Moreover, some of the tribe’s laborers are drawn to cities away from the reservation, he said, because of the greater employment opportunities and higher wages there. This lack of skilled human resources is costly. HUD officials told us that as a general rule in the construction industry, labor costs should not exceed 50 percent of the total cost, but in tribal areas labor costs can run as high as 65 percent because contractors generally have to bring in skilled workers and pay for lodging and commuting costs. In many tribal areas, observers see what appears to be a vast expanse of unused land. However, a lack of available land is, in fact, a constraint that many IHAs face as they develop low-income housing. Factors that limit the availability of land for housing include the trusts in which BIA holds the land that, until this year, limited leases to 25 years in many instances. Special environmental and other restrictions also exist. For example, in planning for development, IHAs and tribes avoid archaeological and traditional burial sites because cultural and religious beliefs preclude using these sites for housing. In many cases, sufficient tribal land exists for housing, but environmental restrictions prohibit the use of much of it for housing. The Urban Institute’s survey of IHAs revealed that, overall, wetlands restrictions, water quality considerations, and contaminated soils add to the cost of housing in tribal areas. In the Western desert, once low-income housing is developed, the severity of the climate can complicate maintenance. The effects of high salt and mineral content in the water and soil were evident at the Gila River Housing Authority, causing damage to water heaters and copper and cast iron pipes. The executive director told us that the average life of a hot water heater costing $300 is about 6 months. To remedy the corrosion to plumbing, the IHA has begun placing plumbing in ceilings and converting to plastic piping. Also, the water’s high mineral content damages the water circulation systems of large fans called “swamp coolers,” used for summer cooling. The executive director told us that because of calcium buildup, the IHA must replace the coolers annually. He also explained that because of the soil’s high salt content, housing foundations and sewer systems also deteriorate more rapidly than in more benign environments. Certain statutes, including the Indian Self-Determination and Education Assistance Act and the Davis-Bacon Act, are intended to protect and provide opportunities for specific groups. However, IHA officials and HUD officials whom we contacted believe that these statutes can make developing housing in tribal areas more costly because they have the effect of raising the cost of labor over local wage rates or restricting the supply of labor. The Indian Self-Determination and Education Assistance Act of 1975 requires IHAs to award contracts and subcontracts to Indian organizations and Indian-owned economic enterprises. IHA executive directors find that implementing the act’s requirement is difficult and believe that the regulations add to contractors’ time and costs to bid on work for IHAs. The officials said that factors that undermine the requirement include a lack of qualified Indian contractors in the area, the creation of fraudulent joint ventures that are not owned or managed by Indians, and the occasional need to use qualified firms outside the region that do not understand local conditions. Under the Davis-Bacon Act, firms that contract with IHAs for housing development must pay wages that are no less than those prevailing in the local area. However, HUD officials told us that this requirement generally increases IHAs’ costs of developing housing in tribal areas. The costs increase because the applicable Davis-Bacon wage rate is often based on wage surveys done by HUD of large unionized contractors based in larger metropolitan areas, and the rate is therefore about $10.00 per hour higher than the rate prevailing in the local tribal area. Officials of the Chemehuevi IHA in Havasu Lake, California, told us that because of high Davis-Bacon wage rates, their cost to develop a single-family home ranges between $85,000 and $98,000. Using the prevailing rate of approximately $6.50 to $8.00 per hour, they estimate the development cost to be between $65,000 and $80,000. If housing units are abused through neglect or vandalism and not regularly maintained, costly major repairs can be needed. These avoidable repairs put pressure on maintenance budgets that are shrinking because a high percentage of rents are unpaid in tribal areas. Moreover, maintaining assisted housing for Native Americans is an increasingly difficult challenge because of its age—44 percent of the units were built in the 1960s and 1970s. For housing units in HUD’s Rental Housing Program for Native Americans, the Urban Institute reported that 65 percent of the IHA officials responding to its telephone survey identified tenants’ abuse and the vandalism of vacant homes as the factors contributing most to maintenance costs. For units under the Mutual Help Program (which are owned or leased by the residents), the Urban Institute reported that, according to IHA officials, residents’ neglect to perform needed maintenance accounted for 30 percent of the poor physical conditions associated with this segment of the housing stock. Our discussions with IHA officials reinforce these findings. The executive director at the Gila River Housing Authority told us that vandalism by juveniles was a major problem for him and that because the tribal area borders Phoenix, Arizona, it is more susceptible to gang activity and violence. Chemehuevi IHA officials pointed out that once a family that has neglected to perform expected maintenance moves out and the tribe turns the housing back to the IHA, the IHA often incurs a large and unexpected rehabilitation cost before it can lease the unit to another family. The high level of unpaid rent among assisted Native American families has exacerbated the problem of accomplishing needed maintenance. Routine and preventive maintenance is an operating expense that an IHA pays for out of rental income and an operating subsidy that HUD provides to help defray expenses. However, according to HUD, appropriations for these subsidies have not been sufficient to cover all operating expenses not covered by rental income. Therefore, shortfalls in rental income generally mean fewer funds to spend on maintenance. In recent years, these shortfalls have been at high levels for both the Rental Housing and the Mutual Help programs. For example, the Urban Institute reported that at the end of 1993, 36 percent of all tenants in the rental program were delinquent in their rent payments. In contrast, the average delinquency rate in public housing is only 12 percent. To counter shortfalls in rental income, some IHAs enforce strong eviction policies. Others, however, are either unwilling or unable to do so. The IHAs attributed the ineffectiveness of their policies to such factors as tribal court systems that do not support evictions, the conflict of such policies with tribal culture, and their own lack of forceful management. Regardless of the reason, these shortfalls coupled with insufficient operating subsidies likely will lead to deferred maintenance and higher costs for major repairs in the future. In December 1996, the Seattle Times reported a series of articles describing the possible mismanagement and misuse of federal funds by Indian housing authorities. The articles covered 29 instances of questionable performance and in many cases suggested that more effective oversight by HUD could have precluded or mitigated the mismanagement at the housing authority. HUD’s IG found that most of the Times reports were accurate, including reports of Indian housing authorities using federal funds to build luxury homes for families with incomes that exceeded the program’s eligibility criterion and reprogramming significant federal funds from one purpose to another without HUD’s approval. Although HUD has a system to identify poorly performing Indian housing authorities, our work showed that this system did not detect, for the most part, mismanagement by the authorities as reported in the Times. This lack of detection was because HUD’s system focuses primarily on authorities assessed as having a high risk of mismanagement. Furthermore, HUD had not assessed those authorities named in the Times as “high risk.” Not having an effective oversight tool could be problematic for HUD, depending on the regulations that are negotiated to implement new Indian housing legislation taking effect in October 1997. HUD field office staff rely on their Risk Assessment and Determination of Resources (RADAR) system to identify “high risk” IHAs. These are the IHAs whose management demonstrates weaknesses that could lead to the misuse of federal funding. The RADAR system uses performance and environmental factors to assess an IHA’s management risks and HUD field staff rely on it to determine where they will allocate their scarce monitoring resources, contract for intensive on-site technical assistance, and focus their training for HUD’s Partners in Progress (PIP) program—a technical assistance program for IHAs with long-standing operating difficulties. HUD staff score Indian authorities on the basis of their funding levels, management control and operating procedures, and compliance with regulations. These scores form the basis for HUD staff to assess the IHA’s risk of mismanaging federal funds. One of the most important factors that RADAR uses to identify poorly performing IHAs is on-site monitoring that provides information about an IHA’s performance and verifies the accuracy of the data submitted by the IHA. At two of the HUD field offices we visited, however, restrictions on the on-site monitoring of IHAs have resulted in a lack of assurance about the conditions that existed at the IHAs. These field offices account for nearly half of all IHAs. In addition, the staff at the offices we visited believed that their knowledge of IHAs’ operations was insufficient and that they do not know enough to accurately assess the IHAs with the RADAR system. Because of this overall lack of assessment in accordance with the RADAR system, and because HUD had not assessed most of the IHAs cited in the Seattle Times articles as high risk, HUD staff were not able to detect inappropriate activities if they occurred. In 1996, the Congress enacted legislation that will change significantly the way that Indian housing is funded and overseen. Under the Native American Housing and Self-Determination Act of 1996, HUD will begin in October 1997 to provide directly to Indian tribes, or their designated recipients, block grants to carry out affordable housing activities. To qualify for the grants, tribes must submit to HUD annual plans and 5-year plans that provide statements of the tribes’ needs and resources available to address those needs. In addition, tribes must submit annual performance reports that describe the accomplishments of the prior year and describe how the tribe would change its program as a result of its experiences. HUD, in turn, is required to conduct a limited review of each Indian housing plan to ensure that the plan complies with the various criteria outlined in the act and review the performance reports to determine whether they are accurate. Among the act’s requirements are that tribes include in their housing plans descriptions of the housing needs of low-income families and of how the geographic distribution of assistance is consistent with the needs for various types of housing assistance. In addition, the plans are to include detailed descriptions of the affordable housing resources available in the tribes’ jurisdictions and of how various government and private entities will coordinate these resources. For example, the plan is to describe how the tribe will coordinate its resources with those of tribal and state welfare agencies to ensure that the residents of such housing will have access to assistance in obtaining employment and achieving self-sufficiency. These plans and the year-end performance report are significant undertakings and are meant to ensure that federal funds are used effectively to meet the needs of low-income families. HUD is now engaged in a negotiated rulemaking with Indian tribes and their representatives to develop a structure under which both the tribes and HUD can comply with the new Indian housing law. Until these regulations are approved and implemented, it is unclear how HUD’s oversight of Native American programs will change and whether HUD can effectively provide such oversight with its current systems and resources. Messrs. Chairmen, this concludes our testimony. We would be pleased to answer questions that you or Members of the Committees may have at this time. The first copy of each GAO report and testimony is free. Additional copies are $2 each. Orders should be sent to the following address, accompanied by a check or money order made out to the Superintendent of Documents, when necessary. VISA and MasterCard credit cards are accepted, also. Orders for 100 or more copies to be mailed to a single address are discounted 25 percent. U.S. General Accounting Office P.O. Box 6015 Gaithersburg, MD 20884-6015 Room 1100 700 4th St. NW (corner of 4th and G Sts. NW) U.S. General Accounting Office Washington, DC Orders may also be placed by calling (202) 512-6000 or by using fax number (301) 258-4066, or TDD (301) 413-0006. Each day, GAO issues a list of newly available reports and testimony. To receive facsimile copies of the daily list or any list from the past 30 days, please call (202) 512-6000 using a touchtone phone. A recorded menu will provide information on how to obtain these lists. | GAO discussed the Department of Housing and Urban Development's (HUD) Native American housing programs, focusing on the: (1) funding history and results of HUD's housing programs for Native Americans; (2) factors that complicate and make costly the development and maintenance of affordable housing for Native Americans; and (3) HUD's ability to detect mismanagement in Native American housing and the potential impact of the recently enacted Native American Housing Assistance and Self-Determination Act of 1996 on HUD's oversight of Native American housing. GAO noted that: (1) from fiscal year (FY) 1986 through FY 1995, HUD provided $4.3 billion (constant 1995 dollars) for housing and community development in tribal areas; (2) of this amount, HUD provided $3.9 billion to approximately 189 Native American housing authorities to develop and maintain affordable housing and assist low-income renters; (3) in this period, the authorities used the funds to construct over 24,000 single-family homes, operate and maintain existing housing, and encourage other development; (4) over the decade, HUD also has provided direct block grants totalling over $424 million (constant 1995 dollars) to eligible tribes for community development and mortgage assistance; (5) many factors complicate and make costly the development and maintenance of affordable housing for Native Americans; (6) these factors include the remoteness and limited human resources of many Native American housing authorities and the Native American communities they serve, land-use restrictions and the inhospitality of the land, the difficulty that contractors and Native American housing authorities have in complying with statutory requirements to give hiring preference to Native Americans, and the vandalism and neglect that make heavy demands on the scarce maintenance funds available to Native American housing authorities; (7) in December 1996, the Seattle Times reported 29 instances of possible mismanagement or misuse of federal funds by Native American housing authorities; (8) for example, the Times reported that Native American housing authorities used federal funds to build luxury homes, covered the mismanagement of one federal grant with funds from another grant, and reprogrammed large federal grants without HUD's approval; (9) HUD's Inspector General found that most of these reports were accurate; (10) GAO's work found that HUD does not effectively apply its system for alerting it to poorly performing Native American housing authorities across its Native American Programs field offices; (11) as a result, HUD may not be able to detect additional instances of mismanagement or misuse of funding; and (12) futhermore, HUD's approach to overseeing Native American housing may change, depending on regulations now being developed to implement the new Native American housing legislation. |
The Energy Reorganization Act of 1974 established NRC as an independent agency, headed by a five-member Commission, to regulate the nation’s civilian use—commercial, industrial, academic, and medical— of nuclear energy and materials, including nuclear power reactors and research and test reactors. NRC’s mission is to ensure that civilian users of nuclear materials adequately (1) protect public health and safety; (2) promote the common defense and security, including securing special nuclear materials against radiological sabotage and theft or diversion; and (3) protect the environment. NRC’s budget authority grew from $626 million for fiscal year 2004 to $824.9 million in fiscal year 2007, and NRC requested $916.6 million for fiscal year 2008. By law, NRC is required to recover about 90 percent of its budget authority each fiscal year, less certain specified amounts, through the fees it charges licensees and applicants. NRC staff grew from 3,110 as of September 2004 to 3,536 employees as of August 2007. NRC’s design-centered review approach is central to its streamlined COL review process because it allows multiple applicants to reference a particular design by including common information in their applications. Specifically, NRC reviews standardized application content for a reactor design at one site—known as the reference COL. Companies using the same design can then refer to this reference COL content in their applications to decrease NRC’s need to conduct the same level of review twice on the same application content. NRC expects that this design- centered review approach will provide the applicant with more certainty about the application process and improve its efficiency in reviewing COL applications without compromising safety. The design-centered review approach intends to leverage work NRC conducts through its design certification process. During that process, NRC examines any possible limits on operations and safety, resolves any issues that arise, and uses a rule-making process to establish a standardized reactor unit design that is not subject to major modifications during the COL review process. However, if a COL application does not reference a design certification, the applicant will have to submit the required design information in its COL application. Furthermore, NRC staff will review any design variations the applicant makes to the reference COL. For each application, NRC staff prepare the project’s Environmental Impact Statement and review other site-specific factors affecting safety and security because these factors are not standard. Accordingly, 10 CFR Part 52 requires that the COL application provide data and assessments of these factors. Alternatively, an applicant may opt to provide this information by applying for an early site permit, which allows the applicant to evaluate the suitability of a given site without going through the full COL application process. Once NRC issues an early site permit, the applicant can reference the permit in its COL application without resubmitting the site information. In preparing for COL application reviews in the time frame since our January 2007 report, NRC has continued its hiring and training efforts and made substantial progress in implementing reviewer and management tools. It also has developed a systematic project management approach— which includes models for planning and scheduling activities and contractor support activities—so that it can apply sufficient resources to several applications simultaneously. However, NRC has not yet fully developed criteria for allocating resources across COL applications, and it has not applied separate decision-making criteria for allocating funding for licensing activities and for support activities, such as developing computer-based review tools. In response to the electric power industry’s growing commitment to building new reactors following the enactment of the Energy Policy Act of 2005, NRC has significantly increased its hiring and funding for its new reactor licensing program. NRC’s overall budget requests for new reactor licensing activities increased from nearly $50 million in fiscal year 2006 to about $175 million for fiscal year 2008. To understand what resources the agency would need, NRC staff developed estimates for how many full-time equivalent (FTE) positions would be needed to review various applications: about 120 FTEs for a design certification, about 60 FTEs for a reference COL, and about 30 FTEs for a subsequent COL. NRC officials noted that the reference COL staff-time estimate does not include any efficiencies gained through applying the design-centered review approach. To support its review of new reactor COL applications, NRC initially reorganized the Office of Nuclear Reactor Regulation to create a division solely responsible for new reactor licensing work and substantially increased its size to more than 750 employees by hiring of entry- and midlevel employees. In August 2006, NRC created NRO to better prepare for new reactor licensing while ensuring that the Office of Nuclear Reactor Regulation maintained appropriate focus on the safety of the 104 currently operating reactors, and began phasing staff into NRO, primarily from the Office of Nuclear Reactor Regulation, in October 2006. NRO is expected to grow from 350 employees in August 2007 to about 500 staff during fiscal year 2008. In addition, NRC is increasing staff to five other offices with new reactor responsibilities. FTEs for new reactor activities in these offices will increase from 50 to about 90 FTEs in fiscal year 2008, as hiring continues. For example, for new reactor work, the Office of Nuclear Security and Incident Response plans to have four times as many staff and the Office of the General Counsel two times as many staff; the Atomic Safety and Licensing Board Panel plans to hire at least two times as many staff, as well as more panelists committed to new reactor work. The Advisory Committee on Reactor Safeguards and the Office of Nuclear Regulatory Research FTE levels will also slightly increase. Several of these offices also reorganized to assume their new responsibilities. Table 1 identifies the new reactor responsibilities of several NRC offices. NRC has taken steps to expeditiously staff NRO in part because more than half of the work for a 30-month COL review is conducted in the first year. NRO reached its fiscal year 2007 staffing level by filling its midlevel and higher positions, phasing in existing NRC employees, and hiring new employees. Regarding fiscal year 2007, NRO managers noted that (1) budget constraints had limited hiring until NRC’s fiscal year 2007 appropriation was enacted in February 2007 and (2) demanding workloads made it difficult for NRC staff to develop vacancy announcements and select and interview candidates. Some critical vacancies remain, and NRO will need to grow by an additional 30 percent to reach its fiscal year 2008 target. NRO managers expressed some concern about whether NRO will have sufficient staff with expertise to fill such critical vacancies as project management, structural engineering, and digital instrumentation and control. Several managers in NRO and other NRC offices also expressed concern about NRC’s ability to retain staff in the intermediate and longer term and provide sufficient physical space for them. Regarding training, NRC has taken several steps to build on its existing curriculum so staff can be prepared to review new reactor license applications. Specifically, for new reactor licensing training, in early 2007 NRO adapted some of the Office of Nuclear Reactor Regulation’s training to contain technical and regulatory content for new reactors. NRC also offers basic regulatory and technical overview training across a range of areas. In 2008, NRC plans to launch several new courses that will include both overview and detailed training on new reactor designs. To the extent possible, NRO and other offices are also using on-the-job training opportunities to ensure employees have some exposure to the breadth and depth of new reactor work, including shadowing and mentoring programs. The in-depth and on-the-job training opportunities made available to staff have been somewhat limited to date. For example, the implementation of some technical training courses was delayed because some reactor design features need further clarification, and NRC’s budget was constrained until February 2007, when its fiscal year 2007 appropriation was enacted. It is unclear whether employees working on some new reactor activities will be able to take these courses before their work group’s design certification or COL applications arrive. In addition, some NRC staff conducting new reactor licensing work will not have related practical experience because they have not participated in early site permit, design certification, or preapplication activities. NRC is in the process of putting new tools into place to support reviewers as they conduct their work. These tools are designed to enhance productivity and ensure a more consistent and coordinated application review process by providing easily accessible pointers to key reviewer guidance and other information. Some tools are also intended to provide a means to document and share knowledge and lessons learned. (See table 2.) The development or completion of such computer-based tools as the RAI system has been delayed until fiscal year 2008 because NRC management gave higher priority to such activities as developing limited work authorization guidance, publishing a proposed rule for assessing aircraft impact characteristics not included in design basis, and completing licensing work already in process. As a result, staff reviews may not be as timely and consistent until these computer-based tools are available, and NRC may not benefit from intended productivity efficiencies. As part of its workforce preparation, NRC is using a project management approach to conduct and coordinate COL reviews so it can apply sufficient resources to several applications simultaneously. With this approach, NRC intends to enhance its overall ability to ensure priorities are appropriate, eliminate uneven workload, and allow managers to appropriately assess progress. As table 3 shows, the project management approach includes four components intended to communicate the processes, procedures, and tools to complete new reactor licensing projects. They include (1) a Licensing Program Plan manual, (2) general and application-specific models and templates—whose estimates NRO took several steps to refine in 2007, (3) a Microsoft Project tool, and (4) a contracting support strategy. In addition, from June through September 2007, NRO provided information to staff involved in new reactor activities to familiarize them with this approach. Because it plans to rely on contractors to perform about one-third of its overall review work, NRC issued a request for proposals, developed a contracting toolkit for staff that includes generic templates to facilitate drafting of statements of work, and took steps to enter into or revise interagency agreements with several DOE laboratories. NRC plans to obligate about $60 million to contractors in fiscal year 2008 to assist reviewers on both the safety and environmental portions of the COL applications. In addition, in fiscal year 2007 NRO used contractors to document its overall project management approach and conduct a program assessment and gap analysis for identifying additional process improvements, among other things. While NRO managers, COL applicants, and reactor designers are generally optimistic about the overall readiness of NRO’s staff to review COL applications, NRC faces the following challenges: Developing decision criteria for addressing competing priorities. NRC has developed plans for allocating resources for a design certification application and an early site permit it is currently reviewing, 20 COL applications, 2 additional design certification applications, and a design certification amendment application—all of which NRC expects to have in its review process over the next 18 months. However, NRC has not yet ranked initial COL application factors for making resource allocations and schedule decisions if licensing work exceeds NRC’s new reactor budget. These factors include the quality and completeness of the application itself, the extent to which the COL application references an early site permit or design certification, evidence of the applicant’s financial commitment to build a reactor in the near term, and other factors. In commenting on recommendations in our draft report, NRO officials said that NRC will develop these criteria by the end of 2007. Maximizing the use of the Microsoft Project tool. In June 2007, NRO began using the Microsoft Project tool to schedule certain internal activities and work related to design certification and early site permit applications already under review. To effectively schedule tasks, the Microsoft Project tool needs several layers of NRC staff to regularly estimate and note their progress on each task. Entering this information into the system is a new practice that officials acknowledged will require some adjustment. Even with this tool, it will be a complex undertaking for staff and managers to regularly update and monitor entries, evaluate them for a range of user needs, and review reports generated to assess progress. While NRC has dedicated scheduling and project management resources to coordinate and direct activities, it is too soon to tell whether they are sufficient. Accordingly, understanding workflow, evaluating reports, and continually assessing resource utilization will take some time to become established practice. Most COL applicants generally supported NRC’s use of the Microsoft Project tool and noted that it could promote more accountability for adhering to established schedules than has historically been the case. Managing the increased reliance on contractors. NRO plans to use contracts to support at least one-third of the COL application review process—for fiscal year 2008, NRO’s budget request is about the same for contractor support as it is for staff salaries and benefits. NRC’s efforts to implement its contractor support strategy are still under way. For example, NRO staff and managers initially defined particular work they expected contractors to conduct in fiscal year 2008. Specifically, NRO plans to use more than 200 task orders for a broad range of skills under at least 10 umbrella contracts or interagency agreements. Contractors are to support about 50 percent of the site-specific and environmental review work, as they did to review early site permit applications. As of early September 2007, NRO staff had completed most initial statements of technical work to be included in each task order, and NRC had awarded three of four commercial contracts and entered into three of seven interagency agreements planned for fiscal year 2008. NRC plans to have the remaining contracts and agreements in place by the beginning of October 2007. Allocating funding for developing reviewer and management tools. In fiscal year 2008, NRC will have hundreds of licensing activities under way and other internal activities to support the review of COL applications and certification of reactor designs. Evaluating the importance of completing activities that support the reviews—such as ensuring the smooth operation of the Microsoft Project tool, revising computer-based reviewer tools for enhancing productivity, delivering contractor training, increasing information technology support, or revising remaining guidance—may not be as important as completing priority licensing priorities. However, NRC has not developed criteria to determine how it will allocate resources between licensing activities and developing reviewer and management tools. Clarifying the Resource Management Board’s role. In May 2007, NRO’s management team formed a board of deputy division directors that meets weekly. The board is responsible for developing decision- making processes if certain milestones are in danger of not being met, and NRO therefore has to significantly shift resources. While NRO expects the board to recommend actions to mitigate the impact on overall scheduling if such changes are required, it is unclear whether the board will have any role in generally setting priorities and directing resource allocation. Without such clarification, NRO may miss opportunities for more effectively managing multiple activities associated with reviewing as many as 20 applications, certifying designs, granting early site permits, and reviewing applications for limited work authorizations. NRC managers recognize this problem and plan to address it. According to NRO officials, some efforts are still under way and the effectiveness of others cannot be determined until the application review begins. Consequently, NRO plans to periodically assess the project management approach’s effectiveness. In redesigning its regulatory framework to better resolve issues early and promote standardization and predictability in the licensing process, NRC reached out to stakeholders, particularly those who would be seeking certification for designs or applying for licenses. Industry stakeholders generally consider NRC’s design-centered review approach and revised framework to be an improvement over NRC’s prior process. However, NRC has not explained to applicants how it plans to implement its revised processes for accepting (docketing) a COL application, requesting additional information, or conducting hearings. These uncertainties may limit expected efficiencies and predictability regarding the total time a COL applicant needs to obtain a license. During the past 4 years, NRC has taken several steps to significantly revise and augment its primary regulatory framework to prepare for licensing and construction of new reactors. This framework consists of NRC’s 10 CFR Part 52 rule; guidance to aid licensees in developing COL application content, such as the Regulatory Guide 1.206; safety and environmental standard review plans that guide reviewers in evaluating applications; and criteria to guide inspectors examining operational programs and construction activities. The framework also includes ancillary rules and guidance related to security, limited work authorization, and fitness for duty. (See table 4 and app. I for more information about the framework’s major components and remaining work.) In revising and augmenting this regulatory framework, NRC took steps to convey key changes and solicit feedback through public meetings and formal interactions with stakeholders to help resolve issues early. NRC also solicited information from potential applicants for planning purposes. In addition, NRC frequently reached out to applicants and reactor designers during 2006 and 2007 regarding new reactor licensing by supporting the formation and activities of design-centered working groups for COL applicants and design certification applicants to help standardize COL application content and format and clarify NRC’s expectations for the level of detail in COL applications; and holding several public meetings related to specific technical areas—such as digital instrumentation and control, probabilistic risk assessment, and seismic analyses—and operational program areas, including quality assurance, reactor component manufacturer inspections, training, and emergency planning. NRC accelerated some schedules to have key components of the regulatory framework in place before applications are submitted. Both applicants and NRC acknowledge that the accelerated, overlapping time frames for power companies to prepare their COL applications while NRC revises its regulatory framework have neither been ideal nor fully avoidable. Specifically, NRC did not promulgate its Part 52 rule until August 28, 2007, 4 months after originally planned. NRC is still in the process of completing some rules and guidance related to both licensing and construction activities. Applicants expressed some concern that NRC’s review of applications, in some areas, could change as long as these components remain incomplete. For example, in September 2006, NRC proposed a rule to update physical protection requirements, which officials told us is not due out in final form until 2008. In addition, its limited work authorization rule, while substantially complete, will not be available in final form before October 2007, and NRC is in the process of developing associated guidance. NRC has not yet told applicants how it will apply resources to limited work authorization applications or how this will affect individual COL application review schedules. Also, because NRC only recently solicited public comments to further update its environmental guidance, applicants may have more difficulty developing specific COL content for unresolved issues. Furthermore, NRC is continuing to develop several components of the Inspections, Tests, Analyses, and Acceptance Criteria (ITAAC) process, such as the final closeout review for ensuring all criteria are met. Finally, NRC has just begun its multiyear process of staffing its Construction Inspection Program; efforts to date have primarily included conducting a range of quality assurance inspections activities. NRC and applicants have taken steps to advance how the design-centered review approach will be implemented during 2008 and 2009 to facilitate NRC’s review of applications for at least 20 COLs, 3 design certifications, 1 design certification amendment, and 1 early site permit, as well as 1 or more limited work authorizations. Figure 3 presents a simplified diagram of the COL application review process, including estimated time frames associated with each aspect of the review; major preapplication activities and postlicensing activities associated with the completion and verification of ITAAC after the Commission grants the COL; and information about the construction time period should an applicant choose to build a plant. NRC officials expect to develop schedule estimates for each application after it is received, conduct an estimated 60-day initial review of technical sufficiency and completeness as a basis for docketing an application; and if the application is found acceptable, develop an estimated schedule for completing the review. The COL review process includes three primary areas of review: the safety/technical review, which results in a Safety Evaluation Report; the environmental review, which results in an Environmental Impact Statement; and the adjudicatory review, which results in hearing findings/orders. Throughout the safety and environmental reviews, NRC typically develops several hundred requests for additional information that range in length and complexity to ascertain the sufficiency of the information the applicant has provided so that NRC can develop its findings. NRC officials estimated that the safety review will take 30 months, the environmental review 24 months. Prehearing activities take place concurrently with the staff’s reviews, while the hearing on any contested issues and on the uncontested portion of the application takes about 12 months once NRC staff have completed their safety and environmental review documents. COL applicants and reactor designers told us they support NRC’s design- centered review approach. They expect that standard applications will enable NRC staff, to the maximum extent practical, to use a “one issue, one review, one position” strategy. They said this approach is feasible if applicants and NRC staff implement it as intended, in accordance with guidance set out in NRC’s Regulatory Guide 1.206 and Standard Review Plan. Most applicants and managers stated that they plan to be thorough, timely, and disciplined in implementing the process for reviewing COL applications. However, they also expected that some processes and procedures will be clarified during the implementation process. Furthermore, several COL and design applicants jointly developed detailed matrixes to identify all reference COL application parts that are identical to the design and all subsequent COL application parts that are identical to the reference COL. These parts are incorporated by reference, other parts are clearly identified as including some similar content, and the remaining parts are clearly identified as site specific. Also, the Nuclear Energy Institute and applicants developed standard templates for certain parts of the application content—for example, some operational programs—and NRC agreed to their use. While NRC has substantially defined its COL review process, it is not yet clear how the agency will implement a few key components. For example, NRC is revising the acceptance review process and the conduct of hearings in response to an internal task force’s recommendations. Consequently, uncertainties remain about how these processes will be implemented, which may make it more difficult for applicants to know what information they must provide and how NRC will review their applications: Clarifying recent acceptance review process changes. In June 2007, 3 months before it expected to receive the first COL applications, NRC announced it would expand its acceptance review process to include not only an evaluation of the application’s completeness but also its technical sufficiency. NRC also increased the allotted amount of time for this review from 30 to 60 days. The intent of the new process is to enable NRC to identify areas of potential concern early in the process and discuss them with the applicant. NRC expects that applicants will submit high-quality, complete applications for docketing. By the end of September 2007, NRC plans to publicly release associated internal guidance that its staff will use for deciding whether to accept, delay, or reject docketing. Better managing the request for additional information process. Such requests to assess technical sufficiency during the review process have been a central component of prior safety and environmental reviews, yet a few steps remain to better ensure efficiency. NRC is still developing its process for tracking requests for additional information from applicants. However, NRC cannot yet coordinate these requests to multiple applicants who are using the same reactor design, which may lead to unnecessary duplication of effort. For example, in some instances, applicants using the same reference reactor design may be asked the same question, and one applicant may have already provided a satisfactory answer. If NRC’s tracking system were in place, the second reviewer could have access to the previously submitted information, thereby avoiding another request for information and improving the efficiency of the review. Several COL applicants also expressed concern that duplicative or unnecessarily detailed requests for information may result because many of the reviews will be conducted simultaneously by multiple reviewers. Until the revised process is available to staff and communicated to stakeholders, it is unclear whether NRC will gain intended efficiencies in applying the design-centered review approach to its request for information process. Addressing ITAAC process implementation concerns early. Some NRC staff and COL applicants said they would benefit from further discussion about how NRC will (1) oversee the applicant’s implementation of ITAAC for the construction and operation of the new nuclear reactor units and (2) determine that an ITAAC is complete. In addition, applicants will need to inform NRC about certain procurement and construction activities, such as the acquisition of major parts. Completing revisions to the hearing process. NRC is revising its policy for conducting hearings on both the contested and uncontested portions of applications. In June 2007, NRC issued a proposed policy statement that would allow the Atomic Safety and Licensing Board Panel to consolidate hearings on contentions related to the standardized portions of multiple applications. The process for hearings for the uncontested portion of the COL proceeding may change. The Commission plans to seek legislative authority from the Congress to eliminate the statutory requirement to conduct a hearing even if no one has requested it in order to conserve resources. If a hearing must be held, however, the Commission has taken steps to assume responsibility for conducting the uncontested portion of hearings. Currently, the Atomic Safety and Licensing Board Panel is responsible for conducting all of NRC’s hearings, not just those associated with new reactor applications. NRC assumes that it would save considerable staff and Panel resources if the Commission takes the responsibility for this portion of the hearings because it could conduct a different style of hearing. Beyond the changing processes and unresolved technical issues that remain—such as evaluating applicants’ use of digital instrumentation and controls, NRC faces some general constraints because of the short or overlapping time frames between the preparation of its regulatory framework and process and the submission of applications starting in October 2007. For instance, for the environmental component of NRC’s review, NRC would prefer to have about 22 months of preapplication discussions with the applicants to allow staff to plan its work more effectively and identify potential areas of concern. However, these discussions are at the applicant’s discretion; none of the fiscal year 2008 applications will begin with this lead time, and some may have had as little as 2 months. Also, while NRC has scheduled considerable resources to conduct design certification reviews concurrently with its COL reviews, applicants have announced plans to use two new reactor designs that have not been submitted to NRC for certification, a reactor designer is amending its previously certified design, and another designer may also revise its design. These additional changes likely will tax NRC’s resources and stafftime. NRC has made major strides in developing its new licensing process for nuclear reactors to improve timeliness and provide more predictability and consistency during reviews. Nevertheless, NRC will face a daunting task in implementing this new process while at the same time facing a surge in applications over the next 18 months. We recognize that NRC cannot prepare for all contingencies in its review of license applications under this new process, but we also find that NRC could be better positioned to manage the process if it further refined the criteria and processes it has already put into place. First, while NRC has identified factors for staff to consider in developing the fiscal year 2008 budget proposal for new reactor activities, it has not made plans to use these factors in making resource allocations and schedule decisions. As a result, NRC may find it difficult to set priorities as it begins to review applications early next year. Second, NRC has not implemented some reviewer and management support tools that are intended to facilitate efficiency and productivity, and may not devote sufficient resources to their completion in the future. Third, NRO established the Resource Management Board to recommend actions when the office is at risk of missing major milestones. However, NRO has not specified the extent to which the board is responsible for generally setting priorities or allocating resources, which is likely to be much more challenging once applications are submitted. NRC managers plan to clarify the board’s responsibilities. Finally, the design-centered approach is premised, in part, on streamlining the review process through standardization. However, NRC has not worked out a process for coordinating multiple, similar requests for additional information, which could facilitate greater efficiencies. To better ensure that its workforce is prepared to review new reactor applications and its review processes more efficiently and effectively facilitate reviews, we recommend that NRC take the following four actions: Fully develop and implement criteria for setting priorities to allocate resources across applications by January 2008. Provide the resources for implementing reviewer and management tools needed to ensure that the most important tools will be available as soon as is practicable, but no later than March 2008. Clarify the responsibilities of NRO’s Resource Management Board in facilitating the coordination and communication of resource allocation decisions. Enhance the process for requesting additional information by (1) providing more specific guidance to staff on the development and resolution of requests for additional information within and across design centers and (2) explaining forthcoming workflow and electronic process revisions to COL applicants in a timely manner. We provided NRC with a draft of this report for its review and comment. In written comments, NRC agreed with our recommendations. (See app. II.) In addition, NRC provided comments to improve the report’s technical accuracy, which we have incorporated as appropriate. To examine the steps NRC has taken to prepare its workforce to review new reactor license applications and manage its workload, we obtained information about its workforce preparation by reviewing NRC documents, conducting semi-structured interviews with several managers directly responsible for the planning and implementation of new reactor licensing activities, and observing internal NRC meetings. More specifically, we reviewed strategy and commission papers, licensing program planning documents and briefings, and a range of documents regarding reorganization, staffing, training, hiring, contracting, and project scheduling. We supplemented this information through interviews with NRC managers in NRO; the offices of Nuclear Security and Incident Response, Nuclear Regulatory Research, General Counsel, and Human Resources; the Advisory Committee on Reactor Safeguards; and the Atomic Safety and Licensing Board Panel. We also observed several NRO- specific internal management meetings and employee training sessions, and NRO staff demonstrated their Microsoft Project tool and associated scheduling models and templates. We updated NRC workforce data presented in our January 2007 report entitled Human Capital: Retirements and Anticipated New Reactor Applications Will Challenge NRC’s Workforce. We also obtained budget data from NRC’s Office of the Chief Financial Officer and determined that these data were sufficiently reliable for the purposes of this report. To examine the steps NRC has taken to develop its regulatory framework and key processes, we reviewed various NRC reports, meeting transcripts and minutes, and strategy and commission papers and supplemented this information with interviews with cognizant NRC managers. We conducted semi-structured interviews with representatives from 2 nuclear power consortia and 16 of the 17 electric power companies that have announced plans to file a COL application, as well as 2 reactor design companies. We also interviewed officials of the Nuclear Energy Institute; the Union of Concerned Scientists; the Institute of Nuclear Power Operations; Winston and Strawn, LLP; and the Georgia Public Service Commission. In addition, we observed several of NRC’s design-centered working group and public meetings focused on new reactor licensing activities, and attended conferences held on new reactor licensing. As agreed with your offices, unless you publicly announce the contents of this report, we plan no further distribution until 30 days from the report date. At that time, we will send copies to appropriate congressional committees, the Chairman of NRC, the Director of the Office of Management and Budget, and other interested parties. We will also make copies available to others upon request. In addition, the report will be available at no charge on the GAO Web site at http://www.gao.gov. If you or your staffs have any questions about this report, please contact me at (202) 512-3841 or [email protected]. Contact points for our Offices of Congressional Relations and Public Affairs may be found on the last page of this report. GAO staff who made major contributions to this report are listed in appendix III. In April 1989, NRC promulgated 10 CFR Part 52 to reform its licensing process for new nuclear power plants. In December 1998, NRC issued SECY-98-282, “Part 52 Rulemaking Plan,” to update 10 CFR Part 52 based on its experience in using the standard design certification process. In March 2006, NRC published a revised proposed rule to update Part 52 for public comment. In October 2006, NRC staff forwarded draft final rule to the Commission for consideration. In April 2007, the Commission made the rule final, pending certain revisions. On May 22, 2007, NRC posted the draft final rule on its Web site while the Office of Management and Budget completed its review. On August 28, 2007, the final rule was published in the Federal Register. Development of Regulatory Guide 1.206, “Combined License Applications for Nuclear Power Plants”: Describes and makes available to the public (1) data that NRC staff need in reviewing applications for permits and licenses, (2) methods that NRC staff consider acceptable for use in implementing specific parts of the agency’s regulations, and (3) techniques that NRC staff use in evaluating specific problems or postulated accidents. In September 2006, NRC staff posted Draft Guide 1145, the precursor to Regulatory Guide 1.206, on its Web site for public comment. In April 2007, NRC posted completed sections of Regulatory Guide 1.206 for preliminary use. In June 2007, NRC issued final guide in total. Update of high-priority regulatory guides: Provides guidance to applicants on implementing specific parts of the regulations, techniques used by the NRC staff in evaluating specific problems or postulated accidents, and data the staff will need to review permit or license applications. In July 2006, NRC staff identified about 30 high-priority regulatory guides to update by March 2007. Public comment period for the high-priority regulatory guides ended in December 2006. In March 2007, NRC staff completed publishing these guides for new reactor licensing activities. Update of Safety Standard Review Plan (SRP), “Standard Review Plan for the Review of Safety Analysis Reports for Nuclear Power Plants,” NUREG 0800: Provides guidance to NRC staff for evaluating whether an applicant or licensee complies with 10 CFR Parts 50 and 52. SRP’s principal purpose is to ensure the quality and uniformity of staff safety reviews. In August 2004, NRC staff began issuing updates to SRP sections. The staff also made public its reprioritized schedule for updating SRP sections starting in April 2005 to support new reactor licensing. In January 2006, NRC accelerated the issuance schedule to March 2007. In March 2007, NRC issued all SRP chapters, except chapter 19 on probabilistic risk assessment. In June 2007, NRC issued the probabilistic risk assessment chapter. Update of Environmental Standard Review Plan (ESRP), “Standard Review Plans for Environmental Reviews for Nuclear Power Plants,” NUREG 1555: Provides guidance to NRC staff for conducting environmental reviews of nuclear power plant license applications. NRC last updated ESRP in 1999. In 2006, NRC staff prioritized ESRP sections and began to update them. Draft Revision 1 revises one or more sections of nearly all chapters. In August 2007, NRC convened a public meeting to obtain comments on draft revisions and is accepting comments through mid-September 2007. Limited Work Authorization rule making: Revises (1) the scope of activities for which a construction permit, COL, or limited work authorization is necessary; (2) the scope of construction activities that may be performed under a limited work authorization; and (3) the review and approval process for limited work authorization requests. In March 2006, NRC published a proposed rule that would substantially amend Part 52, but not Part 50. In response to public comments, NRC prepared a supplemental proposed rule intended to reduce the time between an applicant’s decision to proceed with a COL application and the start of commercial operation. In October 2006, NRC published the supplemental proposed rule. In February 2007, NRC staff submitted a draft final rule to the Commission for review. In April 2007, the Commission approved the rule and issued additional requirements for NRC staff to complete. The rule was submitted to the Office of Management and Budget for clearance review on August 30, 2007. Construction Inspection Program (CIP): Has several components and is designed for NRC to develop a level of confidence in the licensee's programmatic controls. CIP will involve a combination of differently directed inspections, all of which are aimed at validating the acceptability of the construction programs, processes, and products. The components include four inspection manual chapters (IMC), periodic assessment, and vendor oversight activities. In 2001, NRC renewed prior efforts to update the CIP by incorporating lessons learned into the revised framework. The team includes regional and headquarters licensing and inspection staff. In April 2003, NRC issued IMC-2501, "Early Site Permit." In June 2005, NRC issued IMC-2502, "Pre-Combined License (Pre-COL) Phase,” on quality assurance, engineering, and environmental protection. In April 2006, NRC issued IMC-2503, "Inspections, Tests, Analyses, and Acceptance Criteria (ITAAC)," for inspecting construction activities and supporting completion of the ITAAC. In April 2006, NRC issued IMC-2504, "Non-ITAAC Inspections," for inspecting programmatic areas. In June 2007, NRC published information about how it plans to enhance its Vendor Inspection Program, including developing program guidance and increasing audit and inspection activities. Inspections, Tests, Analyses, and Acceptance Criteria: Specifies that a COL application must identify the inspections, tests, and analyses (including those that apply to emergency planning) that the licensee will perform to provide NRC with data to determine whether the applicant has met NRC’s acceptance criteria and the reactor has been constructed and will operate in conformance with the COL, NRC regulations, and the Atomic Energy Act. In 2001, to update the inspection program, NRC formed the Construction Inspection Team, which includes staff from each region, new reactor licensing, and inspection program management. In October 2005, NRC staff issued “Review of Operational Programs in a Combined License Application and Generic Emergency Planning Inspections, Tests, Analyses, and Acceptance Criteria.” The Commission then provided policy direction on license conditions for operational programs in a COL application and the use of emergency planning/emergency preparedness ITAAC. In April 2006, NRC issued IMC-2503, "Inspections, Tests, Analyses, and Acceptance Criteria," and IMC-2504, “Non-ITAAC Inspections,” which describe the programs for inspecting construction activities. In January 2007, NRC solicited stakeholder input from public meetings. In March 2007, NRC staff presented to the Commission its plan for selecting ITAAC for inspection and closing these ITAAC. In May 2007, the Commission approved the staff’s approach for verifying the closure of licensees’ ITAAC through a sample-based inspection program. In July 2007, the Advisory Committee on Reactor Safeguards concurred with the approach and proposed threshold values. NRC continues to develop inspection procedures; work processes and procedures to support the closure of ITAAC and the implementation of the enforcement process; and a methodology for assessing licensee performance. NRC plans to prioritize activities to ensure that products will be ready to support inspector training and inspections. 10 CFR Part 73 rule making on physical protection: Governs requirements for physical protection of nuclear power plants. The rule is intended to codify orders issued in response to September 11, 2001, and fulfill certain provisions in the Energy Policy Act of 2005 by (1) enhancing requirements for access controls, event reporting, security personnel training, safety and security activity coordination, contingency planning and radiological sabotage protection and (2) adding requirements related to background checks for firearms users and authorization for enhanced weapons. In October 2006, NRC published a proposed rule to codify several physical protection orders into sections 73.55 and 73.56. The public comment period closed in March 2007. Since July 2007, NRC has held public meetings on draft guidance related to this rule making, and has provided specific sections of the draft guidance to further inform stakeholders and the public. NRC expects to post the draft final rule for 10 CFR Part 73 on its Web site in 2008. Aircraft Impact Assessment rule making: Requires reactor unit designers to perform a rigorous assessment of design features that could provide additional inherent protection to avoid or mitigate the effects of an aircraft impact while reducing or eliminating the need for operator actions, where practicable. In April 2007, the Commission directed NRC staff to include aircraft impact assessment requirements in 10 CFR Part 52. Since April 2007, NRC has discussed plans for assessing aircraft impact characteristics not included in design basis with reactor and plant designers who have submitted applications. NRC plans to publish a proposed rule for public comment in September 2007 or later. 10 CFR Part 26 rule making on fitness for duty: Governs drug and alcohol testing programs and establishes requirements for managing worker fatigue at operating nuclear power plants. In April 2005, NRC staff presented its proposal to amend the fitness for duty rule. In August 2005, NRC published the proposed rule in the Federal Register. The public comment period ended in December 2005. In March 2006, NRC held a public meeting on the public comments to the proposed rule. In October 2006, NRC posted the draft final rule on its Web site. In April 2007, the Commission approved the final rule and directed staff to continue to engage stakeholders in complete associated regulatory guidance. In July 2007, NRC modified the approved rule. NRC expects to issue a final rule in early 2008. In addition to the individual named above, Richard Cheston, Assistant Director; Amanda Leissoo; Sarah J. Lynch; Amanda Miller; Omari Norman; Carol Herrnstadt Shulman; Julie E. Silvers; and Elizabeth Wood made key contributions to this report. | Nearly three decades after the last order for a new nuclear power reactor in the United States, electric power companies plan to submit 20 applications in the next 18 months to the Nuclear Regulatory Commission (NRC) for licenses to build and operate new reactors. Since 1989, NRC has developed a new license review process that allows a power company to obtain a construction permit and an operating license through a single combined license (COL) based on one of a number of standard reactor designs. NRC expects its new process to enhance the efficiency and predictability of its reviews. GAO reviewed NRC's readiness to evaluate these applications by examining the steps NRC has taken to (1) prepare its workforce and manage its workload and (2) develop its regulatory framework and review process for new reactor activities. GAO reviewed NRC documents for new reactor workforce staffing and training, examined NRC's guidance for the review of license applications, interviewed NRC managers and representatives of nearly all of the COL applicants, and observed NRC's public meetings. NRC has taken many steps to prepare its workforce for new reactor licensing reviews, but several key elements of its preparations are still underway. As a result, uncertainties remain about NRC's ability to manage its workload associated with the surge of applications. Specifically, NRC has increased its funding for new reactor activities, created the Office of New Reactors and reorganized several other offices, and hired a significant number of entry-level and midlevel professionals. To assist its staff in reviewing the applications, NRC also plans to contract out about one-third of its fiscal year 2008 workload. However, several elements of NRC's preparatory activities are still in progress, including hiring for some critical positions; developing key training courses; and developing computer-based tools intended to enhance consistency and coordination in reviewing like sections of COL applications. In addition, NRC has not fully developed criteria for setting priorities if the workload exceeds available staff and contractor resources. Finally, while the Office of New Reactors established a cross-divisional resource management board early in 2007 for coordinating certain office review activities, it has not clearly defined the extent of the board's responsibilities. NRC has significantly revised its regulatory framework and review process to prepare for licensing new reactors, but until NRC completes certain additional actions, it may not fully realize the anticipated benefits of the new process. NRC has revised, augmented, and clarified most rules, guidance, and inspection oversight criteria to provide for early resolution of issues, standardization, and predictability in the license review process. However, NRC has not yet completed several actions to implement this process. For example, NRC only recently modified its acceptance review process to include an evaluation of the application's technical sufficiency in addition to its completeness. NRC plans to complete new acceptance review guidance and tools reflecting this change by the end of September 2007. NRC also is refining its process for tracking requests to each applicant for more information but has not developed a coordinating mechanism to avoid unnecessarily requesting information from multiple applicants. |
The funds that DOD managers need for their research and development programs first must be considered by DOD for inclusion in the President’s Budget. If the President includes the funds in the budget he transmits to Congress, then Congress considers the request. If Congress approves the request, it appropriates funds for the programs in the annual DOD appropriations act that is signed into law by the President. Three years can lapse from the time a program manager begins formulating a research and development program budget request to the time that funds are included in an appropriations act that is signed into law and designated for the program in the accompanying conference report. Figure 1 shows a typical scenario for the research and development program budgeting process. The resulting appropriations act typically specifies a lump sum for several different accounts, including the research, development, test and evaluation appropriation account of each of the military departments as well as separately for DOD-wide research and development activities. The account for research, development, test, and evaluation (referred to in this report as research and development) is further broken down into budget activities, such as basic research and advanced technology development. Each budget activity is then subdivided into program elements, which we refer to as programs in this report. The conference report that accompanies the appropriations act lists the amounts Congress designated for each activity and program. An individual program can be further subdivided by DOD into projects or other activities. Following the annual enactment of the appropriations act, the Office of Management and Budget apportions the funds and DOD allots the funds and—except for those being withheld—makes the money available or releases it to managers for executing programs. Managers generally have 2 years to obligate research and development funds before the funds expire. By the time the budget approval process is complete and the funds are made available, several things can be said about the appropriated amounts for the individual program: (1) they represent decisions by Congress to approve programs as requested, create new programs, and adjust the requested amounts for others; (2) because of the elapsed time from the point the program manager began formulating the budget request until enactment of the appropriations act, situations may have changed that cause a misalignment between the approved funds and the actual status of the program; (3) the inherent unknowns in research and development will result in some programs not being executed as contemplated by the budget; and (4) unanticipated events will develop during the execution year that were not anticipated in the budget. It is for these and other reasons that Congress recognizes that DOD needs some flexibility to adjust research and development funds after they are appropriated. A primary vehicle for exercising this flexibility is reprogramming. DOD can also withhold funds from programs prior to reprogramming or releasing the funds. The Air Force and MDA restrict the authority to reprogram or withhold funds to their headquarters staffs, while the Army and Navy grant their subordinate commands and program executive offices this authority. This report defines withheld funds—or a withhold—as appropriated DOD research and development funds that are not released by DOD to a designated program for part of the 2-year period of availability of those funds. Prior to being released for execution, funds may be withheld by the Office of the Secretary of Defense and the headquarters for the military departments and MDA. DOD withholds funds for a variety reasons and does not seek prior congressional approval for these transactions. While funds are withheld, the funds are still designated for the program but not yet released to that program. In contrast, reprogramming of appropriated funds is a mechanism for which DOD has established a formal process for internal review and approval and, when necessary, congressional notification and approval. For fiscal year 2003, to implement congressional guidelines, DOD’s reprogramming policy required prior written approval from congressional defense committees for any research and development reprogramming increase of at least $10 million to an existing program and for any decrease of at least $10 million or 20 percent of the program’s appropriation, whichever was greater. In fiscal year 2002, the threshold for increases was $4 million, and, for decreases, $4 million or 20 percent of the appropriated amount, whichever was greater. These thresholds are applied at the program level of the budget. According to DOD’s Financial Management Regulation and congressional guidelines, DOD generally does not have to seek prior congressional approval for reprogrammings that do not exceed the threshold; hence, these are BTRs. The threshold applies to both individual BTRs and the cumulative amount of BTRs in each program element. Thus, multiple BTRs for the same program must not exceed the threshold in total. If congressional committees have denied a reprogramming request above the threshold, DOD policy prohibits the use of a series of BTRs to achieve the denied request. DOD submits a number of reports to Congress each year to convey appropriations-related information for each research and development program. One of these reports, the DD 1416, is intended to capture all changes made to the amount designated by Congress for a program, including BTRs. The DD 1416 is Congress’s primary vehicle for information about BTR changes by DOD to the amount designated for a program. The annual DD 1416 report for Congress covers the entire fiscal year ending September 30. A DOD regulation requires that the annual report for Congress be sent by DOD components to the DOD Comptroller within 30 working days after September 30 for review prior to submission to Congress. However, the DOD regulation does not specify a date by which the report must be sent to Congress. DOD’s primary vehicle for reporting BTRs to Congress, the DD 1416 report, has several limitations that reduce the report’s quality as a source of information. DOD provided the DD 1416s for fiscal years 2002 and 2003 to Congress several months after Congress began considering the new budget. Because the reports contained classified information, their distribution was limited. We found a number of discrepancies between the BTR data in the DD 1416s and the information on actual BTRs in DOD organizations’ data collection systems. Further, the reports did not include detailed information about BTR activity on a program-by-program level, such as whether programs gained or lost funding, and provided no withhold data. Data on actual BTRs in DOD are not centralized but rather are contained in the individual data collection systems maintained by the military departments, MDA, and the Office of the Secretary of Defense. These systems range widely in their level of automation, detail, and accessibility. The data needed to determine the amount and volume of BTRs for fiscal years 2002 and 2003 were not readily available from some of the systems and some manual data collection was necessary. Information on actual BTRs did not always reconcile with the data contained in the DD 1416 report to Congress. For fiscal years 2002 and 2003, DOD delivered the DD 1416s to Congress several months after Congress began deliberations on the new budget year. Each report was dated in April the year following the end of the fiscal year, and was not delivered to Congress until May, according to a DOD official. Thus, the report covering the fiscal year ending September 30, 2002, was sent to Congress in May 2003, and the report for the fiscal year ending September 30, 2003, was sent to Congress in May 2004. It appears that until the reports were received, congressional committees were less informed about the funds that were moved from one research and development program to another when considering program budgets for the following year. In addition, the reports were classified because of the sensitive nature of some of the DOD programs. Classification restricts the ease with which reports can be accessed by and circulated among congressional staff. The data contained in the DD 1416s to Congress for both years had several limitations. The reports listed a net amount intended to represent all BTRs for each program—after all BTR increases and decreases were calculated—that occurred in the fiscal year. We found that, except for the Air Force, the net amounts were not based on actual BTR transactions. Rather, the net amounts in the DD 1416s were derived by subtracting all adjustments from the balance of programs’ funds, whether the adjustments were BTRs or not. In addition, when we compared BTR information in the DD 1416s with the BTR data provided to us by the DOD organizations, we found that, except for MDA, the information did not match. The military departments were not able to reconcile the data. In addition, the reports did not contain detailed, continuous data on BTRs. For example, the DD 1416s did not contain the total number of BTRs for each program, whether funds were added or reduced, reasons for BTRs, or the donor or recipient programs. Thus, the reports could not be used to understand what changes occurred in an individual program during the year of execution. Information about funds withheld from programs for some portion of their availability period was not reported to Congress. DOD does not have a single, centralized, integrated data collection system to record, manage, and report on funds that have been reprogrammed through BTRs or withheld. Rather, such information is maintained by the individual organizations with responsibility for managing the funds appropriated for each program. To satisfy the requirements of the mandate, we developed a single database that contains information on research and development funds reprogrammed and withheld in fiscal years 2002 and 2003 from the three military departments and MDA. These organizations employ different systems to track and monitor BTRs. Most but not all systems are centralized, and some organizations have separate systems for recording funds withheld from programs. The quality of BTR and withhold data varied across the three military departments and MDA. We found several features of data collection systems that appeared to be important to generating quality information. These included whether: a centralized record and approval system was in place to track changes within programs; reasons for changes were recorded; data on both donors and recipients were included; details on transactions were easily retrievable; and data reconciled with amounts reported in the DD 1416 report. Table 1 summarizes these features for the individual data collection systems. Details on each of the systems follow. The Army uses DOD’s computerized Program Budget Accounting System to record and track BTRs. The accounting system is accessible at Army headquarters and at all of the subordinate organizations. Although the system provides the net dollar amount of the BTRs for each program and project, the system has several limitations. For example, the system does not show the details of each BTR transaction, such as the donors and recipients of each transaction or the purpose. To identify the donors and recipients, the Army must resort to paper records produced by the system for each transaction. Furthermore, the system does not have the capability to electronically retrieve information about prior individual BTRs because the system only shows the cumulative net BTR balances. Prior individual balances are overwritten after 10 days. Once 10 days have passed, if budget officials do not print a record, the opportunity to save that data is lost. If paper records were printed, budget officials can manually assemble and analyze the records about individual BTR transactions. We found that nearly 41 percent of the Army’s BTR data contained in the DD 1416 for Army programs in fiscal year 2002 did not match the BTR data contained in the paper records produced by the Army’s data collection system, and nearly 46 percent of DD 1416 BTR data did not match for fiscal year 2003. With regard to withholds, the data collection system provides some data on funds withheld from Army programs by the Office of the Secretary of Defense, Army headquarters, and subordinate organizations, but the system only shows the cumulative amount of the withheld funds, not the information for each BTR and withhold. Army Budget Office officials said a report is produced with this information each month. Also, a user of the system can, at any time, print a report that shows cumulative withhold amounts up to the date of printing. However, as with the individual BTR data, the individual withhold data gets overwritten after 10 days and cannot be retrieved afterward. Thus, the Army has to rely on paper-based reports to form an audit trail. The Navy utilizes multiple systems to manage appropriated funds. Separate systems are used at the headquarters level to record and track BTRs and withholds. Another is used to allocate statutory obligations. Multiple subordinate organizations have developed similar systems to record the BTRs and withholds that they authorize. The Navy required about 10 weeks to gather information about BTRs and withholds from subordinate organizations and to consolidate that information with data maintained by headquarters. The Navy data collection systems identified all funding level changes, as well as the programs from which funds were taken and added. The systems did not identify the reasons for these changes. The Navy had detailed records identifying the specific programs that were subject to BTRs and withholds, including the donor or recipient for each BTR transaction, but the reasons for reprogramming transactions were not available. While most of the totals provided to us matched those included in the DD 1416, there were discrepancies for some Navy programs. The Air Force uses a single, computer-based, data collection system to manage adjustments to the funding level for each program. This system was designed and is maintained by a contractor. The system is used to record, track, and manage all changes to Air Force research and development funding levels for headquarters and subordinate organizations, including system program offices and laboratories. The system maintains multiple years of information on research and development funds withheld and reprogrammed. For most reprogrammings, the system records the purpose of the changes and identifies the programs from which funds were decreased and increased. The system is updated about once a month and available principally to those in the headquarters management unit. The system maintains data for multiple years, and the data are easily retrievable. The Air Force had detailed electronic records identifying the specific programs that were subject to BTRs and withholds, including the donor or recipient for each BTR transaction and the reasons for most of them. The information on BTRs and withholds was not available below the program level, such as for a project within a program. Some of the BTR data did not match the data contained in the DD 1416s for fiscal years 2002 and 2003. Air Force officials attributed the discrepancies to adjustments that had been made to BTRs in its management information system and said the problem has been corrected for fiscal year 2004. MDA utilizes a single, computerized data collection system to record and manage changes to program funding levels. The system records BTRs and withholds for all of its programs, including the donors and recipients for BTRs and the reasons for them. The system operates on a real-time basis and is available to all participants from the headquarters unit to the individual program offices. The system maintains multiple years of data, and the data are electronically retrievable. MDA’s BTR data reconciled with the DD 1416s for fiscal year 2003. The Office of the Secretary of Defense has data collection systems for tracking BTRs and withholds for the research and development programs it manages, but these systems were not available to record BTRs for fiscal years 2002 and 2003 appropriations. Consequently, the office did not provide records of individual BTRs. Officials managing these programs stated that a data collection system to record and manage appropriated funds would be helpful, and they are working to improve the system they installed for fiscal year 2004. We found that the Air Force, Army, Navy, and MDA executed 1,927 BTRs in fiscal year 2003, totaling about $1 billion. This amounted to about 2 percent of their research and development funds. These transactions either reduced or added to most research and development programs’ funding. Although we did not observe any instances in which DOD’s use of BTRs exceeded the thresholds, our work was not conclusive on this point as we did not design steps to assess compliance with thresholds. Of the programs affected by BTRs, 48 percent experienced a net loss in funding after accounting for additions and reductions. The effect of BTRs on some programs was so significant that the programs were essentially redirected. With regard to withheld funds, the Army, Navy, and Air Force, and the Office of the Secretary of Defense withheld a total of about $2.8 billion in fiscal year 2003. The Office of the Secretary of Defense withheld 56 percent of the funds, while the military departments withheld the rest. MDA did not report withhold data except for those funds withheld from MDA by the Office of the Secretary of Defense. Because DOD organizations have learned to expect a volume of changes each year—although the specifics are unpredictable—they have developed strategies to anticipate possible DOD decisions to reprogram or withhold portions of their funding. Officials noted that one strategy involves increasing programs’ budget requests to cover anticipated BTRs and withholds so programs can continue to perform at planned levels. Officials from the military departments, MDA, and the Office of the Secretary of Defense cited several reasons for implementing BTRs and withholds, including accommodating unanticipated changes or events, implementing congressional mandates, and, in the case of some withholds, controlling the execution of individual programs. In fiscal year 2003, DOD reprogrammed about $1.7 billion in research and development funds. About $1 billion of this money—59 percent—was reprogrammed by the Air Force, Army, Navy, and MDA using BTRs. This amounted to about 2 percent of the research and development funds for these organizations. The number and amount of BTRs executed in fiscal year 2003 varied by organization, as shown in table 2. Additional details for fiscal years 2002 and 2003 are contained in the appendixes. MDA, which has a total of 12 programs (or 2 percent of the total), accounted for 34 percent of the total dollar value of BTRs and 21 percent of the total number of BTRs. MDA programs generally have larger research and development budgets than other DOD organizations’ programs. MDA programs in fiscal year 2003 ranged in size from about $7.5 million to about $3.2 billion, while the smallest program among the three military departments amounted to $313,000 and the largest was about $1.7 billion. Additional details are shown in appendix III, table 9. Of the programs that experienced BTRs in fiscal year 2003, 48 percent had BTRs that resulted in a net loss of funds, while 28 percent had BTRs that resulted in a net gain, as figure 2 shows. The percentage of programs gaining and losing funds through BTRs varied across organizations. These percentages—and the specific programs involved—also varied from year to year. (App. III, fig. 5, shows percentages for fiscal year 2002.) Some programs lost or gained such a substantial portion of their designated funding that they were essentially redirected. For example, in fiscal year 2003, the Air Force’s KC-10S aircraft program was increased by 92 percent through four BTRs. In contrast, the Air Force’s C-130J aircraft program was reduced by 81 percent through four BTRs. More details on these programs are shown in table 3. The five programs in each of the three military departments and MDA with the largest funding reductions and additions through BTRs during fiscal year 2003 are shown in tables 4 and 5. Additional details are shown in appendix III, tables 10-17. Again, patterns vary from year to year, as a comparison of these appendix tables shows. Funds taken from programs through BTRs may be applied to multiple other programs. For example, in 2003, the Air Force and the Navy reprogrammed a combined total of about $29 million from the Joint Strike Fighter to 15 other programs. Additional details are provided in appendix III, tables 18-21. Similarly, the Army reprogrammed almost $8.7 million from the Logistics and Engineer Equipment Program to 12 other programs in fiscal year 2003, and the Navy reprogrammed almost $21.5 million from the V-22 aircraft program to 8 other programs. Overall, 76 percent of all research and development programs had at least 1 BTR, and 54 percent had more than 1, and 14 percent had 6 or more in fiscal year 2003, as table 6 shows. The Navy and MDA had more programs with substantial numbers of BTRs than did the Air Force or the Army. Specifically, 27 percent of Navy programs and 66 percent of MDA programs had 6 to 35 or more BTRs. Only 3 percent and 6 percent of Air Force and Army programs, respectively, had this many. Additional details are shown in table 7 and in appendix III, tables 22 and 23. As figure 3 shows, 42 percent of programs had both BTR reductions and additions in fiscal year 2003. The percent of such programs ranged from 28 percent in the Army to 80 percent in MDA. Additional details are shown in appendix III, figure 5 and tables 24-32. Patterns vary from year to year, as those tables show. In fiscal year 2003, the DOD organizations we reviewed withheld a total of about $2.8 billion in appropriated funds. The amounts withheld varied widely, as table 8 shows. MDA officials said that while MDA does not always release all appropriated funds immediately to its programs, MDA does not consider such non-releases to be withholds and did not provide this data to us. The Office of the Secretary of Defense, which withheld substantially more than other organizations, accounted for 56 percent of the total amount withheld. Withholds amounts for fiscal year 2002 are in appendix III, table 33. The military departments, MDA, and Office of the Secretary of Defense officials cited several reasons for implementing BTRs and withholds. Generally, the reasons involved accommodating unanticipated changes or events, implementing congressional mandates, and, in the case of some withholds, controlling the execution of individual programs. Officials from each of the DOD organizations noted that because they need to estimate research and development program needs and budgets 2 or more years in advance of receiving appropriated funds, by the time the funds are actually received, factors upon which estimates are based may have changed and unforeseen events may have occurred. Officials also noted that current levels of flexibility are too limited given the adjustments that may be needed to deal with such changes. For example, testing on a program may have been accelerated or delayed; new requirements may have arisen; design changes may be required; a program’s costs may have increased; new technologies may have emerged; priorities may have shifted; and unexpected events, such as operations in Afghanistan and Iraq, may have occurred. Consequently, funding changes may be needed after funds are appropriated. Military department and MDA officials stated that having the flexibility to adjust funding in such circumstances allows them to make better use of available funds by fixing a problem promptly, taking advantage of an opportunity, or responding to an unexpected contingency. For example, in fiscal year 2003, the Air Force reprogrammed almost $10 million to the KC-10S program to address unexpected cost increases in the cockpit modernization program. According to Air Force officials, obtaining these funds when they were needed avoided contract and schedule issues that would have been detrimental to the program. Ultimately in this case, the cockpit modernization program continued to experience unexpected cost increases and schedule slippages, and the Air Force later cancelled the program. In another example, Army officials stated that the presence of improvised explosive devices in the Iraq conflict has made explosive disposal robots more important than the budget preparation process anticipated 3 years ago. They noted that the Army is using some of its BTR flexibility to address this higher priority need. Military department officials told us they also withhold funds for unexpected events or opportunities that may arise during the fiscal year. These withheld funds are then available for reprogramming as needed. For example, the Army withheld and subsequently reprogrammed about 2.3 percent of funds from most programs in fiscal year 2003 to cover expenses of ongoing operations. Officials said that this is the only year the Army instituted a general withhold on its programs. The Navy withheld 2 percent from most research and development programs in fiscal year 2002 and 1 percent in fiscal year 2003. These funds were used to address unexpected contingencies and emerging technological requirements. While Air Force officials stated that they do not routinely withhold funds from all programs, the Air Force Research Laboratory withholds about 5 percent from all laboratory programs to provide for its headquarters unit. The Office of the Secretary of Defense, Research and Development, withholds and subsequently reprograms as necessary about 10 percent from the research and development programs it manages to provide for contingencies and to cover reductions resulting from statutory requirements. Military department officials also use withholds to fund statutory obligations. For example, DOD is required by statute to set aside research and development funds for small business concerns to conduct research projects that have the potential for commercialization. Two programs are supported with these funds: the Small Business Innovation Research Program, which stimulates early-stage research and development by small business concerns; and the Small Business Technology Transfer Program, which funds cooperative research and development projects involving a small business and a research institution. The military departments and MDA vary in the way they set aside the funds for these statutory obligations. This variation provides these organizations with additional flexibility in adjusting appropriated research and development funds. In 2003, the Army and the Navy exempted some intelligence programs from the Small Business Innovation Research and the Small Business Technology Transfer assessments. They then withheld the funds needed to cover these assessments from the remaining programs. Air Force officials informed us that they reallocate the assessments during the fiscal year to adjust funds available to programs. For example, in fiscal year 2002, the Air Force used a BTR to restore the Small Business Innovation Research assessment it had earlier made against the B-2 program, to provide the program with more money. Other programs were assessed a higher amount to make up the difference. In addition, military department officials use withholds to allocate rescissions and reductions that are included in appropriations acts and cancel appropriated funding. Rescissions or reductions may apply specifically to some or all research and development accounts or across- the-board to other appropriations accounts. For example, for fiscal year 2003, because of a change in projected inflation estimates, Congress directed a reduction of $1.4 billion across all operations and maintenance, procurement, and research and development appropriations accounts, with the reduction to be applied proportionally to each program within each account. To implement this reduction, the Air Force and Navy used withholds to reduce research and development programs’ appropriations by $105.6 million and $78.2 million, respectively. Officials from the Office of the Secretary of Defense noted that they withhold funds from research and development programs to make certain programs achieve a particular milestone or other event and to assure that additional funds appropriated by Congress beyond the program’s requested budget reach the intended program and can be used effectively. For example, the Office of the Secretary of Defense sometimes withholds a portion of a program’s appropriation to assure the program completes a report, accomplishes a test, or complies in some other way with headquarters’ direction. Often, these withholds are in response to a congressional directive contained in authorization or appropriations report language. Funds are usually released once the program has accomplished the required task. Each year, Congress adds funds to certain programs’ requested budgets. Officials observed that there is often some uncertainty as to which program Congress intended these funds to benefit and whether those programs can effectively use the funds. Consequently, they withhold the funds until they can determine which programs are to receive the additional funds and to ensure that those programs can use the money effectively before releasing the funds. In fiscal year 2002, these types of withholds represented a large percentage of the Office of the Secretary of Defense withholds, amounting to nearly $2.7 billion. However, the Office of the Secretary of Defense has subsequently reduced its withholds of congressional additions, while some of the departments have increased theirs. DOD, military department, MDA, and program officials informed us that while they can expect with some confidence that reprogramming and withholds will occur during the budget year, they cannot predict the timing or amount. In anticipation of these funding adjustments, program and military department officials noted that program budgets are often increased during preparation. While this does not appear to be an unusual practice, we did not assess its extent or magnitude. This practice allows programs to perform at planned levels if and when these actions actually occur. Program officials stated that in cases for which anticipated reductions were underestimated, schedules are sometimes slowed down in response to BTRs and withholds. For example, tests or other scheduled events may be delayed until withheld funds are released or the funds lost through BTRs are paid back. If funds are not paid back, program schedules may be permanently slowed. For example, according to Air Force officials, when the Air Force reduced the C-130 avionics modernization program’s by $35 million in fiscal year 2003, the program manager extended the development program and renegotiated the development contract. Funds also may be informally held back after they have been released to programs. That is, program managers may be told not to spend some portion of the funds that have actually been released to their programs in order to provide funds for later reprogramming. This differs from withholds because withholds can only be implemented before funds are released to programs. The informal holding back of funds occurs after funds are released, is done verbally, and is not recorded. This essentially creates a pool of reserved funds that can be used to meet anticipated but not fully identified requirements. MDA officials informed us that the Office of the Secretary of Defense requires them to informally hold millions of dollars each year in anticipation of the annual omnibus reprogramming. Omnibus reprogramming is a compilation of several above-threshold reprogrammings sent to Congress late in the fiscal year. For example, in fiscal year 2003, the Office of the Secretary of Defense required MDA to informally hold about $23 million and later used about $6 million of this money for omnibus reprogramming. The remaining funds were then released to MDA. Congress has continued to express concerns about how DOD is adjusting funding for research and development programs and about the adequacy of information from DOD about such actions. Congress recently revised its guidance to DOD on reprogramming and withholding appropriated funds for research and development and on keeping Congress adequately informed about such actions. For fiscal year 2004, congressional guidelines had tightened the threshold for decreases to $10 million or 20 percent of the program’s appropriation, whichever was less, rather than the greater provision of fiscal year 2003. For fiscal year 2005, Congress maintained the tightened thresholds of 2004 and added new direction on the reprogramming and withholding of appropriated funds for research and development programs. Furthermore, Congress directed DOD to provide better information on reprogrammings and withholds both in the short- and the long-term. Specifically, Congress directed: the Secretary of Defense to provide data by January 31, 2005, on the adequacy and use of the DOD’s current reprogramming and withholding practices; DOD to work with congressional defense committees on a method providing timely and accurate data on reprogramming activity (both below and above the threshold) and the application of statutory and administrative withholds; that reprogramming data be available on a least a monthly basis, potentially in conjunction with DOD’s DD 1002 reports; and that DOD should transmit the data electronically, if feasible, to congressional defense committees. DOD has a legitimate need for a degree of flexibility to adjust the funding levels designated for individual research and development programs. Congress has a legitimate need to maintain oversight over the funds it has appropriated. Ideally, both sets of needs can be met through a combination of approval thresholds for adjusting funding levels and reports on how funds have been adjusted. However, DOD has not provided information of sufficient quality and detail to Congress on how it adjusts appropriated research and development funds through BTRs and withholds. In reaction, Congress has tightened thresholds to a level of flexibility DOD officials believe is too limited. In passing the fiscal year 2005 DOD Appropriations Act, Congress has directed DOD to take several actions to improve the information it provides to Congress regarding DOD’s use of reprogrammings and withholds. The direction for DOD and the congressional defense committees to work together provides an excellent opportunity for DOD to make changes that can serve the needs of both Congress and DOD. These changes may not be difficult to make, as much of the desired information already exists within DOD and some of the existing data collection systems are already automated and contain more detailed information than currently reported. How DOD responds to this direction will be critical to realizing this opportunity. DOD provided us with written comments on a draft of this report. The comments appear in appendix II. DOD commented that our report should note more prominently that we found no evidence the department violated existing congressionally approved reprogramming thresholds. DOD expressed concern that Congress had a misconception that the department had violated existing threshholds and policies and had used the BTR process to initiate new start programs. DOD disagreed that its recent reports to Congress provide BTR information of limited quality and cited other information it provides to Congress in addition to the DD 1416. It pointed out that the formats for the information were developed with and approved by committee staff to satisfy Congress’s needs. DOD did note that the issues we raised on the quality of information it provides can be addressed, and that DOD was open to suggestions and will gladly work with the committee staff to satisfy its needs. DOD offered several suggestions to put the findings of the report more in context. These included providing the percentage value of BTRs along with the dollar value, and noting the reasons DOD uses BTRs. DOD also noted that the issue of withholds is separate from BTRs and that they are used primarily to temporarily hold funding from execution until adequate justification is provided that the resources will be executed efficiently and effectively as intended by Congress. DOD stated that it was unaware of the practice of increasing of budget requests to cover anticipated BTRs and withholds and that this was against DOD policy. DOD’s willingness to work with Congress is a constructive response that can lead to reporting changes that can meet the needs of both Congress and DOD. While current reporting formats may have been developed with committee staff to meet its needs, recent congressional direction suggest these needs have changed. Congress has required DOD to provide better and more timely information on reprogramming and withhold activities. We have clarified the language in the report that we did not observe any instances in which DOD’s use of BTRs exceeded thresholds, but we cannot be conclusive on this point as we did not design steps to assess compliance with thresholds. The same observation and qualification applies to whether BTRs were used to start new programs. We did analyze the additional information DOD provides to Congress on BTRs, specifically budget exhibits and monthly accounting reports. However, in their current format, these reports do not provide detailed information on individual BTRs or any information on withholds. To provide additional context for our findings, we have added the percentage value of BTRs in addition to their total dollar value, however, we do not believe it is necessary for individual programs. While the draft report does present the reasons DOD uses BTRs and withholds, we have added language earlier in the report to highlight these reasons. We believe the distinction between BTRs and withholds is adequately clear in the report. We note that while withholds are used to ensure programs are properly executed, we did find instances in which withholds were used to make funds available for reprogramming. We are sending copies of this report to the Secretary of Defense; the Secretaries of the Army, the Navy, and the Air Force; the Director, Missile Defense Agency; and interested congressional committees. We will also make copies available to others upon request. In addition, the report will be available at no charge on the GAO Web site at http://www.gao.gov. If you or your staff has any questions concerning this report, please contact me at (202) 512-4841 or D. Catherine Baltzell at (202) 512-8001. Other contacts and key contributors are listed in appendix IV. To determine the quality of the information available about the Department of Defense’s (DOD) use of below-threshold reprogrammings (BTR) and withholds, we reviewed the DOD Financial Management Regulation and recent congressional guidelines on reprogramming and withholds; various DOD internal reports and reports to Congress; and data from financial management systems recorded for the research and development programs from the Army, Air Force, Navy, and Missile Defense Agency (MDA). We reviewed DOD policy and interviewed decision makers to gain an understanding of how various reports are prepared and to obtain information about BTRs and withholds. Our interviews included officials in the research and development and financial management offices of the Air Force, Army, Navy and MDA; financial management and acquisition policy decision maker offices including the Office of the Secretary of Defense (Comptroller); Office of the Director of Defense Research and Engineering, Director of Plans and Programs; Assistant Secretary of the Air Force for Acquisition; Office of the Naval Research Controller; Aeronautical Systems Command Financial Management office; Air Force Research Labs Headquarters, Propulsion Directorate, and Sensors Directorate; Assistant Secretary of the Army for Financial Management and Comptroller, Investment Division-Army Budget Office; Deputy Assistant Secretary of the Army, for Plans, Programs, and Resources Office; Army Science and Technology Integration Office; and Army Research Laboratory Headquarters. In accordance with federal internal control standards, we defined quality of information as measured by such factors as timeliness, accessibility, accuracy, and appropriateness of content. In addition, we interviewed program officials and collected data from 13 research and development programs: Air Force (5), Army (4), and Navy (4). The programs were selected on the basis of three criteria: a laboratory, a program with significant net reduction or addition of funds through BTRs, and a program with a relatively high number of both reductions and additions of funds through BTRs. We interviewed program officials for the Air Force’s C-130 Airlift and C-130J, and KC-10S; the Air Force Research Lab’s Aerospace Propulsion and Aerospace Sensor’s Labs; the Army’s Tactical Unmanned Aerial Vehicles, and Line-of-Sight Anti-Tank Missile program offices; the Army’s Research Lab’s Weapons and Materials Research, and Survivability/Lethality Directorates; the Navy’s Ocean Engineering Technology Development, and Consolidated Training Systems Development Program; the Office of Naval Research Systems Advanced Technology program; and the Naval Ship and Aircraft Support program. To determine the amount and volume of BTRs and withheld funds, we obtained available data from the Air Force, Army, Navy, and MDA data collection systems on actual BTRs and withholds and developed an integrated, electronic database on adjustments to designated funding levels for each research and development program. In developing our database, we assessed the reliability of the available data, which includes recognizing the limitations of the data as we have discussed in this report. We performed electronic testing of required data elements, reviewed existing information about the data and the systems that produced them, and interviewed agency officials knowledgeable about the data. We determined that the data were sufficiently reliable for the purpose of this report. We conducted multiple analyses of BTR amounts and volume. We used readily available, off-the-shelf commercial software to develop and analyze our database. We performed our review from November 2003 to July 2004 in accordance with generally accepted government auditing standards. In addition, key contributors to the report include Lily J. Chin, Christopher A. Deperro, Joseph E. Dewechter, Alan Frazier, Ivy Hubler, Matthew R. Mongin, Bonita J.P. Oden, Katrina D. Taylor, Bradley L. Terry, and Adam Vodraska. Coast Guard: Station Spending Requirements Met, but Better Processes Needed to Track Designated Funds. GAO-04-704. Washington, D.C.: May 28, 2004. Military Housing: Opportunities Exist to Better Explain Family Housing O&M Budget Requests and Increase Visibility Over Reprogramming of Funds. GAO-04-583. Washington, D.C.: May 27, 2004. Future Years Defense Program: Actions Needed to Improve Transparency of DOD’s Projected Resource Needs. GAO-04-514. Washington, D.C.: May 7, 2004. Budget Issues: Reprogramming of Federal Air Marshal Service Funds in Fiscal Year 2003. GAO-04-577R. Washington, D.C.: March 31, 2004. Budget Process: Long-Term Focus Is Critical. GAO-04-585T. Washington, D.C.: March 23, 2004. Major Management Challenges and Program Risks: Department of Defense. GAO-03-98. Washington, D.C.: January 2003. Defense Budget: Improved Reviews Needed to Ensure Better Management of Obligated Funds. GAO-03-275. Washington, D.C.: January 30, 2003. Performance Budgeting: Opportunities and Challenges. GAO-02-1106T. Washington, D.C.: September 19, 2002. Congressional Oversight: Challenges for the 21st Century. GAO/T-OCG-00-11. Washington, D.C.: July 20, 2000. Managing in the New Millennium: Shaping a More Efficient and Effective Government for the 21st Century. GAO/T-OCG-00-9. Washington, D.C.: March 29, 2000. Congressional Oversight: Opportunities to Address Risks, Reduce Costs, and Improve Performance. GAO/T-AIMD-00-96. Washington, D.C.: February 17, 2000. The Government Accountability Office, the audit, evaluation and investigative arm of Congress, exists to support Congress in meeting its constitutional responsibilities and to help improve the performance and accountability of the federal government for the American people. GAO examines the use of public funds; evaluates federal programs and policies; and provides analyses, recommendations, and other assistance to help Congress make informed oversight, policy, and funding decisions. GAO’s commitment to good government is reflected in its core values of accountability, integrity, and reliability. The fastest and easiest way to obtain copies of GAO documents at no cost is through GAO’s Web site (www.gao.gov). Each weekday, GAO posts newly released reports, testimony, and correspondence on its Web site. To have GAO e-mail you a list of newly posted products every afternoon, go to www.gao.gov and select “Subscribe to Updates.” | Congress recognizes that the DOD needs some flexibility to adjust research and development program levels. A key mechanism--below threshold reprogramming (BTR)--enables DOD to adjust program funding levels without seeking prior congressional approval as long as a certain dollar amount or percentage threshold is not exceeded. In response to a mandate by the appropriations committees, this report addresses (1) the quality of the information available about DOD's use of BTRs and withheld funds in fiscal years 2002 and 2003 and (2) the amount and volume of BTRs and temporarily withheld funds for those years. The report also addresses recent congressional direction on providing information on funding adjustments. DOD disagreed that its recent reports to Congress provide BTR information of limited quality but noted that the issues GAO raised in this regard can be addressed and that DOD was open to suggestions and will gladly work with committee staff to satisfy their needs. DOD also offered suggestions to clarify language on certain issues and to put its use of BTRs more in context. DOD's willingness to work with Congress is a constructive response that can lead to reporting changes that can meet the needs of both Congress and DOD. GAO has made appropriate clarifications of language and overall BTR context. DOD's recent reports to Congress provide BTR information of limited quality and do not contain data about funds withheld from DOD's research and development programs in fiscal years 2002 and 2003. DOD delivered its reports to Congress months after the time that Congress began considerations for the new budget, and accessibility was limited because the reports were classified. BTR data in the reports to Congress were derived through subtraction, rather than totaling the actual value of BTR transactions. The reports do not provide a complete picture of how BTRs are implemented on a program-by-program level. DOD has no overall system for maintaining detailed BTR and withhold data across organizations, although such data can be reconstructed from DOD's multiple data collection systems. GAO found that DOD organizations used BTRs frequently to increase or decrease research and development program funding levels. The Air Force, Army, Navy, and Missile Defense Agency (MDA) executed 1,927 BTRs, amounting to about $1 billion in fiscal year 2003. This amounted to about 2 percent of the research and development funds for these organizations. Among the programs affected by BTRs, about half lost funds and more than one-fourth gained funds. While the dollar amounts and frequency differed for fiscal year 2002, the patterns were similar. Although GAO did not observe any instances in which DOD's use of BTRs exceeded the thresholds, GAO's work was not conclusive on this point, as GAO did not design steps to assess compliance with thresholds. DOD withheld about $2.8 billion in funds in fiscal year 2003. Officials cited several reasons for implementing BTRs and withholds, including accommodating unanticipated changes or events, implementing congressional mandates, and, in the case of some withholds, controlling the execution of individual programs. Congress has required DOD to provide better and more timely information on reprogramming and withhold activities. |
FDA is responsible for assessing the safety, efficacy, and quality of drugs marketed in the United States. As part of this role, it oversees the drug development process and is responsible for approving new drugs for marketing. Patients with serious or immediately life-threatening illnesses and no other FDA-approved therapeutic options may be able to access treatments still in the development process through FDA’s expanded access program. The process by which a drug or biologic is developed and considered for approval for marketing in the United States involves a number of steps that include the clinical testing of the drug’s safety and effectiveness on human volunteers. Before a drug can be tested on humans, it is first tested for toxicity on animals. Following such testing, a manufacturer must submit an investigational new drug application (IND) to FDA in order to test the drug on humans. FDA’s decision of whether or not to allow the human testing to proceed is based, in part, on evidence and analysis regarding the drug’s toxicity in animals and the availability of human volunteers. Additional information about the typical process for human testing and FDA’s review processes is described below and depicted in figure 1. Before a drug or biologic can be tested on humans, it is tested for toxicity on animals. These tests are also used to gather basic information on the safety and efficacy of the drug or biologic. FDA may decide whether or not to allow the investigational drug to be tested on humans, based in part on results of the drug being tested on animals. A manufacturer that wants to test an investigational drug or biologic on humans must first submit an IND to FDA for the agency to review, and FDA must allow the IND to proceed before testing on humans can begin. The IND includes various components, such as the clinical treatment plan, which provides the detailed procedure for how humans will be tested, and Form FDA 1571, which contains a number of administrative elements pertaining to the request. See appendix I for a copy of this form. Clinical trials on humans can only begin after FDA has reviewed and allowed the application to proceed and an IRB has reviewed and approved the clinical treatment plan and reviewed the patient’s informed consent form. After receiving this approval, the manufacturer is considered the sponsor of an existing IND, and clinical trials that involve human volunteers can begin. Once in effect, the sponsor of the existing IND may amend its research plan as needed, such as to expand or otherwise change patient eligibility criteria. Testing under an amended treatment plan may only begin after the changes have been submitted to FDA and approved by an IRB. An investigational drug typically goes through three phases of clinical trials before it is submitted to FDA for marketing approval. According to FDA officials, in some cases when a new drug is being tested for a life- threatening ailment, the drug development process may be expedited by going through only one or two phases of clinical trials before an application is submitted to FDA for marketing approval. At any point during the clinical trials, FDA could issue a clinical hold on the existing IND that would delay the proposed or ongoing clinical trials. When a drug undergoing clinical trials is placed on clinical hold, it cannot be administered to any human volunteers. This includes volunteers already in a clinical trial, and no new volunteers may be recruited to clinical trials. If the drug completes a clinical trial phase and is not on clinical hold, FDA allows it to proceed to the next phase. The three clinical trial phases are detailed below: Phase I: Phase I clinical trials generally test the safety of the drug on about 20 to 80 healthy volunteers. The goal of this phase is to determine the drug’s most frequent side effects and how it is metabolized and excreted. If the drug does not show unacceptable toxicity in the phase I clinical trials, it may move on to phase II. Phase II: Phase II clinical trials assess the drug’s safety and effectiveness on people who have a certain disease or condition and typically are conducted on a few dozen to hundreds of volunteers. During this phase some volunteers receive the drug and others receive a control, such as a placebo. If there is evidence that the drug is effective in the phase II clinical trials, it may move on to phase III. Phase III: Phase III clinical trials generally involve several hundreds to thousands of volunteers and gather more information about the drug’s safety and effectiveness on different patient populations and at different dosages, again while being compared to a control. If phase III clinical trials are successfully completed, the drug may move on to FDA’s review and approval process. When seeking FDA’s approval to market and sell a drug in the United States, the manufacturer submits an application to FDA. Included in these submissions are the data from the safety and efficacy clinical trials for FDA to review. FDA uses the information in the application to either approve or not approve the drug. Based on a study looking at 10 years of data, among the drugs that enter Phase I clinical trials, on average, 9.6 percent were ultimately approved for marketing in the United States. For example, if 100 investigational drugs entered Phase I clinical trials, approximately 63 (63.2%) would advance to Phase II clinical trials, with 19 of those (30.7%) advancing to Phase III clinical trials. Of those 19 drugs, 11 (58.1%) would advance to the new drug application process, and, ultimately, 10 of those (85.3%) would be approved for marketing and sale in the United States. Through FDA’s expanded access program, licensed physicians, on behalf of their patients with serious or immediately life-threatening ailments, who have no other comparable medical options, and who are unable to participate in a clinical trial, can request and possibly access investigational drugs for treatment of the patients, if the patients meet certain eligibility requirements. FDA’s goals for the program are to facilitate the availability of investigational drugs when appropriate, ensure patient safety, and preserve the clinical trial development process. All expanded access requests must be submitted to FDA, and once received take effect within a designated time unless the agency acts to expedite or disallow them from proceeding. The expanded access process also requires the involvement of other entities, including the manufacturer that is developing the drug and must provide access to it, an IRB that must approve the expanded access treatment plan and review the patient’s informed consent form, and a physician who administers the drug. FDA categorizes expanded access requests into two broad categories— protocol requests and IND requests—and the roles and responsibilities of each of these entities within the process can vary depending on the category of the request. An expanded access protocol request aims to provide access to an investigational drug outside of a clinical trial when the sponsor of an existing IND submits a treatment plan for expanded access in an amendment to that existing IND. The manufacturer typically makes these requests and is, therefore, the sponsor of the expanded access request. The manufacturer must submit the expanded access treatment plan using a new Form FDA 1571 notifying FDA that the manufacturer is amending its existing IND to provide the investigational drug to one or more patients outside of the clinical trial. An expanded access protocol may be submitted to provide access to a single patient or to more than one patient. A manufacturer may decide to open an expanded access protocol because it has received requests for a drug that is still in clinical trials— for example, requests for terminal patients with no other options—or because it has a drug that has completed clinical trials and wants to make the drug available to patients who have no other comparable treatment options while waiting for FDA’s new drug approval response. For expanded access protocol requests sponsored by manufacturers, the roles and responsibilities of the various entities involved in the process typically are as follows: The manufacturer: In addition to submitting the request for the expanded access protocol to FDA, the manufacturer, as the sponsor of the request, is responsible for the collection and submission of data to FDA on any adverse events that occurred from administering the drug to patients who received it under the expanded access protocol. These data are included with the manufacturer’s regular adverse event data reporting to FDA under the existing IND. The physician: The patient’s physician administers the investigational drug to the patient and must report any serious adverse events to the manufacturer sponsoring the expanded access protocol. The IRB: A designated IRB must approve the clinical treatment plan that is submitted as part of the expanded access protocol application (similar to its review of the original clinical treatment plan) and review the patient’s informed consent form. FDA generally requires that all IRB reviews be completed by a full IRB—meaning the majority of members of the board participate in the review process—and FDA makes no specific exception for expanded access. An expanded access IND request aims to provide access to an investigational drug outside of a clinical trial and under a new IND. The vast majority of expanded access IND requests are opened to provide access to a single patient. A patient’s physician typically submits these single-patient requests and is, therefore, the sponsor of these requests and must submit to FDA the Individual Patient Expanded Access Application, using Form FDA 3926 or Form FDA 1571. See appendix II and appendix I for copies of these forms. In general, physicians would pursue expanded access IND requests when they learn of a drug being developed and think the benefit of giving their patient expanded access outweighs the risks. For expanded access IND requests sponsored by physicians, the roles and responsibilities of the various entities involved in the process typically are as follows: The physician: The physician first obtains a letter of authorization from the manufacturer that documents it will allow the physician to reference its existing IND information. After receiving this letter, the physician submits an expanded access request to FDA. If FDA allows the request to proceed to treatment, the physician must provide FDA with a written summary of the results at the conclusion of treatment. The manufacturer: The manufacturer decides whether it will allow the patient (or patients) access to the drug. If the manufacturer decides to give the patient (or patients) access to the drug, it gives the physician a letter of authorization. The IRB: The IRB must approve the clinical treatment plan that is submitted as part of the expanded access IND application and review a patient’s informed consent form. FDA generally requires that all IRB reviews be completed by a full IRB—meaning the majority of the members of the board participate in the review process—and FDA makes no specific exception for expanded access. Beyond these broad categories, FDA further categorizes expanded access requests (whether protocol or IND requests) by the number of patients treated and the type of situation. The agency reports data separately on four categories of expanded access requests that FDA defines as follows: 1. Single-patient. 2. Single-patient emergency, for example, for a patient who is not expected to live long enough for FDA and an IRB to review a typical single-patient expanded access request. 3. Intermediate-size generally for two patients to potentially hundreds of patients. 4. Treatment for larger widespread populations. Where the drug is at in the drug development process can affect the type of expanded access request that may be submitted to FDA. (See figure 2.) Figures 3 and 4 illustrate two common examples of situations in which expanded access requests may be submitted to FDA and the roles and responsibilities of various stakeholders for each example. They include an example of an expanded access treatment protocol request submitted by a manufacturer late in the drug development process, and an expanded access single-patient IND request submitted by a physician earlier in the process. Within FDA, the centers that oversee the pre-clinical and clinical testing of drugs and biologics, the Center for Drug Evaluation and Research (CDER) and the Center for Biologics Evaluation and Research (CBER), also review and determine whether an expanded access request for a drug or biologic is allowed to proceed. Each of the nine selected manufacturers from whom we obtained information reported having experiences with the expanded access program, but the extent of the experiences, and with what type of request, varied. Specifically, one manufacturer reported only having experience with expanded three manufacturers reported only having experience with expanded access protocol requests; and five manufacturers reported having experience with both types of requests. Of those manufacturers that had experience with expanded access IND requests, all of the requests were sponsored by physicians and were for single patients, including both emergency and non-emergency requests. Most of these manufacturers said that expanded access INDs can happen at any phase of a drug’s development, but, based upon the availability of safety and efficacy data, manufacturers are more likely to approve these requests at later phases of drug development. The numbers of single-patient IND requests these manufacturers reported receiving ranged from 39 to approximately 800. Additionally, some manufacturers reporting experience with expanded access IND requests said that they may decide to establish an expanded access protocol instead of separately considering single-patient expanded access IND requests. For example, one manufacturer reported that, once it receives an expanded access IND request for a single patient, it will proactively evaluate whether there is the potential for additional requests, and, if so, it will work to establish an expanded access protocol to cover a group of patients for FDA’s review. Another manufacturer said that it has three pathways for patients to access investigational drugs—clinical trials, expanded access protocols, and expanded access INDs—and that it will first evaluate whether a patient is eligible for its clinical trial or an expanded access protocol it has established before it will consider providing access to the drug through an expanded access IND request. Three of the nine selected manufacturers reported that their only experience with the expanded access program was with expanded access protocol requests. These manufacturers cited the following reasons for establishing expanded access protocols. One reason cited by two manufacturers was that expanded access protocols allowed them to give groups of patients access to their drugs subsequent to completion of their phase III clinical trials, pending approval of their drug for marketing. Another manufacturer said that it had already built late-phase expanded access into its overall drug development plans. Among these manufacturers, the reported numbers of patients covered under their expanded access protocols varied—ranging from 18 patients to 800 patients. From fiscal year 2012 through 2015, FDA reviewed nearly 5,800 expanded access requests and allowed nearly all of them to proceed. Specifically, of the 5,753 expanded access requests the agency reviewed, it allowed 5,697 (99 percent) to proceed. (See table 1.) According to a study using FDA data, in the rare cases when FDA did not allow a request to proceed, the most common reasons were incomplete applications, unsafe dosing, the requested drug’s demonstrated lack of efficacy for its intended use, the availability of adequate alternative therapies, and inadequate information provided in the application on which to base a decision. Nearly all of the expanded access requests FDA received and reviewed (approximately 96 percent) were for single patients (including both emergency and non-emergency requests). However, because intermediate-size and treatment requests expand access to groups of patients, more patients may have gained expanded access to drugs through these types of requests. For example, one of the selected manufacturers reported that 400 patients received its drug through an expanded access treatment protocol and anticipated further growth in the number of patients treated under that protocol by the end of 2016. Another manufacturer reported that over 1,500 patients had requested access to its treatment protocol since November 2015. FDA officials said that the agency does not keep data on the number of patients treated under intermediate-size or treatment expanded access requests. We analyzed data from the FDA divisions and offices that reviewed expanded access requests and found that most requests were concentrated among a few divisions and offices. For example, among the 16 CDER divisions that review these requests, four divisions—Anti- infective, Antiviral, Hematology, and Oncology 2—reviewed over 3,700 requests, accounting for 74 percent of all requests that CDER received from fiscal year 2012 through 2015. In contrast, during that same time period 9 other divisions reviewed a combined total of 201 requests, accounting for 4 percent of all requests received. (See table 2.) Similarly, for requests reviewed by CBER, one of its three offices—the Office of Tissues and Advanced Therapies—reviewed 484 of the 692 total requests, which accounted for approximately 70 percent of the requests reviewed by that center. (See table 3.) FDA officials told us that it only tracks response times for expanded access IND requests (not protocol requests), and, from fiscal years 2012 through 2015, the agency typically responded to emergency expanded access IND requests in less than 1 day, according to FDA data. These data also show that the agency responded to all other expanded access IND requests within the 30 days allotted to the agency, as established in regulation. FDA officials reported that, given the nature of emergency expanded access IND requests, they try to respond to these requests within hours of receiving them. From fiscal years 2012 through 2015, of the more than 2,300 emergency expanded access IND requests that were submitted, FDA’s median response time was within less than a day. (See table 4.) For non-emergency single-patient IND requests that were allowed to proceed, the median number of days to review the requests among the two centers ranged from 3 days to 19 days, and was 30 days for both intermediate-size and treatment requests. Under FDA’s rules, unless a request is not allowed to proceed, an expanded access IND request goes into effect 30 days after FDA receives it or on earlier notification by FDA that the expanded access use may begin. FDA officials told us that the agency does not track the time it takes to respond to expanded access protocol requests for various reasons. First, because there are so few protocol requests compared to expanded access IND requests, FDA officials said that the data on time frames for protocols are less meaningful. Second, because expanded access protocol requests are associated with existing INDs that have previously approved treatment plans, all expanded access protocol requests are allowed to proceed as soon as FDA receives the request, except for the treatment category of expanded access protocol requests (i.e., for large sized or widespread patient groups). FDA imposes a 30-day review period on expanded access treatment protocol requests due to the potential for exposing large groups of patients to an investigational drug. If FDA has not otherwise responded to an expanded access treatment protocol request within 30 days, the request is automatically allowed to proceed. The nine selected manufacturers from whom we obtained information reported that they consider a wide range of factors when reviewing expanded access requests. The factors ranged from those related to the specific patients who would receive a drug to how expanded access might affect the drug development process. Specific factors that were commonly reported as used in reviews by the manufacturers we spoke with included patient factors and drug development factors. Patient factors that were commonly reported included the following: The patient’s condition and treatment history. For example, one manufacturer told us that the patient must have a disease that is “serious” or “life-threatening” and have no comparable or satisfactory alternative treatment available to the patient. The patient’s eligibility for a clinical trial. For example, one manufacturer said that it assesses whether the patient is ineligible to enroll in a clinical trial for a medically valid reason or meets eligibility criteria for an ongoing trial but seeks treatment in a location without access to that trial. Whether the potential benefits of treatment outweigh the potential risks to the patient. For example, one manufacturer reported that providing investigational drugs with limited safety data in an uncontrolled setting could increase the potential for significant adverse events to occur. The bioethical implications of providing drugs through expanded access. For example, one manufacturer said that it considers whether providing its drug through expanded access for one patient ethically obligates it to provide its drug to all patients who request it. Drug development factors that were commonly reported included the following: Reducing participation in clinical trials by approving expanded access requests. For example, one manufacturer said that as patients become increasingly aware of the availability of an investigational drug through expanded access, manufacturers may face challenges enrolling a sufficient number of patients for clinical trial studies because patients receiving the drug through expanded access are guaranteed the investigational drug (as opposed to participants in a clinical trial who can have a chance of receiving a placebo). The risk that adverse events experienced by patients using an unapproved drug through the expanded access program could compromise the drug development process. For example, some manufacturers raised concerns that, because an investigational drug is administered in an uncontrolled setting under expanded access, any data reported from such adverse events could complicate the safety findings for that drug during FDA’s review of those data and contribute to a decision to not approve the drug. The potential public backlash that could arise against the manufacturer should an expanded access request be denied. For example, one manufacturer told us that denying an expanded access request could lead to negative publicity through social media. This negative publicity could, in turn, deter potential investors from funding the drug’s development. The requested drug’s availability. For example, one manufacturer said that it evaluates whether it has enough supply of its drug available to successfully administer its clinical trial, as well as to provide the drug to expanded access patients. Another manufacturer said that this is a particular concern early in the drug development process, as manufacturers typically only produce the amount of drug needed to support each clinical trial phase. Generally, the drug’s supply is low in the early clinical phases and increases in the later clinical phases. The financial and administrative resources required to fulfill the request. Manufacturers said that resource requirements could particularly impact smaller manufacturers that have fewer resources available to process expanded access requests and administer clinical trials simultaneously. FDA officials told us that the factors they consider when reviewing expanded access requests to determine whether that request should be allowed to proceed are based on criteria in regulation. Specifically, upon receipt of an expanded access request, FDA officials said that they review that request against the following four general criteria established in regulation: 1. The patient has a serious or immediately life-threatening disease or condition. 2. There is no comparable or satisfactory alternative therapy. 3. The potential benefit justifies the potential risks of the treatment, and those potential risks are not unreasonable in the context of the disease or condition to be treated. 4. Providing the drug will not interfere with clinical investigations that could support marketing approval of the drug or otherwise compromise development of the expanded access use for that drug. In addition to these general criteria applicable to all expanded access requests, FDA officials reported that they consider additional criteria in regulation that apply to specific types of expanded access. Single-patient requests: The physician must determine that the probable risk to the patient from the investigational drug is not greater than the probable risk from the disease or condition and FDA must determine that the patient cannot obtain the drug under another IND or protocol. Intermediate-size populations: FDA must determine that there is enough evidence that the drug is safe at the dose and duration proposed for expanded access use to justify a clinical trial of the drug in the approximate number of patients expected to receive it under expanded access. In addition, there must be preliminary clinical evidence of effectiveness of the drug or a plausible pharmacological effect of the drug to make expanded access use a reasonable therapeutic option in the anticipated patient population. Treatment INDs or protocols: FDA must determine that the drug is being investigated in a controlled clinical trial (or that all clinical trials of the drug have been completed) and that the IND sponsor is actively pursuing marketing approval of the drug for the expanded access use with due diligence. Additionally, when expanded access use is for a serious disease or condition, FDA must determine that there is sufficient clinical evidence of safety and effectiveness to support the expanded access use. When expanded access use is for an immediately life-threatening disease or condition, the available scientific evidence, taken as a whole, must provide a reasonable basis to conclude that the investigational drug may be effective for the expanded access use and would not expose patients to an unreasonable and significant risk of illness or injury. FDA officials told us that, in addition to these criteria, agency reviewers will also consider whether submitted requests have provided sufficient information to allow FDA to make an informed decision on the request. According to FDA officials and stakeholders, FDA has undertaken efforts to improve the expanded access program. These efforts include publishing a simplified application form, finalizing existing guidance and making changes to its website for single-patient expanded access IND requests, and working with the Reagan-Udall Foundation—a non-profit established by Congress to assist FDA—to develop a website to help patients and physicians navigate the expanded access process. In response to concerns raised by patients and physicians that the process for physicians trying to request expanded access to drugs for single patients was complex and cumbersome, FDA issued a new simplified, alternative application form for these requests (Form FDA 3926) in June 2016, finalized its related guidance, and made changes to its website. According to FDA, prior to these changes physicians who wanted expanded access for a single patient had to complete and submit the same form that manufacturers complete when establishing clinical trials (Form FDA 1571). According to FDA officials, the new form requires the physician to complete 11 elements of information, far fewer than the 26 elements identified on Form FDA 1571. FDA officials estimate that the new application will take physicians, on average, 45 minutes to complete. In addition to the new application, FDA finalized another guidance document which provided more details on the implementation of FDA expanded access regulations, to further assist physicians in the expanded access process. FDA has also redesigned its expanded access website pages to explain the new form and guidance document in detail. Most stakeholders, including physicians, spoke positively about the new application and some said the new application is easier and takes less time to complete compared to Form FDA 1571. However, even with these changes, a few of the stakeholders that we spoke with said the revised website and forms may still be hard to understand, particularly for physicians and patients who have no prior experience with expanded access requests. In response to concerns from patients and patient advocates that it is difficult to locate and understand information about single-patient expanded access IND requests, FDA asked the Reagan-Udall Foundation to develop a website—referred to as the Expanded Access Navigator—that will help physicians and patients find relevant information about the process. According to the foundation’s proposal, the Navigator will include a directory of manufacturers’ expanded access policies, procedures, and points of contact. The Navigator will also offer information on IRBs and reporting requirements for physicians. Foundation officials also told us that FDA has been helping with this effort by identifying issues and reviewing the content of the Navigator, and that the website is expected to launch in June 2017. Foundation officials noted that key challenges with the website include determining how to keep its information current and how to get potentially cautious manufacturers to provide the needed information. Some stakeholders told us they were skeptical the website could be maintained with updated information or were concerned that it could be a duplication of the information found on ClinicalTrials.gov. However, the proposal for the Navigator website states that it would not duplicate the information on ClinicalTrials.gov. Other stakeholders told us that the Navigator could help patients quickly and efficiently obtain information on drug manufacturers’ expanded access policies and information. This type of website appears to complement a provision in the recently enacted 21st Century Cures Act, which requires manufacturers to make their expanded access policies publically available. Some stakeholder groups are taking steps to improve the expanded access process through efforts to streamline the IRB process, help manufacturers manage expanded access requests for drugs, and increase patient access through legislative changes. In response to concerns raised by stakeholders, including manufacturers and patient advocacy groups, that IRB involvement in the expanded access process increases the time it takes for patients to obtain access to drugs in single-patient IND situations and that IRBs lack a full understanding of the expanded access program, the WCG Foundation is developing a project to streamline the IRB process and educate IRBs. According to the foundation officials, the timeliness of IRB reviews is hindered by the IRB’s unfamiliarity with the expanded access review process, which may occur only once every few years for some IRBs. In addition, foundation officials said that even though FDA has developed the abbreviated Form FDA 3926 for physicians to use for single-patient expanded access IND requests, some IRBs continue to require the use of the longer form (Form FDA 1571) as the basis for their review of the application, which could slow the process further. See appendix I for a copy of Form FDA 1571 and appendix II for a copy of Form FDA 3926. The foundation’s project aims to overcome these obstacles by working with IRBs to meet and respond to a physician single-patient IND request within 72 hours from the date the request was received. In addition, they must agree to adopt FDA’s simplified application (Form FDA 3926) for single-patient IND requests. Some of the intended outcomes for the project include establishing a core group of IRBs with expanded access experience, streamlining the IRB process by providing the IRB community with a standard form for reviewing expanded access requests, and educating the broader national IRB community on using a streamlined IRB process. FDA officials said the agency supports WCG’s efforts and is meeting with foundation officials on a regular basis. Some of the stakeholders that we spoke with noted that more education and guidance for IRBs on how to handle expanded access requests is needed. To address concerns that drug manufacturers’ decisions on expanded access requests could be biased or unfair, the drug manufacturer Janssen Pharmaceuticals Companies of Johnson & Johnson is piloting a process through which it receives recommendations about which patients should receive expanded access from a third party group. Specifically, in May 2015, Johnson & Johnson announced a partnership between Janssen and the Compassionate Use Advisory Committee (CompAC) at the New York University (NYU) School of Medicine’s Division of Medical Ethics. At the time the committee was established, Janssen was receiving numerous expanded access requests for a drug it was developing to treat a form of cancer, but the drug had not yet been approved for marketing by FDA. According to officials from Janssen and NYU CompAC, Janssen decided it needed help with allocating the drug fairly and transparently to patients outside of clinical trials. The committee, which consists of medical experts, bioethicists, and patient representatives, meets weekly to review anonymized expanded access requests submitted to Janssen, evaluate each request against a set of criteria the committee developed, and provide Janssen with a suggested approach for each request. Between July 1 and December 31, 2015, the committee recommended that Janssen approve 60 of 76 requests that it reviewed. Janssen reported that it approved all 60 of these requests recommended by the committee, and, based on the positive experience with the pilot, the manufacturer is planning to expand the program to additional investigational drugs. In an effort to help facilitate patient access to investigational drugs, the Goldwater Institute—a public policy research organization—developed model legislation for states. The institute’s model legislation, which is referred to as Right-to-Try, would place limitations under state law on liability lawsuits and licensing actions against individuals or entities involved in the care of individuals seeking expanded access. The institute officials stated that such legislation would provide incentives for manufacturers and physicians to provide access to such drugs. According to the institute’s officials, the model legislation applies only to drugs that have successfully completed phase I clinical safety trials. According to the Goldwater Institute, as of June 2017, 37 states had enacted Right-to-Try laws similar to this model. The stakeholders we spoke with, including representatives of drug manufacturers and patient and physician advocacy groups, reported concerns about these legislative changes: Some contended that the laws would not help patients gain access to investigational drugs because they do not compel manufacturers to give access. As we previously noted, manufacturers have cited various reasons why they may not give a patient access to their investigational drug, and it is unclear to what extent these laws would address these concerns. Others raised concerns that the laws might give patients false hope that experimental drugs will cure them. Thus, patients may not fully consider the risks associated with these drugs, which may not be effective and which could potentially be more harmful than no treatment. FDA reported using expanded access safety data, specifically adverse events data, in a few cases in approving new drugs for marketing in the United States and not more widely because expanded use situations generally lack controls used in most clinical trials. FDA guidance specifies that safety data, which include any unexpected adverse events that are associated with the use of a drug, even during expanded access use, must be reported along with safety data from clinical trials. Agency officials noted that these data can contribute important safety information that might not otherwise be collected in clinical trials and that they take into account the context of the expanded access situation, such as use in patients with serious or life-threatening ailments, when reviewing new drug applications (NDA) and biologics license applications (BLA). For example, officials said that in some cases adverse events data from expanded access use can identify rare side effects not detected in clinical trials, as well as inform FDA reviewers of any safety issues involving patient populations that were not otherwise included in the drug’s clinical trials. FDA’s primary goal of the expanded access program is to allow patients with no other options access to investigational drugs when appropriate. Data from expanded access use can also help FDA meet its agency goal of collecting meaningful data about the use of investigational drugs. However, several stakeholders we spoke with, including the selected manufacturers, raised concerns that FDA is not clear about how it uses expanded access adverse events data in its review of NDAs and BLAs. Some of the manufacturers noted that use of such data may influence FDA in making final approval decisions and that this possibility can contribute to a manufacturer deciding not to grant patients access to their drug through the expanded access program. Some of the manufacturers reported that they have concerns about the possibility that FDA’s use of adverse events data from expanded access requests would result in a clinical hold on their drug, which would halt all testing on human subjects and, as a result, delay the drug’s development process. One study included a review of ten years (2005 through 2014) of expanded access data to determine how often a clinical hold was put on a drug that was obtained via expanded access. This review only found two instances in which adverse events from expanded access use contributed to a decision to have a clinical hold put on a drug. However, manufacturers continued to raise concerns about how FDA uses adverse events data from expanded access use. FDA briefly mentions its perspective on how adverse events data from expanded access are viewed in NDAs and BLAs; but, the information is vague and is not consistently communicated in other documents FDA uses to communicate with manufacturers on expanded access use. Specifically, our review of FDA’s regulations and nine related documents FDA uses to communicate with manufacturers regarding expanded access use found little information communicating how FDA uses adverse events data from expanded access in new drug application reviews. Our review included FDA’s three new guidance documents on expanded access, four letters of acknowledgement FDA sends to sponsors after they submit an expanded access request, and two guidance documents on IND safety reporting (a 2012 final document and 2015 draft of new guidance). Only one of the documents—its expanded access treatment use guidance that was issued in June of 2016—refers to how expanded access data might be used by FDA in the drug approval process. According to FDA officials, it included this reference in response to manufacturer’s requests that more clarity be provided on how these data would be used. Although FDA took steps to improve its communication on this, the information in the document is vague in that it contains few details and no specific examples. The specific language is as follows: “…There are a small number of cases in which FDA has used adverse event information from expanded access in the safety assessment of a drug. However, FDA reviewers of these adverse event data understand the context in which the expanded access use was permitted (e.g., use in patients with serious or immediately life-threatening diseases or administered in a clinical setting (not clinical trial)) and will evaluate any adverse event data obtained from an expanded access submission within that context….” According to standards for internal control in the federal government, management should ensure adequate means of communicating with external stakeholders who have a significant impact on the agency achieving its goal. While FDA officials told us that they believe manufacturers are aware of how the agency uses adverse events data from expanded access use, some of the manufacturers and other stakeholders told us they did not think the guidance was clear. Some manufacturers also noted that the lack of clear information about how FDA uses these data can influence their decision not to give patients access to their drugs. This could impact FDA’s goal of facilitating expanded access to drugs for treatment use by patients with serious or life-threatening diseases or conditions, when appropriate. FDA’s expanded access program was established to facilitate access, when appropriate, to investigational drugs for certain patients when no other comparable medical options are available. Although FDA provides clear guidance on the expanded access data that must be submitted by physicians and manufacturers and recently took steps to communicate how it will use these data, the agency’s communication lacks clarity and specificity. In addition, this information is not consistently communicated in other documents that FDA uses to communicate with manufacturers about the program. Manufacturers and other stakeholders expressed concerns about this lack of clarity, and some noted that, without a better understanding of the how the data will be used, they may be more likely to deny expanded access requests for fear that any adverse events associated with these often terminally ill patients may delay the development of the drug should FDA place a clinical hold due to the adverse event. Such delays in clinical trials can have a significant impact on a manufacturer, especially on small companies trying to make a drug available to a larger patient population. Without clearly communicated information from FDA on how adverse event data from expanded access is used, manufacturers do not have the information they need to make informed decisions about expanded access. To help FDA meet its goal of facilitating expanded access to investigational drugs by patients with serious or life-threatening diseases or conditions, when appropriate, the Commissioner of FDA should clearly communicate how the agency will use adverse event data from expanded access use when reviewing drugs and biologics for approval for marketing and sale in the United States. We provided a draft of this report to HHS for comment. In its comments, reproduced in appendix III, HHS concurred with our recommendation. HHS noted that while there have only been two instances in which adverse event data have contributed to decisions to temporarily put development of investigational drugs on partial clinical holds, additional clarity on how FDA uses such data from expanded access use may allay manufacturers concerns. HHS also provided technical comments, which we incorporated as appropriate. We are sending copies of this report to the congressional addressees, the Secretary of Health & Human Services, and other interested parties. In addition, the report is available at no charge on the GAO website at http://www.gao.gov. If you or your staffs have any questions about this report, please contact me at (202) 512-7114 or [email protected]. Contact points for our Offices of Congressional Relations and Public Affairs may be found on the last page of this report. GAO staff who made key contributions to this report are listed in appendix IV. In addition to the contact named above, Gerardine Brennan, Assistant Director; Carolyn Garvey, Analyst-in-Charge; Nick Bartine; George Bogart; Laurie Pachter; Vikki Porter; and Dharani Ranganathan made key contributions to this report. | FDA's goal for the expanded access program is to allow patients with immediately life-threatening and serious ailments access to investigational drugs when appropriate. Stakeholders have raised concerns that FDA's process is confusing or burdensome, particularly for the entities that have roles in the process—such as physicians, manufacturers, and institutional review boards. GAO was asked to examine the expanded access program. Among other objectives, GAO examined 1) what is known about the number, type, and time frames of expanded access requests received by FDA; 2) what actions FDA and other stakeholders have taken to improve expanded access; and 3) how FDA uses data from expanded access in the drug approval process. GAO reviewed regulations and FDA documents and analyzed FDA data on the numbers and types of expanded access requests it received from FY2012 through 2015, the most recent at the time of the review. GAO also interviewed FDA officials and other stakeholders including nine manufacturers—selected to represent large and small companies—and patient and physician representatives. Under the Food and Drug Administration's (FDA) expanded access program, patients with serious or life threatening ailments and no other comparable medical options can obtain access to investigational drugs outside of a clinical trial. Expanded access requests must be submitted to FDA but manufacturers must also grant permission for patients to access their investigational drugs. Of the nearly 5,800 expanded access requests that were submitted to FDA from fiscal year 2012 through 2015, FDA allowed 99 percent to proceed. Almost 96 percent of these requests were for single patients (either emergency or non-emergency). FDA's review process for expanded access requests is designed such that all requests are either allowed or not allowed to proceed within 30 days of receiving each request. FDA typically responded to emergency single-patient requests within hours and other types of requests within the allotted 30 days. FDA and other stakeholders, including a non-profit organization and a drug manufacturer, have taken steps to improve the expanded access process and patient access to drugs. For example, in response to concerns that the process to request expanded access to drugs was complex and cumbersome, FDA simplified its website, guidance, and the forms required for the most common types of requests. Efforts by other stakeholders include a project to educate and streamline the process by which institutional review boards approve treatment plans for expanded access drug use and a pilot advisory group to help a drug manufacturer manage expanded access requests. Some states have also enacted “Right-to-Try” laws to facilitate patient access to investigational drugs. These laws provide liability and licensing protections for manufacturers and providers under state law if an adverse event—such as an adverse reaction to the drug—occurs with patients who were allowed access to investigational drugs. However, some stakeholders GAO interviewed cited concerns that these laws may not help patients access drugs, in part because they do not compel a manufacturer to provide access. Manufacturers sponsoring clinical trials must submit safety reports to FDA that include adverse events data resulting from clinical trials and any expanded access use, to be used in assessing the safety of a drug within the drug approval process. FDA reported using these data from expanded access use in a few cases during the drug approval process but not more widely, because its use does not have the same controls as clinical trials. FDA officials reported that they communicate with manufacturers on how they will use expanded access adverse events data. However, GAO's review of documents FDA uses to communicate with drug manufacturers about the expanded access program found that only one included a reference to its use of these data, and it did not include specific examples of how the data might be used. Further, some of the manufacturers told GAO the guidance was unclear. These manufacturers noted that the lack of clear information can influence their decision whether to give patients access to their drugs because of their concerns that an adverse event will result in FDA placing a clinical hold on their drug, which could delay its development. This could impact FDA's goal of facilitating expanded access to drugs for treatment use by patients with serious or life-threatening diseases or conditions, when appropriate. FDA should clearly communicate how it uses adverse events data from expanded access use in the drug approval process. FDA agreed with the recommendation. |
As the lead federal agency for maritime homeland security within the Department of Homeland Security, the Coast Guard is responsible for homeland and nonhomeland security missions, including ensuring security in ports and waterways and along coastlines, conducting search and rescue missions, interdicting drug shipments and illegal aliens, enforcing fisheries laws, and responding to reports of pollution. The deepwater fleet, which consists of 186 aircraft and 88 cutters of various sizes and capabilities, plays a critical role in all of these missions. As shown in table 1, the fleet includes fixed-wing aircraft, helicopters, and cutters of varying lengths. Some Coast Guard deepwater cutters were built in the 1960s. Notwithstanding extensive overhauls and other upgrades, a number of the cutters are nearing the end of their estimated service lives. Similarly, while a number of the deepwater legacy aircraft have received upgrades in engines, operating systems, and sensor equipment since they were originally built, they too have limitations in their operating capabilities. In 1996, the Coast Guard began developing what came to be known as the Integrated Deepwater System acquisition program as its major effort to replace or modernize these aircraft and cutters. This Deepwater program is designed to replace some assets—such as deteriorating cutters—with new cutters and upgrade other assets—such as some types of aircraft—so they can meet new performance requirements. The Deepwater program represents a unique approach to a major acquisition in that the Coast Guard is relying on a prime contractor—the system integrator—to identify and deliver the assets needed to meet a set of mission requirements the Coast Guard has specified. In 2002, the Coast Guard awarded a contract to Integrated Coast Guard Systems (ICGS) as the system integrator for the Deepwater program. ICGS has two main subcontractors—Lockheed Martin and Northrop Grumman—who in turn contract with other subcontractors. The resulting program is designed to provide an improved, integrated system of aircraft, cutters, and unmanned aerial vehicles to be linked effectively through systems that provide command, control, communications, computer, intelligence, surveillance, reconnaissance, and supporting logistics. We have been reviewing the Deepwater program for several years. In recent reports we have pointed out difficulties the Coast Guard has been having in managing the Deepwater program and ensuring that the acquisition schedule is up to date and on schedule. The existing schedule calls for acquisition of new assets under the Coast Guard’s Deepwater program to occur over an approximately 20-year period. By 2007, for example, the Coast Guard is to receive the first National Security Cutter, which will have the capability to conduct military missions related to homeland security. Plans call for 6 to 8 of these cutters to replace the 12 existing 378-foot cutters. However, in order to carry out its mission effectively, the Coast Guard will also need to keep all of the deepwater legacy assets operational until they can be replaced or upgraded. Coast Guard condition measures show that the deepwater legacy assets generally declined between 2000 and 2004, but the Coast Guard’s available condition measures are inadequate to capture the full extent of the decline in the condition of deepwater assets with any degree of precision. Other evidence we gathered, such as information from discussions with maintenance personnel, point to conditions that may be more severe than the available measures indicate. The Coast Guard acknowledges that it needs better condition measures but has not yet finalized or implemented such measures. During fiscal years 2000 through 2004, the Coast Guard’s various condition measures show a general decline, although there were year-to-year fluctuations (see table 2). For deepwater legacy aircraft, a key summary measure of the condition—the availability index (the percentage of time aircraft are available to perform their missions)—showed that except for the HU-25 medium-range surveillance aircraft, the assets continued to perform close to or above fleet availability standards over the 5-year period. In contrast, other condition measures for aircraft, such as cost per flight hour and labor hours per flight hour, generally reflected some deterioration. For cutters, a key summary measure of condition—percent of time free of major casualties—fluctuated but generally remained well below target levels. The number of major casualties generally rose from fiscal years 2000 through 2003 and then dropped slightly in fiscal year 2004. Another, albeit less direct, measure of an asset’s condition is deferred maintenance—the amount of scheduled maintenance that must be postponed on an asset in order to pay for unscheduled repairs. Such deferrals can occur when the Coast Guard does not have enough money to absorb unexpected maintenance expenditures and still perform all of its scheduled maintenance, thus creating a backlog. For example, in spring 2004, while on a counter-drug mission, the 210-foot cutter Active experienced problems in the condition of its flight deck that were to be corrected during its scheduled depot-level maintenance. However, because of a lack of funding, the maintenance was deferred and the flight deck not repaired. As a result, the cutter lost 50 percent of its patrol time, since the required support helicopters could not take off from or land on it. As table 3 shows, deferred maintenance does not show a clear pattern across all classes of deepwater legacy assets. For the deepwater legacy aircraft, the overall amount of estimated deferred maintenance increased each year during fiscal years 2002 through 2004, from $12.3 million to about $24.6 million. However, most of the increase came from one type of asset, the HH-60 helicopter, and was mainly the result of shortening the interval between scheduled depot-level maintenance from 60 months to 48 months—thereby increasing the scheduled maintenance workload—and not from having to divert money to deal with unscheduled maintenance. For the deepwater cutters, the amount of estimated deferred maintenance increased from fiscal year 2002 to 2003, but then dropped significantly in fiscal year 2004. The decrease in fiscal year 2004 came mainly because (1) the Coast Guard ceased maintenance on an icebreaker, thus freeing up some maintenance funds; and (2) the Coast Guard also received supplemental operational and maintenance funding, allowing it to deal with both scheduled and unscheduled maintenance. Thus, the drop in the estimate of deferred maintenance costs for fiscal year 2004 is not necessarily an indicator that the condition of the legacy assets was improving; it could result from the Coast Guard having more money to address the maintenance needs. At the time we began our work, the Coast Guard’s condition measures were not sufficiently robust to systematically link assets’ condition with degradation in mission capabilities. As we discussed with Coast Guard officials, without such condition measures, the extent and severity of the decline in the existing deepwater legacy assets and their true condition cannot be fully determined. As a result, the picture that emerges regarding the condition of the deepwater legacy assets based on current Coast Guard condition measures should be viewed with some caution. While there is no systematic, quantitative evidence sufficient to demonstrate that deepwater legacy assets are nearing a “train wreck,” this does not mean the assets are in good condition or have been performing their missions safely, reliably and at levels that meet or exceed Coast Guard standards. We identified two factors that need to be considered to put these condition measures in proper context. The first factor deals with limitations in the measures themselves. Simply put, the Coast Guard’s measures of asset condition do not fully capture the extent of the problems. As such, they may understate the decline in the legacy assets’ condition. More specifically, Coast Guard measures focus on events, such as flight mishaps or equipment casualties, but do not measure the extent to which these and other incidents degrade mission capabilities. Here are two examples in which the Coast Guard’s current measures are not sufficiently robust to systematically capture degradation in mission capabilities: The surface search radar system on the HC-130 long-range surveillance aircraft, called the APS-137 radar, is subject to frequent failures and is quickly becoming unsupportable. Flight crews use this radar to search for vessels in trouble and to monitor ships for illegal activity, such as transporting illicit drugs or illegal immigrants. When the radar fails, flight crews are reduced to looking out the window for targets, greatly reducing mission efficiency and effectiveness. A flight crew in Kodiak, Alaska, described this situation as being “like trying to locate a boat looking through a straw.” Mission capability degradations such as these are not reflected in the Coast Guard’s current condition measures. The 378-foot cutter Jarvis recently experienced a failure in one of its two main gas turbines shortly after embarking on a living marine resources and search and rescue mission. While Jarvis was able to accomplish its given mission, albeit at reduced speeds, this casualty rendered the cutter unable to respond to any emergency request it might have received—but did not in this case—to undertake a mission requiring higher speeds, such as drug interdiction. The Coast Guard condition measures are not robust enough to capture these distinctions in mission capability. The second factor that needs to be kept in mind is the compelling nature of the other evidence we gathered outside of the Coast Guard’s condition measures. This evidence, gleaned from information collected during our site visits and discussions with maintenance personnel, showed deteriorating and obsolete systems and equipment as a major cause of the reduction in mission capabilities for a number of deepwater legacy aircraft and cutters. Such problems, however, are not captured by the Coast Guard’s condition measures. One example of this involves the HH-65 short-range recovery helicopter. While this helicopter consistently exceeded availability standards established by the Coast Guard over the 5- year period we examined, it is currently operating with underpowered engines that have become increasingly subject to power failures. As a result, Coast Guard pilots employ a number of work arounds, such as dumping fuel or leaving the rescue swimmer on scene if the load becomes too heavy. Further, because of increasing safety and reliability problems, the Coast Guard has also implemented a number of operational restrictions—such as not allowing the helicopter to land on helipads—to safeguard crew and passengers and prevent mishaps until all of the fleets’ engines can be replaced. The Coast Guard has recently recognized the need for improved measures to more accurately capture data on the extent to which its deepwater legacy assets are degraded in their mission capabilities, but as of March 2005, such measures have not yet been finalized or implemented. Subsequent to our inquiries regarding the lack of condition and mission capability measures, Coast Guard naval engineers reported that they had begun developing a “percent of time fully mission capable” measure to reflect the degree of mission capability, as well as measures to track cutter readiness. We agree that measures like this are needed—and as soon as possible. Further, current plans call for the measure, if approved, to be used for cutters, but not for aircraft. Consequently, even if this measure were to be implemented across the Coast Guard, there would still be no measure to address degradation in mission capabilities for aircraft. We will be exploring this issue further in our follow-on report. The Coast Guard has taken several actions to address maintenance issues and upgrades for its deepwater legacy assets. These include establishing a compendium of information for making decisions regarding maintenance and upgrades, performing more extensive maintenance between deployments, and, at the Pacific Area Command, applying new business rules and strategies to better sustain the 378-foot high-endurance cutters through 2016. These additional efforts are likely helping to prevent a more rapid decline in the condition of these assets, but condition problems continue, and the efforts will likely involve additional costs. Since 2002, the Coast Guard has annually issued a Systems Integrated Near Term Support Strategy compendium. Among other things, this compendium consolidates information needed to make planning and budgeting decisions regarding maintenance and upgrades to sustain legacy assets. Its purpose is to serve as a tool for senior Coast Guard management in setting priorities and planning budgets. From this strategic document, the Coast Guard has identified a number of upgrades to improve the capabilities of the deepwater legacy aircraft and cutters. The most recent compendium (for fiscal year 2006) lists more than $1 billion worth of upgrades to the deepwater legacy assets. The planned upgrades identified in the compendium that have been approved and received initial funding account for an estimated $856 million the Coast Guard anticipates it will need to complete those projects. The approved upgrades for deepwater legacy assets are shown in table 4. Among the projects already begun is the re-engining of the HH-65 helicopters to increase the helicopter’s power and capabilities. The Coast Guard is also upgrading several other aviation systems in an effort to improve aircraft capabilities. Enhancements are also planned for certain classes of deepwater cutters. For example, during this fiscal year, the Coast Guard is to begin a maintenance effectiveness project on the 210- foot and 270-foot cutters. This project includes replacing major engineering subsystems with the goal of extending the cutters’ service lives until their replacement by the Offshore Patrol Cutter. Of the $856 million total estimated costs needed for the planned upgrades to the deepwater legacy assets listed above, the Coast Guard has received $215 million through fiscal year 2005 and has requested another $217.3 million in its fiscal year 2006 budget. The remaining estimated costs of $423.7 million would have to be funded beyond fiscal year 2006. Coast Guard personnel consistently reported to us that crewmembers have to spend increasingly more time between missions to prepare for the next deployment. For example, to prevent further corrosion-related problems, air station maintenance personnel at the locations we visited said they have instituted additional measures, such as washing and applying fluid film to the aircraft prior to each deployment. Similar accounts were told by personnel working on cutters. For example, officers of the 270-foot cutter Northland told us that because of dated equipment and the deteriorating condition of its piping and other subsystems, crewmembers have to spend increasingly more time and resources while in port to prepare for their next deployment. While we could not verify these increases in time and resources because the Coast Guard does not capture data on these additional maintenance efforts, the need for increasing amounts of maintenance was a message we consistently heard from the operations and maintenance personnel with whom we met. Such efforts are likely helping to prevent a more rapid decline in the condition of these deepwater legacy assets, but it is important to note that even with the increasing amounts of maintenance, these assets are still losing mission capabilities because of deteriorating equipment and system failures. For example, in fiscal year 2004, one 378-foot cutter lost 98 counterdrug mission days because of a number of patrol-ending casualties—including the loss of ability to raise and lower boats and run major electrical equipment—requiring $1.2 million in emergency maintenance. Another 378-foot cutter lost 27 counterdrug mission days in the fall of 2004 when it required emergency dry-dock maintenance because of hydraulic oil leaking into the reduction gear. One effort is under way at the Coast Guard’s Pacific Area Command to improve maintenance practices for the 378-foot cutters. Pacific Area Command officials have recognized that a different approach to maintaining and sustaining legacy cutters may be needed and, as a first step, they have undertaken an initiative applying what they refer to as “new business rules and strategies” to better maintain the 378-foot high- endurance cutters through 2016. Under the original Deepwater proposal, the final 378-foot cutter was to be decommissioned in 2013, but by 2005, that date had slipped to 2016. To help keep these cutters running through this date, Pacific Area Command officials are applying such rules and strategies as (1) ensuring that operations and maintenance staffs work closely together to determine priorities, (2) recognizing that maintaining or enhancing cutter capabilities will involve trade-off determinations, and (3) accepting the proposition that with limited funding not all cutters will be fully capable to perform all types of missions. Pacific Area Command officials believe that in combination, these principles and strategies will result in more cost-effective maintenance and resource allocation decisions—recognizing that difficult decisions will still have to be made to balance maintenance and operations. The Pacific Area Command’s new initiative has the potential for assisting the Coast Guard in making more informed choices regarding the best use of their resources, but the approach will likely require additional funding. In particular, the Pacific Area Commander told us that in order for the 378- foot cutters to be properly maintained until their replacements become operational; the Coast Guard will have to provide additional funding for sustaining the 378-foot cutters. So far, the Coast Guard’s budget plans or requests do not address this potential need. Since the inception of the Deepwater program, we have expressed concerns about the degree of risk in the acquisition approach and the Coast Guard’s ability to manage and oversee the program. Last year, we reported that, well into the contract’s second year, key components needed to manage the program and oversee the system integrator’s performance had not been effectively implemented. We also reported that the degree to which the program was on track could not be determined because the Coast Guard was not updating its schedule. We detailed needed improvements in a number of areas, shown in table 5. These concerns have a direct bearing on any consideration to increase the program’s pace. Because the Coast Guard was having difficulty managing the Deepwater program at the pace it had anticipated, increasing the pace by attempting to speed the acquisition would only complicate the problem. The Coast Guard agreed with nearly all of our recommendations and has made progress in implementing some of them. In most cases, however, while actions are under way, management challenges remain that are likely to take some time to fully address. We have seen mixed success in the Coast Guard’s efforts to improve management of the program and contractor oversight. All four areas of concern—improving integrated project teams (IPT), ensuring adequate staff for the program, planning for human capital requirements for field units receiving new assets, and updating the program’s schedule—have yet to be fully addressed. Although the Deepwater program has made some efforts to improve the effectiveness of IPTs, we continue to see evidence that more improvements are needed for the teams to effectively do their jobs. These teams, the Coast Guard’s primary tool for managing the program and overseeing the contractor, are generally chaired by a subcontractor representative and consist of members from subcontractors and the Coast Guard. The teams are responsible for overall program planning and management, asset integration, and overseeing delivery of specific Deepwater assets. Since our March 2004 report, the teams have been restructured, and 20 teams have charters setting forth their purpose, authority, and performance goals. And new, entry-level training is being provided to team members. Despite this progress, however, the needed changes are not yet sufficiently in place. A recent assessment by the Coast Guard of the system integrator’s performance found that roles and responsibilities in some teams continue to be unclear. Decision making is to a large extent stovepiped, and some teams still lack adequate authority to make decisions within their realm of responsibility. One source of difficulty for some team members has been the fact that each of the two major subcontractors has used its own databases and processes to manage different segments of the program. Decisions on air assets are made by Lockheed Martin, while decisions regarding surface assets are made by Northrop Grumman. This approach can lessen the likelihood that a “system of systems” outcome will be achieved. Officials told us that more attention is being paid to taking a systemwide approach and that the Coast Guard has emphasized the need to ensure that the two major subcontractors integrate their management systems. The Coast Guard has taken steps to more fully staff the Deepwater program, with mixed effects. In February 2005, the Deepwater program executive officer approved a revised human capital plan. The plan emphasizes workforce planning, including determining needed knowledge, skills, and abilities and developing ways to leverage institutional knowledge as staff rotate out of the program. This analysis is intended to help determine what gaps exist between needed skills and existing skills and to develop a plan to bridge these gaps. The Coast Guard has also taken some short-term steps to improve Deepwater program staffing, hiring contractors to assist with program support functions, shifting some positions from military to civilian to mitigate turnover risk, and identifying hard-to-fill positions and developing recruitment plans specifically for them. Finally, the Deepwater program and the Coast Guard’s acquisition branch are now working on an automated system for forecasting military rotation cycles, a step Deepwater officials believe will help with long- range strategic workforce planning and analysis. Despite these actions, however, vacancies remain in the program, and some metrics that may have highlighted the need for more stability in the program’s staff have been removed from the new human capital plan. As of January 2005, 244 positions were assigned to the program, but only 206 of these were filled, a 16 percent vacancy rate. A year ago, 209 staff were assigned to the program. Further, the new human capital plan removes a performance goal that measured the percentage of billets filled at any given time. Coast Guard officials acknowledged that the prior plan’s goal of a 95 percent or higher fill rate was unduly optimistic and was a poor measure of the Coast Guard’s ability to meet its hiring goals. For example, billets for military personnel who plan to rotate into the program in the summer are created at the beginning of the budget year, leading the metric to count those positions as vacant from the beginning of the budget year until summer. Other performance metrics that were included in the prior plan to measure progress in human capital issues have also been removed. For example, to help ensure that incoming personnel received acquisition training and on-the-job training, a billet was included in the prior plan to serve as a floating training position that replacement personnel could use for a year before the departure of military incumbents. This position was never funded, and the new plan removes the billet. The Coast Guard recognizes the critical need to inform the operators who are to use the Deepwater assets of progress in the program, and officials stated that, on the basis of our recommendations, they have made a number of improvements in this area. A November 2004 analysis of the Deepwater program’s communication process, conducted in coordination with the National Graduate School, found that the communication and feedback processes were inadequate. Emphasis has now been placed on outreach to field personnel, with a multipronged approach involving customer surveys, face-to-face meetings, and presentations. We have not yet evaluated the effectiveness of the new approach. Human capital requirements for the Deepwater program—such as crew numbers and schedules, training, and support personnel—will have an increasing impact on the program’s ability to meet its goals as the pace at which assets are delivered to field units picks up. Recent assessments by Coast Guard performance monitors show this to be an area of concern. Coast Guard officials have expressed concern about whether the system integrator is appropriately considering human capital in systems engineering decisions. The system integrator is required to develop a workforce management plan for Deepwater, as well as “human factors engineering” plans for each Deepwater asset and for the overall system of systems. The Coast Guard rejected the contractor’s workforce management plan and several of the proposed human factors engineering plans as being inadequate. The rejections were due, in part, to the lack of an established and integrated system-level engineering approach that shows how issues relating to human capabilities and limitations of actually performing with the system will be approached. One performance monitor noted that, as of late 2004, requirements for staffing and training of maintenance facilities and organizations had yet to be determined. According to the Coast Guard, emphasis on a contractor’s approach to addressing human capital considerations is necessary to ensure that Deepwater goals are met, especially as they pertain to operational effectiveness and total ownership cost. The Coast Guard has recently undertaken efforts to update the original 2002 Deepwater acquisition schedule—an action that we suggested in our June 2004 report. The original schedule had milestone dates showing when work on an asset would begin and when delivery would be expected, as well as the integrated schedules of critical linkages between assets, but we found that the Coast Guard was not maintaining an updated and integrated version of the schedule. As a result, the Coast Guard could not demonstrate whether individual components and assets were being integrated and delivered on schedule and in critical sequence. As recently as October 2004, Deepwater performance monitors likewise expressed concern that the Coast Guard lacked adequate visibility into the program’s status and that lack of visibility into the schedules for component-level items prevented reliable forecasting and risk analysis. The Coast Guard has since taken steps to update the outdated schedule, and has indicated that it plans to continue to update the schedule each month for internal management purposes, and semiannually to support its budget planning efforts. We think this is an important step toward improving the Coast Guard’s management of the program because it provides a more tangible picture of progress, as well as a baseline for holding contractors accountable. We will continue to work closely with the Coast Guard to ensure progress is made and to monitor how risks are mitigated. We have seen progress in terms of the rigor with which the Coast Guard is periodically assessing the system integrator’s performance, but concerns remain about the broader issues of accountability for achieving the overarching goals of minimizing total ownership costs and maximizing operational effectiveness. Improvements continue to be made to the criteria for assessing the system integrator’s performance. In March 2004, we reported that the process for assessing performance against specific contract tasks lacked rigor. The criteria for doing so have since been revised to more clearly reflect those that are objective, (that is, measured through automated tools against established metrics), and those that are subjective, meaning the narrative comments by Coast Guard performance monitors. Weights have been assigned to each set of evaluation factors, and the Coast Guard continues to refine the distribution of the weights to reach an appropriate balance between automated results and the eyewitness observations of the performance monitors. Coast Guard officials told us that they have also provided additional guidance and training to performance monitors. We found that efforts have been made to improve the consistency of the format used for their input in assessments of the system integrator’s performance. Coast Guard officials said that they are continuing to make improvements to ensure that performance monitors’ relevant observations are appropriately considered in making award fee determinations. It is important to note that although performance monitor comments are considered subjective, they are valuable inputs to assessing the system integrator’s performance, particularly when they are tied to measurable outcomes. It will be necessary for the Coast Guard to continue refining the award fee factors as the program progresses. In some cases, we noted that the performance monitors’ assessments differed vastly from the results of automated, data-driven assessments. For example, while schedule management is discussed in the Coast Guard’s most recent assessment of the system integrator’s performance as a major area of challenge and risk, the objective measure showed 100 percent compliance in this area. Another metric assesses the extent to which integrated product teams consider the impact of their decisions on the overall cost and effectiveness of the Deepwater program. Performance monitors reported that because system-level guidance had not been provided to the teams responsible for specific assets, they had a limited ability to see the whole picture and understand the impact of decisions on total ownership costs and operational effectiveness. However, the automated measure was again 100 percent compliance. Coast Guard officials said that, in some cases, the data-driven metrics do not accurately reflect the contractor’s performance. For the next award fee assessment, Deepwater officials plan to revise the metrics and place more weight on the performance monitors’ input, while ensuring that it is based on measurable outcomes. Changes have been made to the award fee metrics that place additional emphasis on the system integrator’s responsibility for making integrated project teams effective. Award fee criteria now incorporate specific aspects of how the integrator is managing the program, including administration, management commitment, collaboration, training, and empowerment of these teams. However, as discussed above, concerns remain about whether the teams are effectively accomplishing their goals. While the Coast Guard has developed models to measure the system integrator’s performance in operational effectiveness and total ownership costs, concrete results have not yet emerged. Minimizing total ownership costs and maximizing operational effectiveness are two of the overarching goals of the Deepwater program. The system integrator’s performance in these two areas will be a critical piece of information when the Coast Guard makes a decision about whether to award the contractor the first contract option period of 5 years. Initial decision making is to start next year. With regard to the operational effectiveness of the program, measuring the system integrator’s impact has yielded limited results to date because few of the new assets are operational. The Coast Guard has developed modeling capabilities to simulate the effect of the new capabilities on its ability to meet its missions. However, until additional assets become operational, progress toward this goal will be difficult to determine. With regard to total ownership costs, the Coast Guard does not plan to implement our recommendation. It has not adhered to its original plan, set forth in the Deepwater program management plan, of establishing as its baseline a cost not to exceed the dollar value of replacing the assets under a traditional approach (e.g., on an asset-by-asset basis rather than a system-of-systems approach). Although a cost baseline consistent with the program management plan’s approach was initially established, this number has not been rebaselined, as has the system integrator’s cost estimate baseline, and is not being used to evaluate the contractor’s progress in holding total ownership costs down. In practice, the baseline being used to measure total ownership cost is the system integrator’s own cost estimate. As we reported in March 2004, we believe that measuring the system integrator’s cost growth compared with its own cost proposal will tell the government nothing about whether it is gaining efficiencies by turning to the system of systems concept. Coast Guard officials stated that the contract total ownership cost and operational effectiveness baseline is adjusted based on approved decision memorandums from the Agency Acquisition Executive, the Vice Commandant of the Coast Guard. The Coast Guard reported taking steps to address our recommendations concerning cost control through competition. Our recommendations pertained to competition among second-tier suppliers and notification of “make” decisions. Competition among second-tier suppliers. Coast Guard officials told us that in making the decision about whether to award the first contract option, the government will specifically examine the system integrator’s ability to control costs by assessing the degree to which competition is fostered at the major subcontractor level. The evaluation will consider the subcontractors’ project management structure and processes to control costs, as well as how market surveys of similar assets and major subsystems are implemented. The Coast Guard is focusing its attention on those areas that were priced after the initial competition for the Deepwater contract was completed, such as the HH-65 re-engining and the C-130J missionization. For example, a new process implemented for the C-130J missionization was a requirement for competition in subcontracting and government approval of all subcontracts exceeding $2 million in order for the Coast Guard to monitor the integrator’s competition efforts. Notification of make decisions. According to the Federal Acquisition Regulation, the prime contractor is responsible for managing contract performance, including planning, placing, and administering subcontracts as necessary to ensure the lowest overall cost and technical risk to the government. When “make-or-buy programs” are required, the government may reserve the right to review and agree on the contractor’s make-or-buy program when necessary to ensure negotiation of reasonable contract prices, among other things. We recommended that the Coast Guard be notified of make decisions over $5 million in order to facilitate controlling costs through competition. We suggested the $5 million threshold because Lockheed Martin, one of the major subcontractors, considers that amount to be the threshold for considering its suppliers major. The Coast Guard has asked the system integrator, on a voluntary basis, to provide notification one week in advance of a make decision of $10 million or more based on the criteria in the Federal Acquisition Regulation. According to Coast Guard officials, to date, no make decision has exceeded $10 million since the request was made. The details implementing this recommendation have not yet been worked out, such as specifically who in the Coast Guard will monitor the subcontractors’ make decisions to ensure that the voluntary agreement is complied with. Our work to date suggests the costly and important Deepwater program will need constant monitoring and management attention to successfully accomplish its goals. In this respect, we identified three points that should be kept in mind in considering how to proceed with the program. First, the need to replace or upgrade deteriorating legacy assets is considerable. While the Coast Guard lacks measures that clearly demonstrate how this deterioration affects its ability to perform deepwater-related missions, it is clear that the deepwater legacy assets are insufficient for the task. Second, although the need to replace and upgrade assets is strong, there still are major risks in the Coast Guard’s acquisition approach. The cost increases and schedule slippages that have already occurred are warning signs. We will continue to work with the Coast Guard to determine how best to manage these risks so that the Deepwater missions can be accomplished in the most cost-effective way. Third, there are signs that as the Deepwater program moves ahead, the Coast Guard will continue to report more problems with sustaining existing assets, together with the attendant need for additional infusions of funding to deal with them. Some of these problems, such as those on the 378-foot cutters, are included in the compendium the Coast Guard uses to set sustainment priorities and plan budgets, but have not been funded because they pertain to assets that are among the first to be replaced. However, projects to address these problems are nevertheless likely to be needed. We will continue to work with the Coast Guard to determine if there is a more systematic and comprehensive approach to keeping the Congress abreast of the potential bill for sustaining these assets. Mr. Chairman and Members of the Subcommittee, this completes my prepared statement. I would be happy to respond to any questions that you or other Members of the Subcommittee may have at this time. For information about this testimony, please contact Margaret Wrightson, Director, Homeland Security and Justice Issues, at (415) 904-2200, or [email protected]. Other individuals making key contributions to this testimony include Steven Calvo, Jerry Clark, Christopher Conrad, Adam Couvillion, Michele Fejfar, Geoffrey Hamilton, Julie Leetch, Michele Mackin, Christopher Miller, Stan Stenersen, and Linda Kay Willard. This is a work of the U.S. government and is not subject to copyright protection in the United States. It may be reproduced and distributed in its entirety without further permission from GAO. However, because this work may contain copyrighted images or other material, permission from the copyright holder may be necessary if you wish to reproduce this material separately. | In 2002, the Coast Guard began a multiyear, $19 billion to $24 billion acquisition program to replace or modernize its fleet of deepwater aircraft and cutters, so called because they are capable of operating many miles off the coast. For several years now, the Coast Guard has been warning that the existing fleet--especially cutters--was failing at an unsustainable rate, and it began studying options for replacing or modernizing the fleet more rapidly. Faster replacement is designed to avoid some of the costs that might be involved in keeping aging assets running for longer periods. This testimony, which is based both on current and past GAO work, addresses several issues related to these considerations: (1) changes in the condition of deepwater legacy assets during fiscal years 2000 through 2004; (2) actions the Coast Guard has taken to maintain and upgrade deepwater legacy assets; and (3) management challenges the Coast Guard faces in acquiring new assets, especially if a more aggressive schedule is adopted. Available Coast Guard condition measures indicate that the Coast Guard's deepwater legacy aircraft and cutters are generally declining, but these measures are inadequate to capture the full extent of the decline in the condition of deepwater assets with any degree of precision. GAO's field visits and interviews with Coast Guard staff, as well as reviews of other evidence, showed significant problems in a variety of the assets' systems and equipment. The Coast Guard has acknowledged that it needs to develop condition measures that more clearly demonstrate the extent to which asset conditions affect mission capabilities, but such measures have not yet been finalized or implemented. The Coast Guard has taken several types of actions to help keep the deepwater legacy assets operational, but these actions, while helpful, may not fully address mission capability issues and may require additional funding. For example, to help meet mission requirements, Coast Guard staff are performing more extensive maintenance between deployments, but even so, aircraft and cutters continue to lose mission capabilities. One Coast Guard command is using a new approach to help sustain the oldest class of cutters, but this approach will likely require additional funds--something not included thus far in Coast Guard budget plans or requests. If the Coast Guard adopts a more aggressive acquisition schedule, it will likely continue to face a number of challenges that have already affected its ability to effectively manage the Deepwater program. GAO has warned that the Coast Guard's acquisition strategy, which relies on a prime contractor ("system integrator") to identify and deliver the assets needed, carries substantial risks. In 2004, well into the contract's second year, key components for managing the program and overseeing the system integrator's performance had not been effectively implemented. The Coast Guard has begun addressing some problems--for example, putting more emphasis on competition as a way to control costs--but many areas have not been fully addressed. A more aggressive schedule would only heighten the risks. |
After the Cold War, DOD’s base structure was larger than required to meet changing national security needs. Consequently, the Congress enacted two separate laws that instituted base closure rounds in 1988, 1991, 1993, and 1995. Through these four BRAC rounds, DOD has closed or scheduled to close 311 bases, installations, and activities and realigned or planned to realign an additional 112 bases. Table 1 shows the number of closures and realignments for each BRAC round. As a result of military base downsizing, DOD has had to phase down base operations, expedite the sale or transfer of unneeded base property for future reuse, properly account for cost and savings attributable to base closures, and perform environmental cleanup of contaminated property no longer needed. Because of congressional interest in the impact of base closures on DOD and affected states and communities, we have issued several reports on these issues. In August 1996, we reported on the status of bases closed during the BRAC 1988, 1991, and 1993 rounds. In February 1995, we reported on the environmental impact at DOD closing bases. In November 1994 and August 1995, we reported on property reuse issues arising from the BRAC 1988 and 1991 rounds. In March 1993 and April 1996, we reported on BRAC cost and savings issues. The severity of contamination at a large number of BRAC bases has turned environmental cleanup into a major challenge for DOD. Before BRAC, DOD had begun addressing environmental contamination at its active military bases through ongoing compliance and restoration programs. Types of hazardous waste found at military installations include solvents and corrosives; paint strippers and thinners; metals, such as lead, cadmium, and chromium; and unique military substances, such as nerve agents and unexploded ordnance. Contamination has usually resulted from storage and disposal practices that were accepted at the time but which have proved damaging to the environment. Cleanup issues faced at closing bases are similar to those at active bases. Base closures have underscored the importance and urgency of environmental cleanup. Because cleanup is, in most instances, a prerequisite for the title transfer of BRAC property to nonfederal parties, DOD must begin to address environmental issues early in the closure process to expedite property transfer. In doing so, DOD must comply with existing federal and state laws and regulations. Two federal environmental statutes—the Comprehensive Environmental Response, Compensation, and Liability Act (CERCLA) and the Resource Conservation and Recovery Act (RCRA)—and state laws and regulations govern most of the environmental compliance and restoration activities at closing bases. In general, CERCLA governs the cleanup of inactive waste sites, and RCRA regulates the management of facilities that treat, store, and dispose of hazardous wastes. Appendix I summarizes selected federal and state laws and regulations pertinent to BRAC environmental cleanup. The Congress established separate BRAC funding accounts to help ensure that DOD could devote high-priority attention to base closure and property transfer. Although the Congress appropriates overall funding for BRAC based on DOD budget requests and not directly for environmental cleanup purposes, it may specify either maximum (ceiling) or minimum (floor) dollar amounts to be used for environmental efforts in any given budget year. DOD uses overall BRAC appropriations to allocate funds to the services based on requirements in each of several BRAC subaccounts, including the environmental subaccount. This subaccount includes multiyear funding for each of the BRAC rounds, thereby allowing the services greater flexibility in executing the environmental cleanup program. Further, with a floor, unneeded funds from other BRAC subaccounts may be transferred into the environmental subaccount throughout the year. With a ceiling, environmental funding can be shifted into other subaccounts. We review BRAC budget account issues on an annual basis; we issued our latest report in July 1996 on the validity of DOD’s fiscal year 1997 BRAC budget submission. The cleanup of contaminated base property has been costly, and with the majority of base cleanup work still to be done, costs will continue to grow. Although $3.4 billion had been allocated for BRAC environmental cleanup through March 1996, it is likely that costs will exceed $11 billion before cleanups are completed well into the next century. In the earlier years of the BRAC program, the Congress had expressed concern about DOD’s slow progress in obligating funds for environmental cleanup. Our analysis shows that in recent years DOD has greatly increased the rate at which it has obligated funds. As of September 1995, for example, DOD had obligated 96 percent of available funds, which was substantially higher than the 50-percent rate 2 years earlier. Through March 1996, DOD had allocated $3.4 billion, obligated $2.8 billion, and expended $1.6 billion on BRAC environmental cleanup. Tables 2 and 3 show these amounts by BRAC round and military component, respectively. Appendix II provides additional detail on allocations, obligations, and expenditures by military component for each BRAC round. The estimated cost for the BRAC environmental cleanup program is uncertain but will be much higher than amounts allocated thus far. The $3.4 billion allocation through March 1996 included only initial funding for BRAC 1995 bases and was insufficient to complete cleanup at prior round BRAC bases. Even though the Congress has established a 6-year period for closing a base, there are no statutory deadlines for the cleanup process. All indicators point to cleanups extending well into the next century. At the time of our review, DOD did not have a total BRAC environmental cleanup cost but was in the process of collecting the data to make such a projection. Our analysis showed that many base cleanups are expected to be very costly. Available DOD data indicate, for example, that cleanup costs for 27 closing bases will likely exceed $100 million each. Further, with the use of available DOD financial data, we estimate that the total cost is likely to exceed $11 billion, as shown in table 4. Our total cost estimate was based on the best available data at the time of our review, but we believe the estimate is likely to be conservative for several reasons. First, environmental cleanup cost estimates for many of the 1995 BRAC bases are based on projected costs developed while they were active installations. DOD officials told us that cost estimates for these bases would likely increase as additional environmental studies are performed, more work is identified, and cleanup timelines are accelerated. Second, according to DOD officials, certain Navy and Air Force environmental compliance costs that are funded under the BRAC program are not included in the above estimate. Finally, previous DOD estimates were generally understated. For example, in September 1994, DOD reported that it would cost about an additional $3.1 billion to complete base-level environmental cleanups of its 1988, 1991, and 1993 BRAC bases. However, in September 1995, that estimate had increased to $4.7 billion. In recent years, DOD has significantly increased the rate at which it has obligated environmental funds for the BRAC program. As shown in figure 1, DOD obligated $2.5 billion, or 96 percent, of the $2.6 billion available for the BRAC environmental program as of September 1995. In comparison, DOD had obligated 50 percent of the funding available in September 1993. Low obligation rates in the early years of the BRAC program raised concerns on the part of the Congress. DOD officials offered a variety of reasons for the low obligation rate in the early BRAC years and the high obligation rate in recent years. First, during the early BRAC years, DOD officials acknowledged they (1) were probably overly optimistic in the level of funds requested, (2) did not have all the necessary expertise to better estimate requirements and timing, and (3) were slow in actually obligating funds through existing contract mechanisms. Second, because BRAC funds are available for use on a multiyear basis, there was no overriding pressure to quickly obligate funds. Due in large part to heightened congressional interest in the issue, however, DOD made a concerted effort to increase obligations. Further, with the expiration of BRAC 1988 funds on September 30, 1995, DOD focused its attention on obligating as much of the available money as possible for remaining BRAC 1988 cleanup requirements. Although the obligation rate has increased and the relative amount of unobligated funds has decreased, a large unexpended balance of funds remains. As of September 1995, BRAC environmental expenditures were about 48 percent of obligations—a modest increase from the 34-percent rate existing in September 1993. DOD officials told us that the large amount of unexpended funds was typical of other environmental programs and were relatively low because of (1) widespread service use of large cost-reimbursable contracts for environmental work where major projects are in the early stages and (2) the lag involved in contractor payments and subsequent reporting in the financial system. DOD officials also told us that the services had been able to obligate funds quicker through the use of large cost-reimbursable contracts than through previous contracting vehicles. However, because the contracts are often for time-consuming studies or site cleanups, expenditures have a tendency to lag well behind the obligated amounts. Further, the gap between expenditures and obligations has widened, since many projects are deferred or planned for execution in later years. As this practice continues, there is greater uncertainty as to when and how much of the funds will actually be spent. Charleston Naval Shipyard officials, for example, told us they were expending funds at a slower rate than expected because of uncertain cleanup requirements and state regulatory reviews that were delaying many contracted site contamination surveys. In addition, at Pease Air Force Base, BRAC officials, citing that available BRAC 1988 funds were due to expire, obligated about $8 million in September 1995 for future environmental monitoring and operating requirements extending into fiscal year 1998. The amount of this money that will actually be spent will not be known for several years. Our review of selected base closure sites and other analysis showed that BRAC environmental costs are driven by several key factors. Among these factors are (1) the large number of contaminated sites and associated extent of contamination, (2) the requirements of federal and state environmental laws and regulations, (3) the lack of cost-effective cleanup technology, and (4) property reuse plans. The sheer magnitude of the BRAC program, coupled with the severe soil and water contamination that has developed over decades of base operations, is a key cause for the high cost of cleanup. The closing bases have a large number of contaminated sites, and it often becomes very difficult and costly to determine the full extent and severity of site contamination. Further, the number of BRAC contaminated sites has grown as more bases have been selected for closure and additional contaminated sites have been identified. In addition, further study often reveals a number of areas of environmental concern on the bases, thereby increasing fund expenditures to resolve the concerns. DOD officials told us that typically after a base is slated for closure, the likelihood increases that additional contaminated sites will be identified as more investigative work is performed. For example, before the closure of Pease Air Force Base, Air Force officials had identified 18 contaminated sites; as the closure process progressed and more investigative work was performed, the number of sites grew to 55. Table 5 shows the number of BRAC contaminated sites and their disposition. DOD officials told us that the extent of site contamination is often difficult, time-consuming, and costly to detect and may not be fully determined until environmental cleanup is actually underway. At Pease Air Force Base landfill sites, for example, it was not known whether contaminants existed below the water table level until excavation was underway. Also, according to Army officials, the Army spent over $45 million—$20 million more than originally estimated—for radioactive contamination cleanup at the Army Material Technology Laboratory in Massachusetts. The cost underestimation was due largely to difficulties in accurately determining the extent of the contamination caused by the reactor. Unexploded ordnance is another concern for many closing bases. At Mare Island Naval Shipyard, for example, potential unexploded ordnance sites, which include dredge ponds and the waterfront, are the result of decades of ordnance manufacturing, storage, and disposal. Navy engineers estimate that cleaning up these sites could cost about $60 million. The requirements of federal and state environmental laws and regulations have a significant impact on the cost of environmental cleanup. Under the existing environmental legal framework, DOD must comply with cleanup standards and processes associated with existing laws, regulations, and executive orders in conducting assessments and cleanups of its base closure property. Although CERCLA and RCRA are two of the primary drivers for the BRAC environmental program and the ones that impact most closing bases, other laws or executive orders, such as the Endangered Species Act or Executive Order 11990 (Protection of Wetlands), are directed to more unique areas of concern that may exist at a BRAC base. At Pease Air Force Base, for example, BRAC officials had to consider threatened and endangered species, sensitive habitats, wetlands, and historic sites in their cleanup plans. In response to the requirements to protect wetlands, these officials were creating a 2.5-acre wetlands parcel at a cost of about $100,000 to replace wetlands destroyed during cleanup at another site. Further, environmental laws and regulations vary by state and often have more stringent requirements that tend to increase cost. For example, California’s standard for clean drinking water is 10 times more stringent than the federal standard, thereby increasing cleanup costs when this standard is applied. BRAC officials told us that the current assessment and cleanup process, as dictated by legal requirements, was complex, costly, and time-consuming. This description is consistent with our findings in our review of high-priority site cleanup efforts at active bases. For example, under CERCLA, DOD follows a detailed four-phase process—preliminary assessment, site inspection, remedial investigation/feasibility study, and remedial design/remedial action—in cleaning up property for transfer. Embodied in the process are extensive requirements for documentation, studies, and the need to interact frequently with Environmental Protection Agency (EPA) and state officials and the public. BRAC officials told us that cleanups could require sustained action over many years—10 years in many cases—to achieve targeted goals. Site studies can take 4 or more years to complete, remedial designs may require 3 years, and cleanup may take another 3 years. Delays are frequent as federal and state regulators review and approve documents. An inherent part of the process that has undergone criticism is the amount of time and money devoted to base contamination studies. Our prior work on environmental issues, for example, showed that DOD has spent large amounts of money on studies but that actual cleanup progress has been slow. We recognize that the cleanup process is driven largely by regulation and involves time-intensive steps. Therefore, many of the BRAC sites have not reached the actual cleanup stage while several sites have been closed out as a result of study. The Congress has expressed concern and directed DOD to establish a goal to limit, by the end of fiscal year 1997, spending for administration, support, studies, and investigations to 20 percent of the funding for its active base program. No such restriction has been enacted for the BRAC program. Although DOD does not have readily available data that show overall funding devoted to studies at BRAC bases, officials have stated that the amount has been substantial. However, DOD now states that more funding is being devoted to actual cleanups, particularly for earlier round BRAC bases. Our review of the six bases we visited indicated considerable amounts of money are being expended on studies. Pease Air Force Base officials estimated, for example, that about one-half of the $140 million they expected to spend would be for studies. The technology used to clean contaminated property can be a key cost factor. In many cases, a cost-effective cleanup technology may not be available. Cleaning up unexploded ordnance, for example, may be not be practical or affordable, especially when there are large parcels of property. Removal work can involve burning and clearing thousands of acres to apply existing cleanup techniques, which are labor-intensive, dangerous, time-consuming, and costly. For example, preliminary estimates by the Army Corps of Engineers indicate that cleaning up unexploded ordnance at Fort Ord may cost over $200 million. Most of the cost would be attributable to an 8,000-acre impact range. “Pump and treat” systems, which are shown in figure 2 and commonly used to treat groundwater contamination, can also cost millions and, depending on site conditions, be only marginally effective in some cases. Further, such systems may need to operate for decades after the base has closed and the property has been transferred. As this occurs, DOD continues to incur costs for operating and maintaining the system as well as monitoring water quality results. At Norton Air Force Base, for example, the Air Force spent over $10 million between 1980 and 1992 to investigate contamination of a groundwater plume that extends beyond the base boundary and threatens water supplies in a nearby community. A small-scale pump and treat system was initially installed in 1989; beginning in 1991, a larger-scale pilot system was constructed and subsequently upgraded in 1995. Further, in March 1993, the Air Force contracted for a $5.5-million pump and treat system to be located near the base boundary, and in August 1994, it increased the funding by $1.6 million. Even though the project was costly, its effectiveness was not certain, and Air Force officials agreed to modify the system to treat the off-base water or reimburse the community if the remediation action was not effective. Intended property reuse can also increase the costs associated with cleaning up contaminated property. In particular, reuse plans are a major determinant most often in the cleanup standard levels (e.g., residential or industrial) used as criteria in cleanup plans. Cleanup of a site that will be transferred to the Department of Interior for nonpublic use, for example, will typically not be as thorough or costly as a site that will be used for residential purposes. We noted several cases in which reuse or public concern associated with reuse has, or could, impact costs. For example, the Air Force has been conducting site investigations since 1982 in search of radioactive wastes in soils and groundwater on or near Norton Air Force Base. In fiscal year 1995, it obligated $2.7 million, and in May 1996 was planning to obligate an additional $185,000. The Air Force cited high community interest, scrutiny, and review as significant in its search for the waste. At Lowry Air Force Base, a change the community has proposed for the 77-acre landfill site could cost the Air Force an additional $1 million to $5 million for cleanup. The Air Force had originally planned for limited use (e.g., nature trails) at the site; however, in March 1996, the redevelopment authority identified alternative uses for the property, such as a golf course and facility to be used along with the adjacent existing golf course or polo and soccer fields. Air Force officials told us they were studying these alternatives because they would require more extensive and costlier remediation actions. Potential options exist for reducing the cost of cleanup. We are not taking a position on these options because of policy and legislative implications associated with them. Rather, we are presenting them in the context of tradeoffs they represent so that congressional and defense decisionmakers have the information for their consideration as they explore ways to reduce program costs while achieving environmental cleanup goals. The options we analyzed are (1) deferring or extending certain cleanup actions, (2) modifying existing laws and regulations, (3) adopting more cost-effective cleanup technologies, and (4) sharing costs with transferees. Deferring or extending certain cleanup actions for those sites where there is no immediate danger to human health or the environment has the potential for reducing environmental costs at closing bases. Under current policy, DOD is advocating an expedited approach to BRAC cleanups in the interest of making property quickly available to communities and others for reuse. Because of the higher priority given to cleanups, DOD officials told us that preclosure cleanup schedules are typically accelerated after a base is slated for closure. However, although accelerating cleanup may offer faster transfer possibilities, it may also cause program cost increases, according to DOD officials. For example, McClellan Air Force Base officials estimate that their cleanup efforts, originally targeted to cost between $705 million and $925 million through fiscal year 2034, could cost $1.2 billion to $1.8 billion under an accelerated program ending in fiscal year 2018. The officials said longer time frames allow for more cost-effective sequencing of the cleanup work and the use of new technologies that become available. Deferring or extending cleanup within acceptable bounds of risk may decrease costs but not without programmatic tradeoffs and cost risks. It would delay transfer of property to users and be contrary to the spirit of the President’s base closure community reinvestment program, announced in July 1993, for the economic recovery of those communities affected by the closure process. Delaying cleanup could promote significant community dissatisfaction and delay reuse—even for clean parcels that may be adjacent to contaminated property. It must be recognized that, on a case-by-case basis, deferring or extending cleanups may increase costs. Because DOD may be required to retain unneeded property for a longer period of time, it may incur added caretaker costs. However, according to DOD officials, the caretaker costs would be relatively minor in comparison to the cleanup cost. Further, environmental costs may increase if contamination spreads or is not otherwise contained while cleanup is deferred. Deferring or delaying cleanup at certain sites requires that a priority system be in place to provide decisionmakers with a means to determine the sequence in which projects are funded. The order in which sites are cleaned can impact the overall cost of environmental cleanup. DOD has stated that its highest priorities for BRAC environmental cleanup are for those sites that pose an immediate danger to human health or the environment or are needed for prompt reuse. With regard to protecting health and the environment, in September 1994, DOD issued guidance for a prioritization framework, referred to as Relative Risk Site Evaluation, that categorizes contaminated sites into high-, medium-, and low-relative risk groups. Relative risk is based on an evaluation of contaminants, hazards, pathways, and receptors in groundwater, surface water, sediment, and surface soils. Even though relative risk categorizations are important, service officials said that relative risk is one of many factors they consider in prioritizing funding at BRAC bases. Other considerations include reuse plans; cultural, social, and economic factors; and statutory requirements and legal agreements. These officials said that, with the exception of immediate health and safety threats, reuse plans are often the most important factor for funding and that some sites with lower environmental risk are funded in the interest of reuse. Although most interested parties we spoke to endorsed the need for setting priorities, many had concerns about DOD’s current efforts. For example, EPA officials were concerned about the (1) lack of objectivity in DOD’s relative risk model, (2) large number of sites not included in the evaluation, and (3) lack of regulatory involvement in the development of the criteria. State environmental representatives were also concerned that a large number of sites, some of which may be high priority, had not been evaluated. One state official indicated many states had already established cleanup priorities that may differ from DOD’s because of differences in risk evaluations. DOD officials told us that the use of Restoration Advisory Boards, as advisors in the prioritization process, have had strong input in community-based decisions, taking into account risk and other factors. We did not evaluate the effectiveness of these efforts. Modifying laws and regulations that must be considered when performing environmental cleanup at closing bases could ease the severity of requirements and help reduce costs. However, the benefits of modifying certain aspects of existing laws and regulations may not be achieved without tradeoffs. For example, easing cleanup standards and associated requirements may increase environmental risk and create unacceptable danger to human health and the environment, thereby increasing public resistance and dissatisfaction. DOD has supported a number of proposed legislative and administrative changes that would reduce the cost of environmental cleanup and expedite the closure process. Many of these have been debated by the Congress in the past and are still under consideration. In this regard, DOD supports efforts to improve the remedy selection process by using realistic site-based risk assumptions and foreseeable future land uses in the decision-making process. According to Navy environmental officials, emphasizing site-based risk assumptions over specific cleanup standards has the potential for reducing costs. Further, DOD supports wider use of generic or presumptive remedies in certain cases to reduce lengthy study time and cost. DOD also supports legislative revision as to what constitutes an uncontaminated parcel and further clarification that such parcels be excluded from placement on the National Priorities List. This revision would reduce cost and allow more expedited transfer of uncontaminated property. EPA has indicated its support for many of DOD’s proposals, but state officials and private representatives we talked to were more skeptical. Changing regulatory requirements can have a significant impact on costs, as illustrated by recent changes being recommended in California’s approach to remediating contamination resulting from leaking underground fuel storage tanks. In late 1995, a report by the Department of Energy’s Lawrence Livermore National Laboratory, California, concluded that, where soil conditions were favorable, natural processes, rather than other cleanup actions, could be relied on to clean up petroleum contaminants left by leaking underground fuel storage tanks. The report estimated that traditional cleanup costs had been averaging $150,000, thereby prompting state water control board officials to recommend the use of natural processes for cleanup of those sites where contamination was deemed to be of low risk. If these same procedures were used at DOD facilities where favorable soil conditions existed, costs could be reduced. At Norton Air Force Base, the Air Force has spent about $5 million to remediate about 20,000 cubic yards of contaminated soil at former underground storage tank sites. Air Force officials estimate that about 20 percent of the cleanup may not have been needed and could have been left to natural processes. At Pease Air Force Base, officials estimated that about $2.5 million was spent to clean up fuel contaminated soils around 10 pumphouses. Figures 3 and 4 show underground tank removal operations at Pease Air Force Base. At Mare Island Naval Shipyard, Navy officials estimate that about 50 underground storage tanks and about 42,000 feet of abandoned underground fuel lines require cleanup at an estimated cost of $26.9 million. Under the new policy for underground storage tank cleanups, this estimate may be reduced to $13.5 million. However, Air Force and Navy officials noted that the new policy is not statewide at this point and is being adopted only in certain regions of the state. In another example, bases were once required, before the issuance of EPA guidance in September 1993, to develop cleanup plans for certain groundwater problems, even though the proper technology was not available. However, EPA guidance now recognizes that some groundwater cleanups are technically not possible. According to Air Force BRAC officials, the Air Force was thus permitted to cease further consideration of several remedial actions proposed for one site contaminated by a waste solvent that could not be removed with known technology. The officials said this change saved between $2.3 million and $7 million, depending on which remedial action alternative would have been selected. New and more cost-effective technology may offer cost reduction potential for cleaning up groundwater, unexploded ordnance, and other contaminants. The Congressional Budget Office has reported that (1) DOD could reduce costs by delaying expensive remediation projects when contamination posed no imminent threat and cost-effective technology was lacking and (2) in the long run, new cleanup technologies represented the best hope of addressing environmental problems with available DOD funds. The replacement of many of the current remediation technologies with more cost-effective methods of environmental cleanup could have a significant effect on reducing the cost of cleanup. However, although new technologies may offer significant cost reduction potential, there are programmatic tradeoffs or risks involved with awaiting for the emergence of more cost-effective technology. First, because many BRAC bases are being cleaned up under accelerated schedules, many new technologies now under development may not be available for widespread use for years after the technology is needed. Awaiting for new technology would thus delay program progress. Second, newer technology may not be more cost-effective than existing technology. Third, the outlook for DOD research and development funding of new technology may not be as optimistic as in previous years, as DOD’s budget has been drastically reduced for this activity in the last 2 fiscal years. Last, contractors and regulators who have become comfortable with certain cleanup methods may be reluctant to adopt new technologies and unwilling to risk using an unfamiliar cleanup technology. Our discussions with interested parties showed a wide range of views on environmental technology issues. The likelihood that entirely new technologies will quickly and inexpensively solve major contamination site problems is slim, according to Air Force and Navy environmental program managers. They said more gains could be made by improving and refining cleanup standards and existing technologies. Army officials told us that, with the exception of unexploded ordnance, they had the technology needed for addressing most contamination at their BRAC bases. EPA officials told us that new technology could reduce the costs of cleanup and that deferring cleanup until new technology becomes available might be an option in certain situations. One state regulator said that new technology was needed for many contaminants because no cost-effective treatment was available and some prevalent problems were not being addressed. Another state official said that, except for unexploded ordnance and groundwater contamination, the services had the necessary technology and should not delay cleanups. Allowing the receiving party, or transferee, to pay fully or in part for environmental cleanup would reduce DOD’s costs, but there are several barriers to achieving cost reduction in this manner. Existing legislation to encourage sharing costs has not been effective, in part, because of unknown future liabilities and difficulty establishing the value of the property. According to DOD officials, communities have not expressed an interest in assuming the cost of cleanup to receive property more quickly because there is apparently little incentive to do so. Current legislation allows DOD to transfer property without cleaning it up, provided that the recipient agrees to do so. Specifically, section 2908 of the National Defense Authorization Act for Fiscal Year 1994 (P.L. 103-160) authorizes DOD to enter into an agreement to transfer by deed real property or facilities with any person who agrees to perform all environmental restoration, waste management, and all environmental compliance activities that are required under federal and state laws, administrative decisions, agreements, and concurrences. However, this transfer may be made only if DOD certifies to the Congress that cleanup costs are equal to or greater than the fair market value of the property or facilities. If, however, the cleanup costs are lower, the recipient must pay the difference between the fair market value and such costs. Although less revenue would be received from the property transfer, DOD would not incur the cost of cleanup. Officials we talked to were unaware of any instances in which property had been transferred under the above provision. They cited a number of reasons for this situation, including (1) difficulty in determining the fair market value of property to be transferred, (2) little incentive for investors to assume the risks of unknown liabilities, and (3) stipulations that the transferee gives up the right for future indemnification if further contamination is found. We requested written comments on a draft of this report from DOD, but none were received. However, officials from the Office of the Deputy Under Secretary of Defense (Environmental Security), Under Secretary of Defense (Comptroller), and the Navy provided us with oral comments. DOD concurred with the findings and the general tone of the report. The officials, however, offered a number of technical clarifications to improve the accuracy of the report. We considered their comments and have made changes as necessary in the appropriate sections of this report. For example, DOD commented that our use of specific environmental terminology was inconsistent throughout the report. We agree and have clarified our use of the terms. To determine the amount of money devoted to the BRAC environmental program, we interviewed DOD and military service comptroller officials and reviewed documentation that tracked BRAC financial information. We analyzed data to determine the relative growth over time in the amounts of money allocated, obligated, and expended for cleanup efforts. We inquired as to the rationale underlying financial growth trends. To determine the estimated total cost for the BRAC environmental program, we aggregated (1) actual DOD fund allocations through fiscal year 1995 for all BRAC rounds, (2) estimated base program completion costs reported in the Defense Environmental Restoration Program Annual Report to Congress for Fiscal Year 1995, and (3) estimated program management costs through completion. To find out how funds are being used and gain insight as to why cleanup efforts are so costly, we visited six closing bases, interviewed DOD headquarters and base-level BRAC officials, discussed cleanup actions with selected state and community representatives, reviewed base cleanup documentation, and observed site cleanup actions underway. Our base-level visits were intended to get a mix of military services’ 1988, 1991, and 1993 BRAC round bases that had obligated significant funds for environmental cleanup. We did not visit 1995 BRAC round bases because, at the time our review, DOD was in the early stages of the closure process at these bases and had not obligated significant BRAC funds for environmental efforts. We visited the following BRAC bases: Norton Air Force Base, California; Pease Air Force Base, New Hampshire; Army Material Technology Laboratory, Massachusetts; Fort Ord, California; Charleston Naval Shipyard, South Carolina; and Mare Island Naval Shipyard, California. We also visited the following military service agencies involved in the award and management of contracts associated with environmental study and cleanup actions: Air Force Center for Environmental Excellence, Texas; Army Environmental Center, Maryland; Army Corps of Engineers, Sacramento District, California; and Naval Facilities Engineering Command, Engineering Field Activity (West), California. To identify potential opportunities and tradeoffs for reducing environmental costs, we analyzed a number of cost reduction proposals that have surfaced in recent years. We reviewed documentation to include past work by us, DOD, the Congressional Budget Office, and the Congressional Research Service, along with congressional efforts to revise existing environmental legislation. We discussed cost and programmatic tradeoffs with affected parties, including BRAC officials; EPA officials; community environmental representatives; and state environmental officials overseeing BRAC issues in California, New York, South Carolina, and Texas. We performed our work between April 1995 and May 1996 in accordance with generally accepted government auditing standards. Unless you publicly announce its contents earlier, we plan no further distribution of this report until 10 days after its issue date. At that time, we will send copies to other congressional committees; the Secretaries of Defense, the Air Force, the Army, and the Navy; the Director, Office of Management and Budget; the Administrator, EPA; and other interested parties. We will also make copies available to others on request. If you have any questions, please call me on (202) 512-8412. Major contributors to this report are listed in appendix III. Requires the Department of Defense (DOD) to comply with a variety of laws—including the Comprehensive Environmental Response, Compensation, and Liability Act (CERCLA) and National Environmental Policy Act—to effect federal real property disposal at most base realignment and closure (BRAC) installations. Defines the roles for the Environmental Protection Agency (EPA), state agencies, and DOD components. CERCLA section 120 compliance is required for all federal facilities, including BRAC bases. Requires for property transfer that all remedial action necessary to protect human health and the environment has been taken. Also requires the federal government to assume financial responsibility for any additional cleanup of DOD-caused pollution discovered in the future. Sets criteria for an installation’s inclusion on the National Priorities List (NPL). Authorizes DOD components to conduct site investigations and cleanups. Used as the basis for the Defense Environmental Restoration Program. Authorizes removal of unexploded ordnance and unsafe buildings and debris on BRAC bases. Defines the process for examining potential impacts to the environment that may result from disposition of BRAC installation property. Requires that reuse alternatives are identified and characterized and that the environmental impacts associated with each are disclosed. CERCLA section 120(a)(4) states that “State laws concerning removal and remedial actions, including State laws regarding enforcement, shall apply to removal and remedial action at facilities owned or operated by a department, agency, or instrumentality of the United States when such facilities are not included in the National Priorities List.” Other relevant federal environmental laws Resource Conservation and Recovery Act (RCRA), 42 U.S.C. 6901, et seq. Establishes the framework for managing solid wastes, including hazardous substances. Applies to both NPL and non-NPL installations. Regulates specific chemical substances, including polychlorinated biphenyls and asbestos. Federal Water Pollution Control Act (“Clean Water Act”), 33 U.S.C. 1251, et seq. Regulates discharges of pollutants into waters. Requires the establishment of criteria and standards to protect water quality. Requires federal permits for dredge and fill operations. Safe Drinking Water Act, 42 U.S.C. 300f, et seq. Establishes regulations to protect human health from contaminants in drinking water. Regulates releases of pollutants into the air. Federal Insecticide, Fungicide, and Rodenticide Act, 7 U.S.C. 135, et seq. Establishes a registration program for pesticides. Governs disposal of pesticides. Protects and preserves access to religious sites of Native Americans. Protects historic or archaeological resources threatened by federal dams or construction projects. (continued) Governs activities and facilities that may threaten protected birds. Requires federal agencies to observe state Coastal Zone Management Plans for activities near shorelines. Protects the habitat of threatened or endangered species by controlling land use and regulating construction. Requires federal agencies to consider the effect of their land and water use activities on fish and wildlife. Establishes a program for the preservation of designated historic properties throughout the nation. Establishes a national goal of no net loss of wetlands. Provides for mitigation of negative effects of water resource projects on fish and wildlife. Preserves and protects the free-flowing condition of designated rivers. Lionel C. Cooper, Jr. The first copy of each GAO report and testimony is free. Additional copies are $2 each. Orders should be sent to the following address, accompanied by a check or money order made out to the Superintendent of Documents, when necessary. VISA and MasterCard credit cards are accepted, also. Orders for 100 or more copies to be mailed to a single address are discounted 25 percent. U.S. General Accounting Office P.O. Box 6015 Gaithersburg, MD 20884-6015 Room 1100 700 4th St. NW (corner of 4th and G Sts. NW) U.S. General Accounting Office Washington, DC Orders may also be placed by calling (202) 512-6000 or by using fax number (301) 258-4066, or TDD (301) 413-0006. Each day, GAO issues a list of newly available reports and testimony. To receive facsimile copies of the daily list or any list from the past 30 days, please call (202) 512-6000 using a touchtone phone. A recorded menu will provide information on how to obtain these lists. | Pursuant to a congressional request, GAO reviewed the costs of the Department of Defense's (DOD) environmental cleanup efforts under the base realignment and closure (BRAC) process, focusing on the: (1) reasons that cleanups are so costly; and (2) potential for reducing costs and the impact on program goals. GAO found that: (1) as of March 1996, DOD had allocated about $3.4 billion for the BRAC environmental cleanup program; (2) as more bases are closed and more cleanup actions are underway, program costs are likely to increase significantly; (3) although DOD has not computed a total cost estimate for the program, available DOD financial data indicate that program costs are likely to exceed $11 billion; (4) the key reasons for the high cost of closing base cleanups include the large number of contaminated sites and difficulties associated with types of contamination, requirements of federal and state laws and regulations, lack of cost-effective cleanup technology for certain contaminants, and intended property reuse; (5) DOD has identified over 5,300 potentially contaminated sites at its BRAC bases; (6) the laws and regulations DOD must abide by in expediting property transfer for reuse have proven to be time- consuming, complex, and costly; (7) technology limitations in cleaning property of certain contaminants (such as unexploded ordnance) have proved costly; (8) options for reducing cleanup costs at closing bases include deferring or extending certain cleanup actions, modifying existing laws and regulations, adopting more cost-effective cleanup technologies, and sharing costs with the ultimate user of the property; (9) all of these options may adversely impact programmatic goals, thereby presenting decisionmakers with difficult choices in developing a cost-effective environmental cleanup program; (10) deferring or extending cleanup actions may delay property transfer and reuse, hurt the economic revitalization of communities affected by the closure process, and harm the environment and health as well; (11) modifying law and regulations may increase environmental risk, thereby increasing public resistance and dissatisfaction; (12) adopting more cost- effective technologies may delay the program because new technologies currently under development may not be available for years and the new technologies may not be more cost- effective than existing technologies; and (13) sharing costs with the ultimate user could present problems because of unknown future liabilities and difficulty establishing the value of the property. |
A number of events are important in the history of DOE’s U.S. Plutonium Disposition program. In 1994, the United States declared 38.2 metric tons of weapons-grade plutonium as surplus to national security needs. In 1997, DOE announced a plan to dispose of surplus, weapons-grade plutonium through the following dual approach: (1) conversion into MOX fuel and (2) immobilization in glass or ceramic material. According to DOE, its approach would require the construction of three facilities—a pit disassembly and conversion facility, a MOX fuel fabrication facility, and an immobilization facility. In 2000, the United States and Russia entered into a Plutonium Management and Disposition Agreement, in which each country pledged to dispose of at least 34 metric tons of surplus, weapons-grade plutonium, including the disposition of no less than 2 metric tons of plutonium per year. In 2000, DOE announced in a record of decision that it would construct a pit disassembly and conversion facility, a MOX fuel fabrication facility, and an immobilization facility at SRS. In 2002, NNSA canceled the immobilization portion of its surplus plutonium disposition strategy due to budgetary constraints. In addition, according to NNSA officials, NNSA canceled the immobilization portion because (1) Russia would not dispose of its plutonium if the United States adopted an immobilization-only approach and (2) the technology for MOX fuel fabrication had been in use in Europe for three decades, whereas immobilization of weapons-grade plutonium in glass or ceramic had never before been demonstrated. In 2003, NNSA announced that it was pursuing a MOX-only plutonium disposition program to dispose of 34 metric tons of surplus, weapons- grade plutonium. The majority of the 34 metric tons of surplus, weapons-grade plutonium is in the form of pits, clean metal, and oxides. The remainder is in nonpit forms, such as contaminated metal, oxides, and residues from the nuclear weapons production process. While NNSA plans to build a pit disassembly and conversion facility to obtain plutonium from pits, it also plans to use the ARIES project—a technology development and demonstration project for pit disassembly and conversion located at LANL—to obtain a small amount of plutonium from pits. In addition, according to NNSA documents, NNSA plans to obtain plutonium from nonpit forms in two ways. First, the K-Area Facility at SRS is storing 4.1 metric tons of plutonium in nonpit form that is already suitable for use by the MFFF. Second, NNSA plans to prepare and process additional quantities of plutonium (3.7 metric tons) already at the K-Area Facility or planned for storage at the facility. Prior work by GAO has identified persistent problems with cost overruns and schedule delays on the PDCF project. For example, in our March 2007 report on major DOE construction projects, we found that ineffective DOE project oversight, poor contractor management, and external factors were among the primary reasons for the cost increases and schedule delays associated with the PDCF project. In addition, according to a May 2005 DOE Inspector General report, NNSA officials attributed schedule delays for the PDCF to the disagreement between the United States and Russia about liability for work performed by U.S. contractor personnel working in Russia and a change in funding priorities. NNSA project directors are responsible for managing the MFFF, WSB, and PDCF projects and overseeing the contractors that design and construct these facilities. In doing so, project directors follow specific DOE directives, policies, and guidance for project management. Among these is DOE Order 413.3A, which establishes protocols for planning and executing a project. The protocols require DOE projects to go through a series of five critical decisions as they enter each new phase of work. These decisions are as follows: Critical decision 0, which approves a mission-related need. Critical decision 1, which approves the selection of a preferred solution to meet a mission need and a preliminary estimate of project costs—an approval that is based on a review of a project’s conceptual design. Critical decision 2, which approves that a project’s cost and schedule estimates are accurate and complete—an approval that is based on a review of the project’s completed preliminary design. Critical decision 3, which reaches agreement that a project’s final design is sufficiently complete and that resources can be committed toward procurement and construction. Critical decision 4, which approves that a project has met its performance criteria for completion or that the facility is ready to start operations. To oversee projects and approve these critical decisions, DOE conducts its own reviews, often with the help of independent technical experts. For example, for large projects (with a total project cost of greater than $100 million), DOE’s Office of Engineering and Construction Management (OECM) validates the accuracy and completeness of the project’s performance baseline as part of the critical decision 2 process. DOE Order 413.3A also requires projects to use EVM to measure and report the progress of construction projects (with a total project cost of greater than or equal to $20 million). EVM measures the value of work accomplished in a given period and compares it with the planned value of work scheduled for that period and with the actual cost of work accomplished. Differences in these values are measured in both cost and schedule variances. EVM provides information that is necessary for understanding the health of a program and provides an objective view of program status. As a result, EVM can alert program managers to potential problems sooner than expenditures alone can, thereby reducing the chance and magnitude of cost overruns and schedule delays. The following DOE offices and entities provide independent nuclear safety oversight: HSS is responsible for policy development, independent oversight, enforcement, and assistance in the areas of health, safety, the environment, and security across DOE. Among its functions are periodic appraisals of the environmental, safety, and health programs at DOE sites, including evaluation of a sample of high-hazard nuclear facility at these sites to determine whether the program offices and their contractors are complying with DOE policies. The NNSA Central Technical Authority is responsible for maintaining operational awareness of nuclear safety on NNSA projects, especially with respect to complex, high-hazard nuclear operations, and ensuring that DOE’s nuclear safety policies and requirements are implemented adequately and properly. The CDNS is responsible for evaluating nuclear safety issues and providing expert advice to the Central Technical Authority and other senior NNSA officials. In particular, the CDNS is responsible for (1) validating that efforts to integrate safety into a project’s design include the use of a system engineering approach, (2) determining that nuclear facilities have incorporated the concept of defense-in-depth into the facility design process, and (3) validating that federal personnel assigned to an integrated project team as nuclear safety experts are appropriately qualified. Finally, DOE considers assessments and recommendations from external organizations, most prominently the Defense Nuclear Facilities Safety Board—an independent, external organization that reviews nuclear safety issues at DOE defense facilities and makes nonbinding recommendations to DOE. The MFFF and WSB construction projects both appear to be meeting their cost targets, but the MFFF project has experienced some delays over the past 2 years. In accordance with DOE project management requirements, both projects are using EVM to measure and report progress against their established cost and schedule estimates (also known as performance baselines) for construction. EVM provides a proven means for measuring such progress and thereby identifying potential cost overruns and schedule delays early, when their impact can be minimized. Differences from the performance baseline are measured in both cost and schedule variances. Positive variances indicate that activities are costing less or are completed ahead of schedule. Negative variances indicate that activities are costing more or are falling behind schedule. These cost and schedule variances can then be used in estimating the cost and time needed to complete the project. Figure 1 presents information on both cumulative cost and schedule variances for the MFFF project over the 2-year period ending November 2009. With respect to cost, the MFFF project has experienced fluctuating variances during this period. Overall, these cost variances are relatively small compared with the project’s average monthly expenditures of over $20 million. In addition, it is normal for variances to fluctuate during the course of a project. However, with respect to the project’s schedule, the MFFF project has experienced consistently negative variances for most of the past 2 years. Specifically, as shown in figure 1, these schedule variances were consistently negative for most of 2008, and, for much of 2009, the project had not completed almost $40 million in scheduled work. According to the data and project officials, delays during 2008 were due primarily to the delivery of reinforcing bars that did not meet nuclear quality standards. Specifically, in February 2008, NRC inspectors identified numerous pieces of reinforcing bars—steel rods that are used in reinforced concrete—that did not meet industry standards for nuclear facilities. At that point, NNSA’s contractor, Shaw AREVA MOX Services, LLC (MOX Services), had accepted delivery of about 10,000 tons of reinforcing bars on-site and had installed almost 4,000 tons. Although NRC and MOX Services officials determined that the error did not affect the safety of reinforcing bars already installed, this issue had a major effect on the overall schedule for pouring concrete and installing reinforcing bars in the structure during 2008. According to project officials, the project switched to a different supplier of reinforcing bars in September 2008 and by April 2009 had a sufficient supply of material to support the construction schedule. Schedule delays in 2009 occurred primarily because project officials decided that they had not allocated sufficient time in the existing schedule to ensure the delivery of materials that would meet the stringent safety and design standards for nuclear facilities. For example, according to project officials, the project extended the amount of time needed to produce concrete for the MFFF to provide additional assurance that the concrete will meet nuclear quality standards. The rate of concrete production will be gradually increased beginning in early 2010, according to project officials. In addition, the project extended the amount of time needed to fabricate and deliver slab tanks, which are used to hold liquid fissile material, to provide additional assurance that these tanks meet stringent safety and design standards. In recent months, the MFFF project has improved its schedule performance, so that it faced roughly $25 million in uncompleted work by November 2009, compared with almost $40 million in uncompleted work earlier in the year. According to project officials, this amount of negative schedule variance is equivalent to about 2 to 3 week’s worth of work on the project, and they expect to recover from this variance during 2010. In comparison, these officials stated that the project’s schedule includes 16 month’s worth of contingency to mitigate any risks from additional delays before the expected start of MFFF operations. Figure 2 presents information on both cumulative cost and schedule variances for the WSB project over a 11-month period ending in November 2009. With respect to cost, the WSB project has experienced consistently positive cost variances. However, schedule variances have been consistently negative over the same period. By November 2009, the project had not completed over $4 million worth of scheduled work, compared with average monthly expenditures of roughly $2 million during fiscal year 2009. According to the NNSA federal project director, the schedule variances are due to a variety of factors, including delays in the procurement of cementation equipment and in the installation of piping due to inclement weather. However, the official said that he expects the project to recover from these delays, and that none of these factors will affect the overall construction schedule for the project. The reliability of a project’s EVM system depends in large part on the reliability of its underlying schedule. A reliable schedule specifies when the project’s work activities will occur, how long they will take, and how they relate to one another. We have previously identified nine key practices necessary for developing a reliable schedule. In a March 2009 testimony before this subcommittee, we identified several instances in which the MFFF project’s schedule did not adhere to these practices. In particular, we found that MFFF project staff had not conducted a risk analysis on their current schedule. However, since our March 2009 testimony, MFFF project officials have taken a number of steps to address our concerns. For example, project officials conducted a risk analysis of the MFFF project schedule in the summer of 2009 and used the results to update their risk management plan. In addition, project officials stated that they have significantly reduced the number of scheduled activities with long durations—that is, activities with start-to-finish durations of over 200 days. On the basis of these actions, we reevaluated the MFFF project’s schedule against the nine key scheduling practices. We also evaluated the WSB project’s schedule against these same practices. We found that both projects met most of the key practices to a satisfactory degree. For example, one key practice is to plan the schedule so that it can meet critical project dates. To do so, project officials must logically sequence all planned activities in the order that they are to be carried out. In particular, project officials must identify both predecessor activities—which must finish prior to the start of another activity—as well as successor activities—which cannot begin until other activities are completed. We found that the MFFF project had logically sequenced all scheduled activities, while the WSB project had logically sequenced the vast majority of its scheduled activities. For the complete results of our analysis of the projects’ schedules, see appendixes II and III. NNSA recently announced that it is considering a new alternative for its pit disassembly and conversion mission. However, due to the amount of time and effort needed to reconsider alternatives and construct a facility, as well as the amount of uncertainty associated with the agency’s new alternative, it seems unlikely that NNSA will be able to establish this capability in time to produce the plutonium oxide feedstock needed to operate the MFFF. As result of the likely delay in establishing a pit disassembly and conversion capability, NNSA may need to expand the ARIES project at LANL to provide additional interim plutonium feedstock to the MFFF. However, NNSA has not sufficiently planned for such a contingency. In addition, NNSA has not sufficiently planned for the maturation of critical technologies to be used in pit disassembly and conversion operations. In 1997, DOE decided to establish a pit disassembly and conversion capability as part of its strategy for plutonium disposition. Because about two-thirds of the plutonium slated for disposition is contained in nuclear weapon pit form, the ability to disassemble pits is critical to the success of the program. In 2000, DOE decided to construct and operate a PDCF at SRS. Through 2009, NNSA’s strategy has been to design and construct the PDCF as a new, stand-alone facility on a site adjacent to the current construction site of the MFFF. While NNSA has never established a definitive cost and schedule estimate for the PDCF project, a 2009 NNSA report estimated that the PDCF would cost $3.65 billion to construct and be operational by April 2021. However, DOE recently proposed a new alternative for establishing a pit disassembly and conversion capability at SRS. In September 2008, DOE authorized a study to review alternatives to the siting location of the PDCF capability within existing facilities at SRS and, as a result, to potentially improve its approach to disposition of surplus plutonium at SRS. Specifically, the study looked at the feasibility of combining the capabilities of the PDCF project with the Plutonium Preparation project, another project at SRS being managed by DOE’s Office of Environmental Management. The purpose of the Plutonium Preparation project, as approved by DOE in June 2008, was to prepare for disposition of up to 13 metric tons of surplus, nonpit, plutonium-bearing materials that are either at the SRS K-Area Facility or planned for storage at the facility. According to DOE’s plans, the project would be installed in the K-Area Facility and would prepare the plutonium-bearing materials for disposition via two pathways: (1) converting some of the materials into plutonium oxide feedstock for the MFFF and (2) immobilizing the rest of the materials with high-level waste in glass using the Defense Waste Processing Facility at SRS. According to DOE’s 2008 preliminary estimate, this project would be operational in the 2013-2014 time frame at a cost of $340 million to $540 million. In November 2008, DOE issued a report stating that it would be feasible to combine the two projects at the K-Area Facility. According to NNSA’s preliminary estimates, the combined project would cost about $3.65 billion and would be constructed in two phases. The first phase would include the design and installation of equipment in one area of the K-Area Facility to provide the capability (formerly associated with the Plutonium Preparation project) to process 3.7 metric tons of surplus, nonpit plutonium, which would be used as an early source of plutonium oxide feedstock to the MFFF. The second phase would include the modification of a different area within the facility and the design and installation of equipment to provide the pit disassembly and conversion capability. In December 2008, NNSA suspended many of the activities associated with the PDCF project while it performed additional analyses, and DOE suspended activities associated with the Plutonium Preparation project. Finally, in November 2009, DOE approved the “pursuing” of the combined project approach, noting several potential benefits, such as greater funding flexibility, greater flexibility regarding DOE’s secure transportation system, the avoidance of expenditures associated with constructing a new facility, and the avoidance of costs associated with decontaminating and decommissioning two Category 1 nuclear facilities, among others. However, it appears unlikely that NNSA will be able to establish a pit disassembly and conversion capability in time to produce the plutonium feedstock needed to operate the MFFF beginning in 2021, due to the amount of time and effort needed to reconsider alternatives and construct a facility as well as the amount of uncertainty associated with the agency’s new proposal. First, according to NNSA officials, they do not expect to make a decision in the near future on which approach—either the PDCF as a stand-alone facility or the K-Area Facility combination project—they will ultimately approve. Specifically, officials told us that prior to making any decision, NNSA must first select its preferred alternative as part of the DOE critical decision 1 process. To prepare for critical decision 1, NNSA will need to develop and manage numerous details, including (1) the appropriate review and documentation pursuant to the National Environmental Policy Act; (2) a transfer by the Secretary of Energy from the Office of Environmental Management to NNSA of the necessary materials, functions, and facilities to carry out the preferred alternative; and (3) issues related to federal and contractor program management, contract management, project management, and budget/financial management. As a result, NNSA officials said that they are still developing plans and schedules for the combination project and cannot provide any specific project schedule dates at this time. In addition, they stated that once NNSA makes a final decision on its strategy for pit disassembly and conversion as part of the critical decision 1 process, it will take several additional years to develop definitive cost and schedule estimates for its final approach as part of the critical decision 2 process. Second, a number of issues with NNSA’s new proposal raise doubts regarding whether the agency will be able to construct a facility in time to provide the plutonium feedstock necessary to operate the MFFF. For example: According to NNSA documents, the K-Area Facility combined project will require an aggressive, near-term acquisition strategy and project development effort to design, construct, and start a pit disassembly and conversion capability under the current time constraints. Phase 1 of the project is scheduled to be operational by 2014 to provide an early source of feedstock (from nonpit plutonium sources) to the MFFF, and phase 2 must be operational by 2021 to provide the bulk of the plutonium oxide feedstock that the MFFF will require to meet its planned production schedule. According to NNSA documents, the existing schedule for the K-Area Facility combined project is at an early stage of development and lacks any quantified schedule contingency. The project will require construction within an existing, secure, operating facility. Specifically, the project will need to excavate material from existing walls and floors in numerous locations to install piping and utilities, among other things. According to NNSA, during these excavations, the project may encounter conditions that have not been documented in existing design drawings for the K-Area Facility. Construction of a new facility, the original plan for the PDCF project, carries fewer risks of encountering unknown conditions—such as undocumented electrical wiring or other physical interfaces. The project will require substantial coordination between NNSA and the Office of Environmental Management, as well as various contractor organizations, to address competing missions and out-year issues. As a result, according to NNSA, DOE may require additional federal resources and interface agreements between its various offices to ensure the proper integration and execution of the project. NNSA’s new alternative assumes that the K-Area Facility combined project will become operational by the 6th year of MFFF operations (2021). However, if the design and construction of the project are delayed, NNSA may have to rely on the ARIES project at LANL to provide additional plutonium oxide feedstock for the MFFF. The ARIES project includes (1) laboratory facility preparation activities, (2) the acquisition of gloveboxes, (3) the design and assembly of a control system to operate the demonstration modules, (4) the preparation of all system documentation requirements, (5) the demonstration of the disassembly and conversion of all types of surplus nuclear weapon pits, (6) material control and accountability, and (7) measurements of personnel radiation exposure from all surplus pit types. LANL conducts activities associated with the ARIES project at its Plutonium Facility 4 building, which was constructed in 1978 as a multiuse plutonium research and development facility. NNSA’s current production mission for the ARIES project is to produce about 2 metric tons of plutonium oxide feedstock. Specifically, LANL is to produce 50 kilograms of plutonium oxide by the end of fiscal year 2010, ramp up to a target rate of 300 kilograms per year in fiscal year 2012, and sustain this rate through fiscal year 2017. However, this material—along with additional quantities of plutonium in nonpit form currently stored at the K-Area Facility—will only be enough for the first 5 years of the MFFF production schedule. NNSA has examined the possibility of expanding the ARIES project at LANL to provide additional plutonium oxide feedstock to the MFFF. Specifically, in May 2008, NNSA published a report that estimated NNSA might need as much as 12 metric tons of plutonium oxide feedstock to bridge a time gap between the startup of operations at the MFFF and the PDCF. The report’s authors evaluated several potential scenarios for increasing the amount of equipment and the number of work shifts at LANL and estimated that ARIES could produce up to 16.7 metric tons of plutonium oxide at a cost of over $700 million. In conducting its analysis, the report’s authors made a number of assumptions, including that space would be available within the Plutonium Facility 4 building to accommodate an expanded ARIES mission, and that LANL would be able to provide the necessary vault space to accommodate an expanded ARIES mission. However, recent GAO work raises questions about the validity of these assumptions. Specifically, in May 2008, we assessed NNSA’s plans to expand pit manufacturing operations within the Plutonium Facility 4 building. We found that NNSA would not be able to substantially increase its pit manufacturing capacity in the building for the foreseeable future because of several major constraints, including (1) limited vault space in the Plutonium Facility 4 building for storing pits and associated wastes and (2) competition for available floor space in the building due to the presence of other NNSA and DOE programs. For example, we found that vault space was one of the major limiting factors for pit production in fiscal year 2007, and that the vault was operating at 120 percent of its originally designed capacity. In a more recent study, NNSA concluded that LANL would not be a viable option to perform the entire pit disassembly and conversion mission. Specifically, in a November 2009 report, NNSA stated that the ARIES project would be unable to sustain the annual output of plutonium oxide feedstock necessary to support MFFF operations for a number of reasons. For example, the report stated that because the Plutonium Facility 4 building is a one-of-a-kind, mission-critical facility for national defense, national defense missions in the facility will continue to take precedence over other programs—including the pit disassembly and conversion mission—for the foreseeable future. In addition, the report pointed out several of the same constraints to expanding operations in the Plutonium Facility 4 building that we described in our prior report on pit manufacturing. NNSA’s November 2009 report also concluded that LANL continues to be a viable option to produce some additional plutonium oxide material to fill a potential gap if the PDCF project is delayed further. However, the report did not update the prior 2008 report to determine what additional amount of material it would be feasible for the ARIES project to produce. The report also did not provide estimates for how much an expanded ARIES mission would cost or when LANL would be able to produce additional plutonium oxide material. Instead, the report noted that NNSA would need to prepare and validate a detailed, resource-loaded, integrated schedule for an expanded ARIES mission. As a result, it remains uncertain whether ARIES could fill a potential gap if NNSA’s main pit disassembly and conversion operations are delayed. In March 2010, DOE stated that NNSA does not plan on expanding the current mission of the ARIES project until LANL demonstrates that it can sustain a production rate of 300 kilograms of plutonium oxide a year over an extended period of time. In addition, DOE stated that NNSA is evaluating other options to provide plutonium oxide feedstock to the MFFF prior to the start of pit disassembly and conversion operations. These options included (1) the use of 1.4 metric tons of fuel-grade plutonium—material originally not intended for use by the MFFF—already in storage at the K-Area Facility and (2) starting up “limited but sufficient” pit disassembly processes. NNSA’s current strategy relies on a number of technologies that are critical to establishing a pit disassembly and conversion capability. These technologies include the following systems and components: Pit disassembly—includes a lathe, manipulators, and grippers to cut pits, extract the plutonium, and prepare it for oxidation. Hydride dehydride—includes two furnaces to separate plutonium from other pieces of material. Direct metal oxidation—includes a furnace to convert plutonium and uranium metal into plutonium and uranium oxide. Oxide product handling—includes mill rollers and a blender to size and blend the plutonium oxide product. Product canning—includes an automated bagless transfer system to package the final product. Sanitization—includes a microwave furnace to melt components that do not contain plutonium or uranium. To demonstrate the viability of these technological components, DOE started the ARIES project at LANL in 1998. In addition, four other organizations are conducting testing and development activities in support of some of the critical technologies for pit disassembly and conversion: DOE’s Savannah River National Laboratory, DOE’s Pacific Northwest National Laboratory, the Clemson Engineering Technologies Laboratory, and a commercial vendor. Assessing technology readiness is crucial at certain points in the life of a project. Within DOE’s critical decision framework, such assessments are crucial at critical decision 2—acceptance of the preliminary design and approval of the project’s cost and schedule estimates as accurate and complete—and at critical decision 3—acceptance of the final design as sufficiently complete so that resources can be committed toward procurement and construction. Proceeding through these critical decision points without a credible and complete technology readiness assessment can lead to problems later in the project. Specifically, if DOE proceeds with a project when technologies are not yet ready, there is less certainty that the technologies specified in the preliminary or final designs will work as intended. Project managers may then need to modify or replace these technologies to make them work properly, which can result in costly and time-consuming redesign work. DOE has endorsed the use of the technology readiness level (TRL) process for measuring and communicating technology readiness in cases where technology elements or their applications are new or novel. In March 2008, DOE’s Office of Environmental Management published guidance on conducting technology readiness assessments and developing technology maturation plans. According to the guidance, staff should conduct technology readiness assessments using the TRL framework. Specifically, staff are to use a nine-point scale to measure TRLs. This scale ranges from a low of TRL 1 (basic principles observed) to a midlevel of TRL 6 (system/subsystem model or prototype demonstration in relevant environment) to a high of TRL 9 (total system used successfully in project operations). According to the guidance, for any critical technologies that did not receive a TRL of 6 or higher during such an assessment, staff should develop a technology maturation plan, which is supposed to describe planned technology development and engineering activities required to bring immature technologies up to the desired TRL of 6 or higher. This plan should include preliminary schedule and cost estimates to allow decision makers to determine the future course of technology development. In addition, the guidance stated that once a project reached the critical decision 2 stage, all critical technologies should have reached a TRL of 6. NNSA has undertaken a number of assessments of technological maturity and readiness for pit disassembly and conversion over the past decade as part of the ARIES project. For example, the PDCF project team carried out an evaluation of the maturity of ARIES equipment in 2003. According to project officials, the TRL framework was first used to assess the maturity of pit disassembly and conversion technologies in November 2008, in accordance with the Office of Environmental Management’s 2008 guidance. In addition, as part of an independent review of the PDCF project, NNSA issued a report in January 2009 that included a technology readiness assessment of the ARIES equipment and other critical technologies. The results of this assessment, as well as the earlier assessment conducted in 2008, are shown in table 1. As table 1 shows, there are a number of key technologies for pit disassembly and conversion that had not attained a TRL of 6. In accordance with the guidance on TRLs, NNSA should have a technology maturation plan in place to describe the planned technology development and engineering activities required to bring immature technologies up to the desired TRL of 6 or higher. According to NNSA officials, LANL had developed such a plan. However, we found that LANL’s plan lacked several key attributes of a technology maturation plan as described by DOE’s guidance. Specifically, we found the following problems with LANL’s plan: A technology maturation plan is supposed to be developed to bring all immature critical technologies up to an appropriate TRL. However, LANL’s plan only addressed the technologies under development at LANL as part of the ARIES project. The plan did not address technologies, such as the oxide product handling equipment, being tested by the four other organizations. For each technology assessed at less than TRL 6, a technology maturation plan should include preliminary schedule and cost estimates to allow decision makers to determine the future course of technology development. However, LANL’s plan did not include preliminary estimates of cost and schedule. LANL’s plan is dated November 2007. However, NNSA has conducted or sponsored two technology readiness assessments of the PDCF critical technologies since that date. As a result, LANL’s plan is out of date and does not take into account the current state of maturity of its critical technologies. NNSA officials told us that while they recognize some of the problems with the project’s existing technology maturation plan, they have already prepared budget and schedule estimates for technology development activities in a number of separate documents (including the overall PDCF project schedule). However, they still have not updated the current technology maturation plan in accordance with DOE guidance. Until such an update is completed, it is uncertain whether these technologies will be sufficiently mature in time to meet the current, aggressive schedule for establishing a PDCF capability. NNSA has offered several incentives to attract customers for its MOX fuel and is working toward a formal agreement for the Tennessee Valley Authority (TVA) to purchase most of this fuel. However, NNSA’s outreach to other utilities may not yet be sufficient to inform potential customers of incentives to use MOX fuel. NNSA and its contractor for the MFFF project, MOX Services, have established a production schedule for the fabrication of MOX fuel assemblies from surplus, weapons-grade plutonium. According to the current production schedule, the MFFF is to produce 8 MOX fuel assemblies in 2018, the initial year of production. The MFFF’s production rate is then to increase over the next 5 years up to a maximum rate of 151 fuel assemblies per year (see fig. 3). The MFFF is expected to produce 1,700 fuel assemblies during its production run. In addition, according to NNSA’s plans, these fuel assemblies will be designed for use in pressurized water nuclear reactors, which are the most common type of nuclear reactor in use in the United States. In June 2000, Duke Power (now Duke Energy Carolinas, LLC, or Duke), a power utility that operates seven pressurized water reactors in North Carolina and South Carolina, signed a subcontract with NNSA’s contractor for the MFFF project, MOX Services. According to NNSA officials, this subcontract gave the utility the option to purchase up to three-fourths of the MOX fuel produced by the MFFF at a discount relative to the price of normal reactor fuel, which uses low enriched uranium. According to the officials, the subcontract also obligated MOX Services to compensate Duke if the MOX fuel was not delivered by December 2007. However, as project delays continued to push back the start of construction, Duke, MOX Services, and NNSA began discussions in 2005 to renegotiate the subcontract. After nearly 3 years of discussions, Duke and MOX Services were unable to reach agreement by the negotiation deadline, and the subcontract automatically terminated on December 1, 2008. As negotiations with Duke came to an end, MOX Services, at NNSA’s direction, issued a request to nuclear utilities in October 2008 to express their interest in the MOX fuel program. The request outlined a number of possible incentives to mitigate the risks to utilities in using MOX fuel— risks that include the need to modify reactors and obtain an operating license amendment from NRC to use MOX fuel. For example, the request discussed the possibility of (1) selling MOX fuel at a discount relative to the price of uranium fuel and (2) paying for costs associated with modifying a reactor and obtaining an operating license amendment from NRC. Furthermore, in January 2009, DOE reserved 12.1 metric tons of highly enriched uranium from its stockpile and hired a contractor to downblend this amount into 155 to 170 metric tons of low enriched uranium to serve as a backup supply of fuel if MOX fuel deliveries to customers are delayed. As of December 2009, NNSA and MOX Services were still working on an agreement on liability if fuel is not delivered on time. According to NNSA officials, three utilities have responded to MOX Services’ request and have expressed interest in the MOX fuel program. Notably, in February 2010, NNSA and TVA executed an interagency agreement to fund TVA studies on the use of MOX fuel in five of TVA’s reactors. Under the agreement, TVA will perform work on core design, licensing, modifications, and other related activities to evaluate the use of MOX fuel in its reactors. According to an NNSA official, using MOX fuel in five of TVA’s reactors could account for up to 85 percent of the MFFF’s output. The official also stated that an agreement with TVA to become a customer could be signed by the fall of 2010. TVA officials stated that they believed that familiarity gained by working with DOE during the Blended Low Enriched Uranium would help them work with DOE during the MOX program and cited this factor in their decision to begin discussions about becoming a customer for MOX fuel. Aside from TVA, NNSA officials characterized their contact with two other utilities as in the preliminary stages, and they could not estimate when or if they would secure them as customers for MOX fuel. Because utilities typically contract with fuel suppliers at least 5 years in advance, NNSA and MOX Services will need to secure customers several years before they deliver MOX fuel to them. NNSA officials said that their goal is to obtain at least one customer by the end of fiscal year 2010, in part because the 5-year period during which the MFFF will increase its production capacity will allow them additional time to secure more customers. Furthermore, if TVA agrees to be a customer and uses MOX fuel in five of its reactors, these officials said that NNSA may only need one additional utility to account for the remainder of the MFFF’s planned production of MOX fuel assemblies. However, NNSA faces two main obstacles in obtaining TVA as its primary customer. First, some of TVA’s reactors that would be candidates for using MOX fuel may not be permitted to use the fuel due to their status as backup reactors in DOE’s tritium production program. According to NNSA officials, the 2000 U.S.-Russian plutonium disposition agreement could be interpreted as precluding reactors involved in weapons production from being used to dispose of MOX fuel. TVA officials told us that they are working with DOE to transfer tritium production responsibilities to another TVA reactor that is not presently a candidate for the MOX program. Second, although NNSA currently plans to produce MOX fuel assemblies for use in pressurized water reactors, three of TVA’s reactors that are candidates for burning MOX fuel are boiling water reactors. NNSA officials told us that they are studying how the MFFF can be reconfigured to produce fuel assemblies for boiling water reactors. In particular, they stated that the MFFF’s design is based on a French MOX Facility, which can switch production between fuel assemblies for pressurized water reactors and for boiling water reactors in about 10 to 20 days. However, the officials also stated that they might need to conduct additional tests on using MOX fuel assemblies in boiling water reactors before producing the fuel assemblies in large quantities, and that it was unclear whether such tests would delay the MOX production schedule. In March 2010, DOE stated that NNSA is evaluating several options for providing alternative sources of plutonium oxide material to the MFFF prior to the start of pit disassembly and conversion operations. One option under consideration is to adjust the “quantity and timing in providing initial fuel deliveries” to potential customers. We interviewed fuel procurement officials at 22 of the nation’s 26 nuclear utilities to determine the extent to which nuclear utilities are interested in participating in DOE’s MOX fuel program and to evaluate what factors may influence their interest. The factors we asked about were based on input we received from industry experts, DOE officials, and former utility officials. (For a list of the structured interview questions that we asked utilities, see app. IV.) As shown in table 2, utility officials most often identified the following factors as very or extremely important when assessing their level of interest in participating in the MOX fuel program: consistent congressional funding of the program, DOE’s ability to ensure timely delivery of MOX fuel, DOE’s ability to ensure the timely delivery of a backup supply of uranium the cost of MOX fuel relative to the cost of reactor fuel, and the opportunity to test MOX fuel in their reactors prior to full-scale use. We then asked utilities about possible incentives—some of which have already been proposed by NNSA and DOE—that may affect their interest in becoming program participants. We also asked about scenarios in which DOE offered a discount of 15 percent and 25 percent for MOX fuel relative to the price of regular reactor fuel. As shown in table 3, DOE’s payment for costs associated with reactor modifications and NRC licensing to use MOX fuel—two incentives DOE has actually proposed to utilities—resulted in the largest number of utilities expressing increased interest in participating in the MOX fuel program. However, despite the incentives offered, as of October 2009 the majority of the utilities that we interviewed expressed little or no interest in becoming MOX fuel customers. Specifically, 12 utilities reported they were either not interested or not very interested in becoming MOX fuel customers, 8 utilities were somewhat interested, and only 2 utilities indicated that they were currently very interested or extremely interested in the program. Three utilities indicated that they were currently interested enough to consider contacting DOE about becoming MOX fuel customers. When asked to consider the proposed incentives, however, 8 utilities expressed such interest. NNSA officials stated that they have communicated their willingness to provide incentives to potential customers. However, neither NNSA nor MOX Services has provided additional outreach or information to utilities in general since the October 2008 request for expression of interest. Furthermore, 11 utilities responded in our interviews that they had heard or read very little about the MOX fuel program, while 5 responded that they had received no information. In our view, the fact that so few utilities expressed sufficient interest in even contacting NNSA and MOX Services suggests that NNSA’s outreach may not be sufficient. NRC has primary regulatory responsibility for nuclear safety at the MFFF, and NRC’s activities to date have included authorizing construction, identifying safety-related issues with construction, and reviewing the license application for the operation of the facility. DOE has primary regulatory responsibility for nuclear safety at the WSB and has looked at some aspects of nuclear safety for both the MFFF and the WSB as part of its management reviews. However, oversight by DOE’s independent nuclear safety entities has been limited. NRC is responsible for licensing the MFFF to produce fuel for commercial nuclear reactors. To do so, NRC is using a two-stage review and approval process: the first stage is construction authorization, and the second stage is license application approval. The construction authorization stage began in February 2001, when the MFFF contractor submitted an application to begin construction. As part of the construction authorization review, NRC reviewed key documents, including the project’s preliminary safety designs, environmental impact statement, and quality assurance plan. NRC approved the facility’s construction authorization request in March 2005. NRC began its review of the MFFF project’s application for a license to possess and use radioactive materials in December 2006. NRC has divided the license review into 16 areas, including criticality/safety, chemical processing, and fire protection. NRC has issued requests for additional information for each of the 16 review areas. According to NRC officials, once NRC staff obtain all of the necessary information in a given area, they prepare a draft section for that area to be included in the draft Safety Evaluation Report for the facility. As shown in table 4, NRC had drafted sections for 6 of the 16 review areas as of January 2010. Once all of the draft sections are complete, NRC staff will prepare a draft safety evaluation report and, after concurrence from NRC management, will submit them to NRC’s Advisory Committee on Reactor Safeguards—a committee of experts that is independent of the staff and that reports directly to NRC’s commissioners—for review and comment. NRC staff are then to incorporate, at their discretion, the committee’s comments into the license approval document and issue a final safety evaluation report for the facility, which NRC expects to occur in December 2010. Once NRC completes the licensing review and verifies that MOX Services has completed construction of the primary structures, systems, and components of the MFFF, it may issue the license. NRC officials stated that they could issue the license by 2014 or 2015, depending on the construction status of the facility. One issue that NRC raised during its review of the MFFF project is the design of safety controls to prevent a chemical reaction known as a “red oil excursion.” Specifically, in January 2004, during the construction authorization stage, a senior NRC chemical safety reviewer stated that the MFFF’s planned safety controls to prevent a red oil excursion differed from those recommended by DOE and the Defense Nuclear Facilities Safety Board. In response, NRC convened a panel in March 2005 to evaluate the reviewer’s concerns. The panel issued a report in February 2007 concluding that although NRC’s construction authorization of the MFFF did not need to be revisited, there was wide agreement among NRC staff and the Advisory Committee on Reactor Safeguards that significant technical questions remained unanswered about the MFFF’s planned safety controls. To address these technical questions, NRC has taken a number of actions, including the following: NRC engaged the assistance of the Brookhaven National Laboratory to provide two independent assessments of the risk of a red oil excursion at the facility. Brookhaven National Laboratory issued an initial report in March 2007 and a follow-up report in August 2009 in which it examined updated safety information provided by MOX Services. The second of the two reports concluded that the risk of a red oil excursion at the facility is highly unlikely. During the current licensing application stage, NRC officials have requested and received additional information from MOX Services related to planned safety controls to prevent a red oil excursion. However, as of our review, NRC staff had not completed their draft safety evaluation report for this area. NRC’s oversight responsibilities also include inspecting the construction of the MFFF as well as the project’s own quality assurance plan. NRC’s Division of Construction Projects, based in NRC’s Region II headquarters in Atlanta, conducts periodic inspections of the MFFF that assess the design and installation of the facility’s principal structures, systems, and components and verify that the project’s quality assurance program is adequately implemented. These inspections involve document reviews and site inspections over several weeks and can include specialty reviews in welding, concrete, and other construction subject areas. NRC evaluates the MFFF’s construction against standards set by the American Concrete Institute and the American Society of Mechanical Engineers, among others. In addition to the Region II inspections, NRC maintains one resident inspector at the construction site who conducts day-to-day inspection activities, such as walk-throughs. NRC also plans to hire an additional full-time resident inspector for the MFFF in fiscal year 2010. As part of its ongoing inspection of the construction of the MFFF, NRC has issued 16 notices of violation against MOX Services since the start of construction in August 2007 related to various subjects, including quality assurance and control over design changes. (See app. V for a complete list and description of NRC notices of violation.) Although NRC has classified all of the violations to date as severity level IV, the lowest safety- significant designation in its four-category scale, the violations have had an effect on the project’s schedule. In addition to its regular construction reviews, NRC issues periodic assessments of the contractor’s performance. In its latest assessment, released in November 2009, NRC concluded that MOX Services had conducted its overall construction activities at the MFFF in an acceptable manner. However, NRC also determined that MOX Services must improve its control over changes to the MFFF’s design and increase its attention to its quality assurance oversight of vendors. NRC identified several examples of deficiencies associated with performing, verifying, and documenting design changes and noted failures on the part of MOX Services to adequately translate requirements into design and construction documents. In addition, NRC concluded that its finding of a violation related to MOX Services’ vendor oversight indicates “a challenge to [MOX Services’] quality assurance staff to provide effective oversight of vendors that perform work on, fabricate, or supply components and equipment for use at the MFFF.” In its assessment, NRC stated that it will conduct additional inspections to assess the effectiveness of MOX Services’ corrective actions. In response to NRC’s assessment, MOX Services stated that it is taking steps to strengthen its design control process, such as increasing training for quality control supervisors; introducing quality control checklists into its subcontractor and construction procedures; and conducting oversight visits to vendors. Although DOE has incorporated elements of nuclear safety in management reviews of the MFFF and the WSB projects that were conducted as part of its critical decision review process, DOE’s independent nuclear safety entities were minimally involved. As part of the critical decisions 2 and 3 review process for the MFFF project, OECM conducted a review of the MFFF project during April and May, 2006, which included nuclear safety as one of several review areas. A review team comprising independent consultants and former DOE officials evaluated, among other things, the integration of nuclear safety into the project’s environmental, safety, and health programs, as well the contractor’s process for addressing issues found by NRC. The review identified one finding related to safety, noting that the ongoing revision of the project contract could introduce conflicts with NRC regulations. NNSA accepted the review’s recommendation to develop a memorandum of understanding with NRC to resolve this issue. Regarding the WSB project, OECM conducted a review during September 2008—as part of the critical decision 2 process—that included nuclear safety as one of several review areas. The review team examined key WSB documents related to nuclear safety, including the facility’s safety evaluation report, preliminary documented safety analysis, and the design hazard analysis report. The review team recommended that an additional hazard analysis for one system be performed but determined that overall, the hazard analyses and safety assessments for the WSB were comprehensive and complete. In addition, NNSA’s Office of Project Management and Systems Support conducted another review of the WSB project during September 2008 as part of the critical decision 3 process. Because it was almost simultaneous with OECM’s review, NNSA’s review was less comprehensive and focused specifically on the WSB’s ability to protect against a red oil excursion. This review resulted in a single recommendation, that is, for additional justification for the inclusion of certain equipment in the facility’s design. In response to the recommendation, the WSB project team submitted a revised safety evaluation report justifying the equipment. HSS is responsible for policy development, enforcement, and independent oversight in the areas of health, safety, the environment, and security across DOE. To accomplish this responsibility, this office performs appraisals to verify, among other things, that the department’s employees, contractors, the public, and the environment are protected from hazardous operations and materials. However, these appraisals are designed to complement, not duplicate, program office oversight and self-assessments. In particular, HSS conducts visits to DOE sites and reviews a sample of facilities at those sites, including construction activities for new facilities. In addition, according to HSS officials, the office assists DOE’s program offices by conducting reviews of documents supporting the safety basis— which is a technical analysis that helps ensure the safe design and operation of DOE’s nuclear facilities—of a sample of high hazard nuclear facilities at a DOE site. For example, in response to our October 2008 report, which found that HSS was not conducting reviews of the safety basis of new, high-hazard nuclear facilities, HSS issued a new appraisal process guide in July 2009 that emphasized increased focus on the safety basis at such facilities. Finally, HSS has other oversight and advisory responsibilities related to nuclear safety during critical decision reviews for major DOE facilities. These responsibilities are spelled out in DOE’s Order 413.3A, which provides direction on program and project management for the acquisition of capital assets, and include the following actions: participating on the Energy Systems Acquisition Advisory Board—a body comprising senior DOE officials who advise DOE’s Secretarial Acquisition Executive in critical decisions regarding major projects and facilities; advising the DOE Secretarial Acquisition Executive on environmental, safety, and security matters related to all critical decision approvals; serving on independent project reviews as a team member at the request of the Secretarial Acquisition Executive or program officials; and participating on external independent reviews as an observer at OECM’s request. Regarding the MFFF project, HSS has provided limited oversight. According to HSS officials, a more limited amount of oversight is appropriate for the MFFF because of the National Defense Authorization Act of 1999, which gave NRC responsibility for regulating nuclear safety at the MFFF. HSS has conducted some inspection activities at the MFFF, including reviewing reinforced concrete and structural steel at the facility during site visits to SRS in August and September, 2009. However, HSS officials said that these activities did not include a review of documents supporting the MFFF’s safety basis. In addition, while HSS officials stated that personnel from HSS’s predecessor office participated in the critical decisions 2 and 3 reviews for the MFFF project during 2006, HSS was unable to provide any documentation to substantiate this statement. According to department officials, HSS had limited resources for conducting reviews and needed to focus its resources on facilities that were not subject to external regulation. Regarding nuclear safety oversight of the WSB project, which is solely regulated by DOE, we found that HSS had not conducted any oversight activities or participated in any critical decision reviews. Specifically, HSS officials told us that they have not reviewed any documents supporting the WSB’s safety basis, nor have they conducted any inspection activities at the WSB construction site. Despite the issuance of HSS’s new appraisal process guide, which contains inspection protocols for new and unfinished high-hazard nuclear facilities, an HSS official told us that the office has yet to determine when they will inspect the WSB. An HSS official told us that he was uncertain whether a WSB inspection would occur in 2010 because an ongoing internal DOE review has delayed the development of the office’s 2010 inspection schedule. However, if HSS’s initial visit occurs later than 2010, NNSA will have already completed at least half of the WSB’s construction, according to the project’s schedule. Additionally, HSS did not participate in any of the critical decision reviews for the WSB project because of existing DOE guidelines. Specifically, although the WSB is considered a category 2 (high-hazard) nuclear facility, it is categorized as a nonmajor project. According to DOE’s order, HSS is not required to participate on the review board for a nonmajor project. In addition, neither OECM nor NNSA requested HSS to participate on the project reviews conducted for critical decisions 2 and 3. DOE’s Order 413.3A calls for the NNSA Central Technical Authority to maintain operational awareness regarding complex, high-hazard nuclear operations, and to ensure that DOE’s nuclear safety policies and requirements are implemented adequately and properly. The order also directs the CDNS to support the Central Technical Authority in this effort by participating as part of the Energy Systems Acquisition Advisory Board for major facilities, or similar advisory boards for minor facilities; providing support to both the Central Technical Authority and the Acquisition Executive regarding the effectiveness of efforts to integrate safety into design at each of the critical decisions, and as requested during other project reviews; determining that nuclear facilities have incorporated the concept of defense-in-depth into the facility design process; validating that the integration of design and safety basis activities includes the use of a system engineering approach tailored to the specific needs and requirements of the project; and validating that federal personnel assigned to projects as nuclear safety experts are appropriately qualified. The CDNS’s manual for implementing DOE Order 413.3A provides additional guidance, such as establishing the responsibilities of CDNS staff for evaluating safety activities at nuclear facilities. The manual also directs the head of the CDNS to participate in relevant staff meetings for NNSA projects that are requesting a decision from the Energy Systems Acquisition Advisory Board, an activity that may not be delegated for major projects. However, according to the head of the CDNS, his office has not participated in any safety review activities at the MFFF because NRC is regulating nuclear safety at the facility. The head of the CDNS acknowledged that his office’s approach to overseeing nuclear safety for the MFFF project does not follow the guidance set out in DOE orders and related manuals and has not been formally adopted by NNSA. He stated this approach is necessary to make more efficient use of CDNS resources by focusing oversight activities on facilities regulated entirely by DOE. According to NNSA officials, DOE Order 413.3A does not explicitly exempt the CDNS from overseeing facilities regulated by NRC. Agency officials stated that NNSA is working with the Department to have that exemption inserted into the order during an upcoming revision of the order. NNSA officials stated that, historically, there was never an intention that the CDNS would have responsibilities for facilities regulated by NRC, and that this needs to be clarified in the order. The CDNS has provided some oversight of the WSB project, but according to the head of the CDNS, this oversight has been limited, due in part to difficulty in applying DOE’s guidance to the WSB and staffing issues. The CDNS participated as an observer on the advisory board for the WSB project during the project’s critical decisions 2 and 3 processes. However, the head of the CDNS said that he had no record of whether his office participated in or evaluated the results of OECM’s review during the critical decision 2 process, which included several lines of inquiry related to nuclear safety. During the critical decision 3 process for the WSB project, CDNS staff reviewed key project safety documents to determine how the facility would protect against a red oil excursion and determine the qualifications of the federal staff person assigned to the project as a nuclear safety expert. Despite these efforts, the head of the CDNS told us that during the critical decision 3 review, his office experienced some difficulty in implementing the guidance established in DOE orders for the WSB project. The office’s current policy is to review a project’s safety documentation early in the design process and determine whether it conforms to DOE’s relevant safety standard for integrating safety into design and incorporating defense-in-depth. The WSB project had completed its design work before DOE issued its current standard, and before the CDNS implemented a systematic approach to fulfilling its functions. Consequently, the CDNS did not perform a systematic review of WSB safety documentation. The CDNS head characterized the WSB review as being an ad hoc, qualitative assessment of some of the project’s safety documentation. Additionally, the CDNS has not evaluated the qualifications of the nuclear safety expert that replaced the one evaluated as part of the critical decision 3 review. However, according to the head of the CDNS, his office only plans to evaluate the qualifications of new staff during technical reviews of the project, not after every change to the project team’s composition. The head of the CDNS told us that his office has begun developing a more systematic approach to evaluating the design safety of DOE facilities. In addition, he stated that he would like to conduct additional safety reviews of facilities currently in design and construction. However, he said that these efforts have been hampered, in part due to staffing shortages. For example, the CDNS had a staff of 13 people in 2007. As of December 2009, however, only 4 people remained on the CDNS staff due to attrition and NNSA’s decision to transfer some of the personnel into other program offices. The head of the CDNS stated that current staffing levels have led the CDNS to focus its attention on projects that are still in the design phase. He said that it was doubtful that the CDNS would return to the WSB to ensure that safety basis controls are fully integrated during its construction. Concerns over CDNS staffing issues also were raised by the Defense Nuclear Facilities Safety Board. Specifically, in its March 2009 letter to the Secretary of Energy, the safety board noted that reduced staff levels and the transfer of CDNS personnel into NNSA’s program offices have reduced the effectiveness of the office. NNSA is already over 2 years into its construction schedule for the MFFF and expects the facility to become operational by 2016. It has also established a production schedule for fabricating up to 151 MOX fuel assemblies per year at full production. However, the agency faces uncertainty as to (1) its ability to supply the MFFF with sufficient quantities of plutonium oxide feedstock to meet its planned production schedule of MOX fuel and (2) the demand for MOX fuel assemblies from potential customers. Regarding the supply of plutonium oxide feedstock, NNSA only has a limited quantity of feedstock on hand to supply the MFFF prior to the start of pit disassembly operations. However, NNSA has not established a definitive strategy for pit disassembly operations, nor does it expect to do so in the near future. As a result, it appears unrealistic that NNSA will be able to meet its current production schedule for MOX fuel without obtaining additional sources of plutonium oxide. NNSA has stated that while it does not plan on expanding the current mission of the ARIES project until LANL demonstrates a sustained production rate over an extended period of time, it is evaluating other options to address this potential shortfall of plutonium oxide. These options include (1) the use of 1.4 metric tons of fuel-grade plutonium already in storage at the K-Area Facility, (2) starting up “limited but sufficient” pit disassembly processes, and (3) adjusting the “quantity and timing” in delivering MOX fuel to potential customers. We have concerns with these options, including: NNSA’s use of a “wait-and-see” approach to the ARIES project, and the implications this may have on the ability of the ARIES project to meet its current and future production goals; the implications of the use of fuel-grade plutonium on the design and safety of the MFFF, and the extent to which DOE has adequately determined how much additional material throughout the DOE complex may be suitable and available for use by the MFFF; how DOE plans to establish limited pit disassembly processes given the current lack of a definitive strategy for pit disassembly operations; and how DOE plans to adjust the MOX fuel production schedule, and the implications this may have on the cost and schedule for operating the MFFF and DOE’s ability to attract potential MOX fuel customers. In addition to these concerns, while NNSA’s strategy relies on critical technologies currently under development at LANL and other sites for pit disassembly and conversion operations, its current technology maturation plan does not meet DOE’s current guidance because the plan is outdated and incomplete. Without a plan that provides more details on the options DOE has mentioned to increase the supply of plutonium oxide, or a comprehensive technology maturation plan, it is uncertain whether NNSA will be able to meet the MFFF’s planned production schedule. Regarding obtaining customers for MOX fuel assemblies, our survey of utilities indicated that some utilities might be interested in becoming customers but appear unaware of the incentives NNSA and DOE are offering. Without additional outreach, NNSA may not be able to obtain sufficient customers for the MOX fuel it plans to produce, which would leave the agency with nuclear material it cannot dispose of and the U.S. Treasury with a forgone opportunity for revenue. Although DOE incorporated some aspects of nuclear safety oversight in its management reviews of the MFFF and WSB projects, oversight by HSS and the CDNS has been limited. Specifically, HSS has conducted limited oversight activities at the MFFF but has played no role in the WSB project because of its designation as a nonmajor project. Conversely, the CDNS has played no role in the MFFF project and has provided some elements of nuclear safety oversight for the WSB project. However, it has not fully met the responsibilities laid out for it by DOE order, in part due to a lack of a formal, standardized approach for reviewing project safety documents. We believe that HSS’s exclusion from the WSB project reviews, as well as the limited involvement of the CDNS in the WSB project reviews, creates a gap in oversight of the WSB and similar facilities. We are making the following five recommendations. To address uncertainties associated with NNSA’s plans to establish a pit disassembly and conversion capability, we recommend that the Administrator of the National Nuclear Security Administration take the following three actions: Develop a plan to mitigate the likely shortfall in plutonium oxide feedstock for the MFFF prior to the start of pit disassembly operations. This plan should include, at a minimum, the following five items: (1) the actions needed to ensure that the ARIES project will meet its existing production goals, and the cost and schedule associated with any needed expansion of the project; (2) an assessment of how much additional plutonium material, including fuel-grade plutonium, is available within the DOE complex for use as feedstock for the MFFF; (3) an assessment of the effect on the design and safety of the MFFF from the use of fuel-grade plutonium as feedstock; (4) an assessment of potential changes to the MOX fuel production schedule and the effect of these changes on the cost and schedule for operating the MFFF; and (5) an assessment of the cost and schedule associated with obtaining a limited but sufficient pit disassembly process to produce feedstock for the MFFF. Develop a technology maturation plan for the pit disassembly and conversion mission that (1) includes all critical technologies to be used in pit disassembly and conversion operations and (2) provides details (including preliminary cost and schedule estimates) on planned testing and development activities to bring each critical technology up to a sufficient level of maturity. Conduct additional outreach activities to better inform utilities about the MOX fuel program and related incentives. To ensure that the WSB and similar projects receive consistent nuclear safety oversight that is independent from the DOE program offices, we make the following two recommendations: The Secretary of Energy should revise DOE Order 413.3A to provide that HSS participate in key project reviews for the WSB and similar high-hazard facilities prior to the beginning of construction activities regardless of their status as nonmajor projects. The Administrator of NNSA should ensure that the CDNS conducts oversight activities to the extent called for by DOE Order 413.3A and establishes a formal, standardized approach to reviewing safety documentation. We provided the Department of Energy, the National Nuclear Security Administration, and the Nuclear Regulatory Commission with a draft of this report for their review and comment. In commenting on the draft report, the NNSA Associate Administrator for Management and Administration said that DOE agreed with the report and its recommendations. However, we have concerns about DOE’s response to one of our recommendations. Specifically, in commenting on our recommendation in a draft report that NNSA should develop a plan for expanding the ARIES project to produce additional quantities of plutonium oxide feedstock for the MFFF, DOE stated that NNSA is also evaluating other options for producing additional feedstock material for the MFFF, including (1) the use of 1.4 metric tons of fuel-grade plutonium already in storage at the K- Area Facility, (2) starting up “limited but sufficient” pit disassembly processes, and (3) adjusting the “quantity and timing” in delivering MOX fuel to potential customers. This information was not disclosed to us during our review, and we have a number of concerns about these options. For example, regarding the option to process fuel-grade plutonium, the MFFF was designed to process weapons-grade plutonium, not fuel-grade plutonium. As a result, we are concerned about the implications of this option on the design and safety of the MFFF. We are also concerned about the extent to which DOE has adequately determined how much additional material might be available throughout the DOE complex for use as an alterative source of feedstock for the MFFF. To address these concerns, we revised our conclusions and expanded our original recommendation to ensure that NNSA establishes a plan to more clearly explain its strategy for mitigating the likely shortfall in plutonium oxide feedstock for the MFFF prior to the start of pit disassembly operations. DOE’s written comments are reprinted in appendix VI, and NRC’s written comments are reprinted in appendix VII. In addition, DOE and NRC provided detailed technical comments, which we incorporated as appropriate. We are sending copies of this report to the appropriate congressional committees, the Secretary of Energy, the Administrator of NNSA, and other interested parties. We will also make copies available at no charge on GAO’s Web site at http://www.gao.gov. If you or your staffs have any questions about this report, please contact me at (202) 512-3841 or [email protected]. Contact points for our Offices of Congressional Relations and Public Affairs may be found on the last page of this report. Key contributors to this report are listed in appendix VIII. To assess the performance status of the MOX Fuel Fabrication Facility (MFFF) and the Waste Solidification Building (WSB) construction projects regarding cost and schedule, we requested and analyzed earned value management (EVM) data contained in the projects’ monthly reports and variance reports, as well as EVM data for the MFFF project contained in Excel spreadsheets. We assessed the adequacy of the MFFF project’s use of EVM reporting by using a set of analysis tasks developed by GAO. In addition, we assessed the reliability of the EVM data by evaluating each project’s schedule against GAO’s scheduling best practices. We have previously identified nine key practices necessary for developing a reliable schedule. These practices are (1) capturing all activities, (2) sequencing activities, (3) establishing the duration of activities, (4) assigning resources to activities, (5) integrating activities horizontally and vertically, (6) establishing the critical path for activities, (7) identifying the float time between activities, (8) performing a schedule risk analysis, and (9) monitoring and updating the schedule. To assist us in these efforts, we contracted with Technomics, Inc., to perform an in-depth analysis of data used in the MFFF’s integrated master schedule and the WSB’s current schedule. For the MFFF project, we also conducted a review of the project’s schedule risk analysis, which was performed during the summer of 2009. We also interviewed officials from the Department of Energy’s (DOE) National Nuclear Security Administration (NNSA) and MOX Services regarding their use of EVM data, scheduling practices, and schedule risk analyses for the two projects. Finally, we conducted tours of the MFFF construction project at DOE’s Savannah River Site (SRS), and met officials from the MFFF’s contractor, MOX Services, Inc.; and DOE’s NNSA and Office of Engineering and Construction Management (OECM). To assess the status of NNSA’s plan to establish a pit disassembly and conversion capability to supply plutonium to the MFFF, we reviewed documentation provided by NNSA and its contractors for the Pit Disassembly and Conversion Facility (PDCF), Plutonium Preparation Project, K-Area Complex, and MFFF projects, including project execution plans, project status reports, EVM data, and independent project reviews. We also requested information from NNSA on risks associated with the development of technology used in pit disassembly and conversion. We analyzed these risks using DOE guidance on assessing technology readiness. We also reviewed project plans, testing and development data, and feasibility studies related to the Advanced Recovery and Integrated Extraction System (ARIES) project. We also toured the ARIES facility at DOE’s Los Alamos National Laboratory (LANL) in New Mexico and interviewed officials involved in the project. To assess the status NNSA’s plans to obtain customers for mixed-oxide (MOX) fuel from the MFFF, we reviewed project documents, including interest requests communicated to utilities, descriptions of possible incentives for participating in the MOX program, and analyses on the expected return to the government from the sale of MOX fuel. We also interviewed officials from NNSA and the Tennessee Valley Authority (TVA) on current efforts to secure TVA as a customer for MOX fuel, as well as officials from Duke on factors that caused the utility to end its agreement with NNSA’s contractor to purchase MOX fuel. To further identify factors affecting utilities’ interest in the MOX fuel program, we conducted structured telephone interviews of U.S. nuclear utilities. We chose to interview fuel procurement officers because they would be the most knowledgeable respondents about factors affecting fuel purchasing decisions, including considerations for MOX fuel. We asked fuel procurement officers to provide information on their currents interest in MOX fuel, important factors in the consideration of using MOX fuel, and possible incentives for the adoption of MOX fuel. To develop the structured interview questionnaire, GAO social science survey specialists and GAO staff developed a draft of the questionnaire on the basis of survey design principles and information obtained in interviews with DOE and nuclear utility officials. The draft questionnaire underwent a blind review by an additional social science survey specialist and was edited to ensure consistency among questions and clearly defined terms. The revised draft questionnaire was then pretested on three respondents, all of whom were familiar with the nuclear fuel procurement process. During the pretests, respondents were asked about their understanding of the questions, how they would approach constructing their answers, and any editorial concerns. The draft questionnaire underwent a final revision before being used to conduct the structured telephone interviews. Structured interviews were completed by fuel procurement officials from 22 of the 26 nuclear utilities in the United States, for an overall response rate of 85 percent. All of the interviews were conducted during September and October, 2009. Respondents were contacted in advance to schedule a time to complete the interview. One of the 22 responding utilities elected not to answer three of the interview questions, but the other 21 completed the entire questionnaire. Data from the interviews were recorded and entered by the interviewer. A social science analyst performed a 100 percent check of that data entry by comparing them with their corresponding questionnaires, to ensure that there were no errors. To examine the actions that NRC and DOE have taken to provide independent nuclear safety oversight of the MFFF and WSB construction projects, we reviewed oversight documentation and reports and interviewed oversight officials from both agencies. In relation to NRC’s oversight activities, we examined documents related to NRC’s approval of the MFFF’s construction authorization request; information requests submitted by NRC to MOX Services in support of NRC’s ongoing review of the facility’s operating license application; and technical analyses conducted by Brookhaven National Laboratory on behalf of NRC examining the likelihood of a red oil excursion at the facility. We also reviewed documents related to NRC’s construction inspection program, including inspection guidance and procedures, inspection reports, periodic assessments of MOX Services’ performance, and MOX Services’ responses to inspection findings. We also interviewed officials from the Nuclear Regulatory Commission’s Office of Nuclear Materials Safety and Safeguards and the Region II Division of Construction Projects. In relation to DOE’s inspection activities, we reviewed DOE project management and nuclear safety oversight guidance, protocols for conducing facility inspections, inspection reports, and records of decision related to reviews conducted by DOE’s Office of Health, Safety, and Security (HSS) and the Chief of Defense Nuclear Safety. We also reviewed reports by the Defense Nuclear Facilities Safety Board on DOE oversight and interviewed Safety Board officials. We interviewed officials from NNSA’s Office of Fissile Materials Disposition, HSS’s Office of Independent Oversight, and the Chief of Defense Nuclear Safety. We conducted this performance audit from January 2009 to March 2010, in accordance with generally accepted government auditing standards. Those standards require that we plan and perform the audit to obtain sufficient, appropriate evidence to provide a reasonable basis for our findings and conclusions based on our audit objectives. We believe that the evidence obtained provides a reasonable basis for our findings and conclusions based on our audit objectives. program’s work breakdown structure, including activities to be performed by both the government and its contractors. The project has provided evidence that the schedule reflects both government and contractor activities, such as the building and testing of software components, as well as key milestones for measuring progress. Sequencing activities The schedule should be planned so that it can meet critical program dates. To meet this objective, activities need to be logically sequenced in the order that they are to be carried out. In particular, activities that must finish prior to the start of other activities (i.e., predecessor activities), as well as activities that cannot begin until other activities are completed (i.e., successor activities), should be identified. By doing so, interdependencies among activities that collectively lead to the accomplishment of events or milestones can be established and used as a basis for guiding work and measuring progress. The schedule should avoid logic overrides and artificial constraint dates that are chosen to create a certain result. Of the approximately 22,000 normal activities, all are logically sequenced—that is, the schedule identifies interdependencies among work activities that form the basis for guiding work and measuring progress. The schedule should realistically reflect how long each activity will take to execute. In determining the duration of each activity, the same rationale, historical data, and assumptions used for cost estimating should be used. Durations should be as short as possible and have specific start and end dates. In particular, durations of longer than 200 days should be minimized. Of the 22,000 normal activities, only 569 have durations of over 200 days. In addition, the schedule includes 38 activities with a remaining duration over 500 days and 10 activities with remaining duration over 1,000 days (3.9 years). The schedule should reflect what resources (e.g., labor, material, and overhead) are needed to do the work, whether all required resources will be available when needed, and whether any funding or time constraints exist. Of the 22,000 normal activities, resources are placed on 3,124 of these, and 13,988 of these have no resources. However, the program does have all resources captured in an alternate software package. According to DOE, the current baseline reflects $2.2 billion. The schedule should be horizontally integrated, meaning that it should link the products and outcomes associated with other sequenced activities. These links are commonly referred to as “handoffs” and serve to verify that activities are arranged in the right order to achieve aggregated products or outcomes. The schedule should also be vertically integrated, meaning that traceability exists among varying levels of activities and supporting tasks and subtasks. Such mapping or alignment among levels enables different groups to work to the same master schedule. Due to concerns about total float values discussed below in “identifying float between activities,” the schedule has not fully integrated key activities horizontally. The schedule has sufficiently integrated key activities vertically. Using scheduling software, the critical path—the longest duration path through the sequenced list of key activities— should be identified. The establishment of a program’s critical path is necessary for examining the effects of any activity slipping along this path. Potential problems that might occur along or near the critical path should also be identified and reflected in the scheduling of the time for high- risk activities. The project has established a number of critical paths by using the scheduling software to identify activities with low or zero float, as well as by identifying high-risk activities. Project officials said that they conduct weekly meetings to keep track of critical path activities. The schedule should identify float time—the time that a predecessor activity can slip before the delay affects successor activities—so that schedule flexibility can be determined. As a general rule, activities along the critical path typically have the least amount of float time. Total float time is the amount of time flexibility an activity has that will not delay the project’s completion (if everything else goes according to plan). Total float that exceeds a year is unrealistic and should be minimized. Partially The schedule contains 8,600 activities with total float exceeding 400 days (1.5 years) and 669 activities with total float exceeding 1,000 days (3.9 years). Many of the activities with large total float values are tied to completion milestones, rather than to an intermediate successor. A schedule risk analysis should be performed using statistical techniques to predict the level of confidence in meeting a program’s completion date. This analysis focuses not only on critical path activities but also on activities near the critical path, since they can potentially affect program status. Project officials conducted a schedule risk analysis during the summer of 2009. This analysis was performed using statistical techniques and focused on critical path and near-the-critical-path activities. Officials said that this analysis has provided important overall project risk information to management. The schedule should be continually monitored to determine when forecasted completion dates differ from the planned dates, which can be used to determine whether schedule variances will affect downstream work. Individuals trained in critical path method scheduling should be responsible for ensuring that the schedule is properly updated. Maintaining the integrity of the schedule logic is not only necessary to reflect true status, but is also required before conducting a schedule risk analysis. Project officials said that they update the schedule on a weekly basis. In particular, project controls staff are associated with each engineering group and provide a status update on a weekly basis. program’s work breakdown structure, including activities to be performed by both the government and its contractors. The project’s schedule reflects both government and contractor activities, such as the building and testing of cementation equipment, as well as key milestones for measuring progress. The schedule should be planned so that it can meet critical program dates. To meet this objective, activities need to be logically sequenced in the order that they are to be carried out. In particular, activities that must finish prior to the start of other activities (i.e., predecessor activities), as well as activities that cannot begin until other activities are completed (i.e., successor activities), should be identified. By doing so, interdependencies among activities that collectively lead to the accomplishment of events or milestones can be established and used as a basis for guiding work and measuring progress. The schedule should avoid logic overrides and artificial constraint dates that are chosen to create a certain result. Mostly Of 2,066 activities that are currently in progress or have not yet started, 80 are not logically sequenced—that is, the schedule does not identify interdependencies among work activities that form the basis for guiding work and measuring progress. The schedule should realistically reflect how long each activity will take to execute. In determining the duration of each activity, the same rationale, historical data, and assumptions used for cost estimating should be used. Durations should be as short as possible and have specific start and end dates. In particular, durations of longer than 200 days should be minimized. Mostly Ninety-eight of the 2,066 activities that are currently in progress or have not yet started have durations of 100 days or more. While durations should be as short as possible and have specific start and end dates to objectively measure progress, project officials provided a valid rationale for the duration of these activities. The schedule should reflect what resources (e.g., labor, material, and overhead) are needed to do the work, whether all required resources will be available when needed, and whether any funding or time constraints exist. The schedule reflects $336 million in resource costs. The project’s cost baseline is $344 million. According to project officials, they are aware of this discrepancy. They stated that while all of the project resources are reflected in the schedule, a software problem has caused some of these resources to not show up. Project officials are working to correct this software problem. The schedule should be horizontally integrated, meaning that it should link the products and outcomes associated with other sequenced activities. These links are commonly referred to as “handoffs” and serve to verify that activities are arranged in the right order to achieve aggregated products or outcomes. The schedule should also be vertically integrated, meaning that traceability exists among varying levels of activities and supporting tasks and subtasks. Such mapping or alignment among levels enables different groups to work to the same master schedule. Project officials provided evidence that the schedule is sufficiently integrated. Using scheduling software, the critical path—the longest duration path through the sequenced list of key activities— should be identified. The establishment of a program’s critical path is necessary for examining the effects of any activity slipping along this path. Potential problems that might occur along or near the critical path should also be identified and reflected in the scheduling of the time for high-risk activities. A critical path has been established. The critical path dates are driven by the logic of the schedule. The schedule should identify float time—the time that a predecessor activity can slip before the delay affects successor activities—so that schedule flexibility can be determined. As a general rule, activities along the critical path typically have the least amount of float time. Total float time is the amount of time flexibility an activity has that will not delay the project’s completion (if everything else goes according to plan). Total float that exceeds a year is unrealistic and should be minimized. Mostly The schedule contains 1,482 activities that have a float time of over 100 days. However, project officials provided a valid rationale for having activities with large float times. A schedule risk analysis should be performed using statistical techniques to predict the level of confidence in meeting a program’s completion date. This analysis focuses not only on critical path activities but also on activities near the critical path, since they can potentially affect program status. Project officials stated that they conducted a schedule risk analysis using statistical techniques in July 2008 on the baseline schedule. The schedule should be continually monitored to determine when forecasted completion dates differ from the planned dates, which can be used to determine whether schedule variances will affect downstream work. Individuals trained in critical path method scheduling should be responsible for ensuring that the schedule is properly updated. Maintaining the integrity of the schedule logic is not only necessary to reflect true status, but is also required before conducting a schedule risk analysis. Project officials conduct weekly meetings to review and update the project schedule. Appendix IV: Summary Results of Interviews with 22 Utilities 1. How much information have you heard or read about DOE’s MOX fuel program? A great deal of information 2. Does your utility own any reactors that are compatible with AREVA fuel designs? 3. Taking into account your current reactor fleet, what is your utility’s current level of interest in participating in the MOX fuel program? (Choose One) 4. What kinds of reactors owned by your utility do you think would be the most likely candidates for MOX fuel if your utility decided to participate in the MOX fuel program? Please choose only one answer. 7 5. How important is this factor in your assessment of your utility’s current level of interest in participating in the MOX fuel program? 6. If DOE would sell MOX fuel to your utility at a 15% discounted price relative to the market price for uranium fuel, what do you think your utility’s level of interest in participating in the MOX program would be? 7. If DOE would sell MOX fuel to your utility at a 25% discounted price relative to the market price for uranium fuel, what do you think your utility’s level of interest in participating in the MOX program would be? 8. How important is this factor in your assessment of your utility’s current level of interest in participating in the MOX fuel program? 12 9. If DOE would cover the costs associated with reactor modifications for compatibility with MOX fuel, what do you think your utility’s level of interest in participating in the MOX program would be? 10. How important are the costs associated with NRC licensing requirements, in terms of monetary outlays and staff time, to your utility’s current level of interest in participating in the MOX fuel program? 11. If DOE would cover the costs associated with obtaining NRC licenses, what do you think your utility’s level of interest in participating in the MOX program would be? 12. Another factor that may affect your level of interest is the ability to test the quality and safety of MOX fuel at your reactor. How important is this factor in your assessment of your utility’s current level of interest in participating in the MOX fuel program? 15 13. If DOE offered to fund a demonstration program of MOX fuel at your reactor, what do you think your utility’s level of interest in participating in the MOX program would be? 14. Another factor that may affect your level of interest is DOE’s ability to ensure the timely delivery of MOX fuel (i.e. – Delivery occurs at an interval that meets a reactor’s needed timeline to prepare prior to a refueling outage). How important is this factor in your assessment of your utility’s current level of interest in participating in the MOX fuel program? 15. Another factor that may affect your level of interest is DOE’s ability to provide a compatible backup supply of uranium fuel as assurance in case of delays in the delivery of MOX fuel. How important is this factor in your assessment of your utility’s current level of interest in participating in the MOX fuel program? 11 16. Another factor that may affect your level of interest is the storage of MOX fuel at your reactor site for longer than the interval that meets a reactor’s needed timeline prior to a refueling outage. How important is this factor in your assessment of your utility’s current level of interest in participating in the MOX fuel program? 17. Another factor that may affect your level of interest is public opinion regarding the use of MOX fuel. How important is this factor in your assessment of your utility’s current level of interest in participating in the MOX fuel program? 18. DOE’s MOX fuel program relies on annual Congressional appropriations. Another factor that may affect your level of interest is the consistency of funding for the program through 2033. How important is this factor in your assessment of your utility’s current level of interest in participating in the MOX fuel program? 12 19. In addition to the factors described above, are there any other factors or issues that we have not discussed that affected your assessment of your utility’s current interest in participating in the MOX fuel program? Open ended responses are not presented in this appendix. 20. How interested in participating do you think your utility would have to be to actually submit such an expression of interest? 21. The MOX Fuel Fabrication Facility is expected to begin delivery of MOX fuel in 2018 and continue supplying fuel through 2032. How confident are you in DOE’s ability to deliver MOX fuel on time throughout this period? 22. How confident are you in DOE’s ability to ensure that a compatible backup supply of uranium fuel is delivered on time in the case of MOX fuel delays? To be determined. MOX Services’ design control procedures did not require that the method of design verification, or the results, be adequately documented when design verifications were performed. To be determined. MOX Services failed to provide a technical justification for an engineering change request. To be determined. MOX Services failed to include a sequential description of work to be performed in implementing documents. To be determined. September 11, 2009 MOX Services failed to promptly identify, evaluate, correct, and document conditions adverse to quality, including incorrect placement of a floor and failure to document a rebar deficiency in the corrective action program. MOX Services conducted a root cause analysis for the conditions that led to each of the findings in NRC’s September 11, 2009, inspection report and instituted actions, including improving communications between engineering, construction, and quality control personnel; adopting checklists for changes; and adding additional training for engineering personnel. NRC stated that the actions appeared adequate, and that it will verify implementation during later inspections. September 11, 2009 MOX Services failed to perform quality-affecting activities in accordance with approved drawings and specifications. MOX Services conducted a root cause analysis for the conditions that led to each of the findings in NRC’s September 11, 2009, inspection report and instituted actions, including improving communications between engineering, construction, and quality control personnel; adopting checklists for changes; and adding additional training for engineering personnel. NRC stated that the actions appeared adequate, and that it will verify implementation during later inspections. September 11, 2009 MOX Services failed to provide and adequate documented justification for changes to final designs. MOX Services conducted a root cause analysis for the conditions that led to each of the findings in NRC’s September 11, 2009, inspection report and instituted actions, including improving communications between engineering, construction, and quality control personnel; adopting checklists for changes; and adding additional training for engineering personnel. NRC stated that the actions appeared adequate, and that it will verify implementation during later inspections. MOX Services failed to correctly translate applicable requirements into design documents. MOX Services initiated corrective actions to address these issues. Suppliers were found to fail to meet a basic NQA-1 requirement, indicating that MOX Services failed to ensure that services were controlled to ensure conformance with specified technical and QA requirements. NRC determined that MOX Services’ oversight of its contractors was acceptable, despite numerous examples of failures to meet the QA requirements. Testing documentation for two separate tests did not include the required information. MOX Services revised documentation procedure to include the necessary information. On two separate occasions, the contractor failed to incorporate an approved design change in project documents, and later did not verify a field drawing, which resulted in failure to identify that the drawing did not implement design requirements. MOX Services took steps to ensure that documentation was appropriately revised, and added the design change into the corrective action plan to initiate correction before concrete placement. NRC found that some design reviews did not ensure that design inputs were correctly incorporated into field drawings. MOX Services revised the design drawings to match the as-built drawings after completing an analysis of the structure. Contractor failed to identify certain conditions adverse to quality assurance plan requirements, including those related to incorrectly poured concrete. MOX Services placed the matter into its corrective action program and took steps to ensure adequate pouring of concrete. Contractor failed to take corrective action for conditions adverse to quality, including providing adequate resolution to justify the use of reinforcing steel splices that did not meet industry standards. NRC reviewers concluded that MOX Services implemented appropriate actions to control purchase of items from the reinforcing bar vendor. Contractor failed to ensure that numerous pieces of reinforcing bar met industry standards for bend radius. NRC reviewers concluded that MOX Services implemented appropriate actions to control purchase of items from the reinforcing bar vendor. NRC found that MOX Services had not followed quality insurance procedures, including, for example, ensuring that a vendor provided clear instructions for operating a concrete batch plant, which resulted in improperly mixed concrete. MOX Services took over concrete testing and took corrective actions, including revising procedures and bringing in independent experts to make recommendations for improvement. In addition to the individual named above, Daniel Feehan, Assistant Director; Steve Carter; Antoinette Capaccio; Tisha Derricotte; Jennifer Echard; Jason Holliday; and Ben Shouse made key contributions to this report. | The end of the Cold War left the United States with a surplus of weapons-grade plutonium, which poses proliferation and safety risks. Much of this material is found in a key nuclear weapon component known as a pit. The Department of Energy (DOE) plans to dispose of at least 34 metric tons of plutonium by fabricating it into mixed oxide (MOX) fuel for domestic nuclear reactors. To do so, DOE's National Nuclear Security Administration (NNSA) is constructing two facilities--a MOX Fuel Fabrication Facility (MFFF) and a Waste Solidification Building (WSB)--at the Savannah River Site in South Carolina. GAO was asked to assess the (1) cost and schedule status of the MFFF and WSB construction projects, (2) status of NNSA's plans for pit disassembly and conversion, (3) status of NNSA's plans to obtain customers for MOX fuel from the MFFF, and (4) actions that the Nuclear Regulatory Commission (NRC) and DOE have taken to provide independent nuclear safety oversight. GAO reviewed NNSA documents and project data, toured DOE facilities, and interviewed officials from DOE, NRC, and nuclear utilities. The MFFF and WSB projects both appear to be meeting their cost targets for construction, but the MFFF project has experienced schedule delays. Specifically, the MFFF and WSB projects are on track to meet their respective construction cost estimates of $4.9 billion and $344 million. However, the MFFF project has experienced some delays over the past 2 years, due in part to the delivery of reinforcing bars that did not meet nuclear quality standards. Project officials said that they expect to recover from these delays by the end of 2010 and plan for the start of MFFF operations on schedule in 2016. The WSB project appears to be on schedule. NNSA is reconsidering its alternatives for establishing a pit disassembly and conversion capability. However, it seems unlikely that NNSA will be able to establish this capability in time to produce the plutonium feedstock needed to operate the MFFF, due to the amount of time and effort needed to reconsider alternatives and construct a facility as well as the amount of uncertainty associated with NNSA's current plans. NNSA had previously planned to build a stand-alone facility near the MFFF construction site to disassemble pits and convert the plutonium into a form suitable for use by the MFFF. However, NNSA is now considering a plan to combine this capability with another project at an existing facility at the Savannah River Site. NNSA officials could not estimate when the agency will reach a final decision or establish more definitive cost and schedule estimates for the project. However, NNSA's new alternative depends on an aggressive, potentially unrealistic schedule. In addition, NNSA has not sufficiently planned for the maturation of critical technologies to be used in pit disassembly and conversion operations, some of which are being tested at the Los Alamos National Laboratory in New Mexico. NNSA has one potential customer for most of its MOX fuel, but outreach to other utilities may be insufficient. NNSA is in discussions with the Tennessee Valley Authority to provide MOX fuel for five reactors. NNSA plans to offer several incentives to potential customers, including offering to sell MOX fuel at a discount relative to the price of uranium fuel. In interviews with the nation's nuclear utilities, GAO found that while many of the utilities expressed interest in NNSA's proposed incentives, the majority of utilities also expressed little interest in becoming MOX fuel customers. This suggests that NNSA's outreach to utilities may not be sufficient. NRC is currently reviewing the MFFF's license application and has identified several issues related to construction. However, oversight of the MFFF and the WSB by DOE's independent nuclear safety entities has been limited. For example, DOE's Office of Health, Safety, and Security has not conducted any oversight activities or participated in any project reviews of the WSB, despite the WSB's status as a high-hazard nuclear facility. In addition, NNSA's Chief of Defense Nuclear Safety has not conducted any nuclear safety oversight activities for the MFFF project and has not conducted all oversight activities for the WSB project that are required by DOE order. |
To protect the public from harmful medical devices, the 1976 Medical Device Amendments to the Federal Food, Drug, and Cosmetic Act expanded FDA’s responsibility for regulating medical devices in the United States. FDA uses three primary mechanisms to ensure that all medical devices are safe and effective for their intended use: Premarket review is a system of checks, reviews, and controls intended to be applied before new devices are approved and made available to the public. On-site inspections of device manufacturers’ facilities are intended to ensure compliance with FDA laws and regulations, including good manufacturing practices (GMP), and prevent the production and marketing of defective devices. The adverse event reporting system is intended to provide FDA with early warning of problems associated with devices after they become available for public use. This monitoring system gathers information about device problems that could necessitate withdrawing a device from the market or taking other corrective actions. Among other things, the act authorized FDA to establish a reporting system for adverse events associated with the use of medical devices. As a result, FDA established the Mandatory Medical Device Reporting (MDR) system. Under this system, since 1984, manufacturers of medical devices have been required to report to FDA—and maintain records on—device- related deaths, serious injuries, and malfunctions that, should they recur, would be likely to result in death or serious injury. A system called the Medical Device and Laboratory Problem Reporting Program (PRP) was established to receive voluntary reports from health care professionals. FDA’s responsibility is to audit manufacturers’ performance to identify systemic problems and trends associated with an individual firm, a specific device, or the entire device industry, issuing guidance as necessary. The Office of Surveillance and Biometrics (OSB) within CDRH operates the adverse event reporting system. OSB reviews adverse event reports on medical devices to identify, manage, and resolve public health issues; prepares safety alerts and public health advisories; and provides regulatory guidance on adverse event reporting issues. CDRH estimates that it spent approximately $8 million and used about 80 full-time-equivalent (FTE) positions in support of the medical device reporting program in fiscal year 1996. This represents an increase of about $606,000 and three FTEs over medical device reporting program expenditures in fiscal year 1995. When FDA receives an adverse event report, OSB health care analysts evaluate and compare the report with other information contained in FDA databases. A decision is then made about whether or not the device problem poses a potential risk to the public health. If so, depending on the nature and severity of the risk, an analyst may initiate a follow-up investigation, which generally involves a written request for additional information or an inspection of the manufacturer or user facility. (App. II provides a detailed description of FDA’s report evaluation process.) For years, FDA’s implementation and enforcement of the medical device reporting regulation have concerned the Congress. Studies issued by our office, the former Office of Technology Assessment, and the Office of Inspector General of the Department of Health and Human Services (HHS) have found significant weaknesses in FDA’s ability to gather information about medical devices in use. For example, in 1986, we found that less than 1 percent of the device problems occurring in hospitals were reported to FDA and that, the more serious the problem with the device, the less likely it was to be reported to FDA. In a follow-up study, we concluded that the problem still existed despite full-scale implementation of the medical device reporting regulation. To improve the flow of information about medical device problems to FDA’s adverse event reporting system, the Congress passed SMDA requires the establishment of a network of communication about device-related events among user facilities, distributors, manufacturers, and FDA. The act requires that user facilities report to FDA—and to device manufacturers, if known—when they become aware of information that reasonably suggests that a device caused or contributed to a death. User facilities are also required to report to manufacturers when they become aware of information that reasonably suggests that a device caused or contributed to a serious injury or serious illness. In the event that the manufacturer of the device is unknown, the facility is required to report a serious injury or illness directly to FDA. User facilities are required to submit reports within 10 work days of becoming aware of such situations. The act also requires that user facilities submit to FDA semiannual summaries of all the adverse event reports they submitted to manufacturers and FDA during the previous 6 months. Table 1 summarizes the medical device reporting requirements for user facilities, distributors, and manufacturers. In addition, SMDA reporting requirements. In addition to the statutory requirement that user facilities and distributors report serious medical device-related events to FDA and manufacturers, the tentative medical device reporting regulation provided nonmandatory guidance. This guidance instructed user facilities to establish and maintain written procedures that include (1) training and educational programs to inform employees about how to identify and report reportable events, (2) internal systems for documenting and reporting adverse events, and (3) documentation and recordkeeping guidelines. In December 1995, 4 years after the tentative medical device reporting regulation was issued, FDA published the final regulation for user facilities and manufacturers. As of July 31, 1996, they are both required to report device-related events under a uniform system of reporting. Also under the final medical device reporting regulation, manufacturers are required to submit baseline reports and annual certifications to FDA. FDA can issue various types of written notification to inform a user facility that it has not complied with the medical device reporting regulation, which could result in civil monetary penalties or warning letters. CDRH established the Manufacturer and User Device Experience (MAUDE) system to replace the PRP and MDR systems. From 1992 to 1996, voluntary reports from user facilities, distributors, and health professionals were input into the MAUDE system; as of April 1996, the MAUDE system contained approximately 20,000 such reports. During this same period, FDA continued to enter manufacturer reports into the MDR system. FDA plans to begin entering into the MAUDE system manufacturers’ reports that give July 31, 1996, or later as the date the manufacturer learned of an adverse event. FDA expects to have moved all the data from the PRP and MDR systems into the MAUDE system by January 1997. Finally, in 1993, FDA established the Medical Products Reporting Program—called “MedWatch”—to encourage health professionals to report adverse events and product problems to FDA, simplify reporting, and improve the postmarket product information in FDA’s adverse event reporting system. MedWatch consists of two forms used to elicit the information needed to monitor the safety of marketed devices: the form 3500 is completed by health professionals for voluntary reporting, and the form 3500A is completed by user facilities, distributors, and manufacturers for required reporting. Using the 3500A was voluntary until the final medical device reporting regulation became effective in July 1996. Although the flow of information to FDA about medical device problems increased dramatically after SMDA is directly responsible for this growth is unclear because the majority of reports were provided by manufacturers rather than by user facilities. The increased volume posed problems for CDRH’s adverse event reporting system, and CDRH experienced significant delays in processing and reviewing reports of potentially hazardous device problems. These delays could hinder the timely identification and resolution of device problems. Moreover, the annual volume of reporting is expected to rise significantly in fiscal year 1997 due, in part, to increased reporting requirements under the final medical device reporting regulation. To speed processing and analysis of reports, FDA has initiated several changes to its adverse event reporting system. Manufacturer reports of medical device problems increased dramatically after SMDA directly accounted for the increased volume of reports because, until recently, FDA did not systematically collect information on the source of complaints. Device manufacturers submitted over 370,400 of the approximately 407,700 (91 percent) adverse event reports that FDA received from all sources during fiscal years 1991 through 1995. A comparison of two 4-year periods, fiscal years 1987 through 1990 and 1991 through 1994, illustrates the rapid growth of FDA officials believe the upward trend in reporting is due to (1) the unanticipated, large volume of problems associated with silicone gel-filled breast implants, which accounted for nearly one-third of all of the manufacturer event reports submitted to FDA during fiscal years 1992 through 1994, and (2) increased compliance by manufacturers with the 1984 medical device reporting regulation and SMDA . CDRH has had considerable difficulty processing and reviewing the heavy volume of adverse event reports in a timely manner. Between March 1994 and April 1995, a backlog of about 48,900 malfunction reports from manufacturers accumulated at CDRH. Many of the malfunction reports were not entered into the adverse event reporting system and available for complete review and assessment until 1996. Although FDA assigns malfunction reports a lower priority than reports of death and serious injury, processing malfunction reports quickly is critical because of their potential to alert FDA to device problems that could cause or contribute to a death or serious injury if the malfunction were to recur. Entering all adverse event reports into the system promptly allows FDA analysts to perform more complete reviews and assessments on device problems. Further, entering event reports expeditiously is important because an event report, regardless of whether it requires immediate action, can become part of a group of reports that ultimately stimulates corrective action on a device problem. Two factors contributed to the backlog, according to FDA. First, FDA received an unanticipated, heavy volume of breast implant adverse event reports. Second, FDA lacked funds to increase hiring for the former medical device reporting contractor (United States Pharmacopeial Convention, Inc.) that performed data processing functions related to the reports. FDA told us that it recognized the potential impact of the increasing backlog and decided to enter death and serious injury reports immediately, leaving less serious injury and malfunction reports to be entered when resources permitted. FDA also emphasized that it screened the malfunction reports for hazards that required immediate attention and that it believes the public health was not compromised by the backlog. In addition, the volume of reporting from all sources is projected to rise in fiscal year 1997 due, in part, to increased reporting requirements under the final medical device reporting regulation. Additional reports that are required include imminent hazard reports and baseline reports for manufacturers. FDA estimates that its fiscal year 1997 reporting workload will exceed 152,000 reports, up 52 percent from the approximately 100,000 reports received in 1995. CDRH is taking steps to minimize backlogs and speed report reviews through changes it made to the final medical device reporting regulation and through computer innovations. To minimize the effects of potential backlogs caused by large increases in reporting, a CDRH official told us, FDA wrote the final medical device reporting regulation with the flexibility for FDA to modify the timing and content of adverse event reports. FDA may, upon written request or at its own discretion, grant to user facilities or manufacturers an exemption or variance from any of the reporting requirements or change the frequency of reporting. Also, CDRH is in the process of developing an electronic data interchange (EDI) system to allow firms to submit their adverse event reports electronically. Currently, most of the reports are manually transmitted and then entered into FDA computers. The EDI system will function as a single system that receives device reports and distributes them for automated data entry into FDA computers. CDRH believes the EDI system, once embraced by the device industry, will reduce the likelihood of a significant backlog in coding and data entry of reports. EDI requirements and standards are currently being developed and will be piloted in fiscal year 1997. In addition, CDRH is developing alternative methods of analyzing event reports through enhancements to the computerized MAUDE system. For many years, CDRH has used several adverse event databases that are not integrated for analysis of reports. As a result, gaps have existed in the information available to analysts, and this information has also been redundant. CDRH’s goal, according to officials, is to reduce its dependency on the individual review of reports and move toward aggregate analysis and other methods of statistical review. The MAUDE system is expected to enable analysts to identify generic product problems and problem-reporting trends across industries and product lines, thereby helping analysts to more efficiently determine appropriate courses of action on device problems. MAUDE will also include a trend and statistical analysis subsystem that will allow analysts to compute statistical trends, such as increases in frequency or severity of reported events for a particular model, family, or type of device. Despite the surge in reporting by manufacturers, user facilities’ participation in reporting device-related events to FDA has been significantly lower than expected. Moreover, the quality of the medical device reports that have been received from user facilities has frequently been poor. Our analysis of CDRH data shows, for example, that many user facilities may be underreporting deaths to FDA and that some facilities are reporting events they are not required to report. Further, user facilities’ reports are often late, inaccurate, or incomplete. User facility reports of device problems are important to manufacturers and FDA because only the user facility’s physicians and staff have direct access to the patient and the device, as well as the clinical skills necessary to detect any adverse effects. Thus, the user facility is in the best position to obtain information that manufacturers and FDA need to determine whether a device presents a public health risk. Without sufficient high-quality reports from user facilities, therefore, FDA’s ability to analyze device problems and assess the public health risk is hampered. Finally, FDA attributed user facilities’ inadequate reporting to FDA’s delay in issuing a final medical device reporting regulation to fully enforce the law, a low level of awareness about SMDA During the 4-year period, more than 80 percent of the user facility event reports were for serious injuries and illnesses (52 percent) and malfunctions (29 percent). Death reports accounted for less than 10 percent of the device-related incidents reported. (See fig. 3.) Before SMDA ’s reporting requirements became effective in late 1991, user facilities were not required to submit device-related adverse event reports to manufacturers and FDA. Consequently, FDA’s knowledge about unsafe devices involved in adverse events, such as deaths, was generally confined to reports from manufacturers, which were themselves sometimes limited by the degree of their compliance with the 1984 medical device reporting regulation. In contrast, user facility reporting under SMDA requires user facilities to submit a report to FDA and manufacturers, if known, within 10 work days of receiving information that reasonably suggests that a device has caused or contributed to a patient death. However, our analysis of CDRH data revealed that user facilities may have underreported thousands of patient deaths to FDA. Without the user facilities’ perspective on these events, FDA’s adverse event reporting system has significantly less information about medical device problems to use in identifying problems and assessing the public health risk. We found that during fiscal years 1992 through 1995, manufacturers reported 5,976 deaths to FDA, while user facilities reported only 978 deaths—a difference of 4,998 death reports (see fig. 4). According to CDRH officials, FDA has taken no action to determine the extent to which the discrepancy in reporting is due to underreporting by user facilities to FDA. Nevertheless, a CDRH official told us that the difference in the number of death reports received is a gross estimate of possible underreporting. Accurately determining the number of facilities that actually did not report deaths would require CDRH to use manufacturers’ reports to identify the user facilities that may not have reported a death and then determine if the death was required to be reported—a task the official said would be very time consuming. The official also stated that the difference in the number of deaths reported could be due, in part, to the different criteria that manufacturers and user facilities were required to use in deciding whether to report an event. For example, under the 1984 medical device reporting regulation, manufacturers were required to submit all event reports from health care professionals, even if the firm believed or knew that the event was not related to its device. In contrast, SMDA Once fully operational, the MAUDE system will be able to match and cross-reference all reports from manufacturers, distributors, user facilities, and health professionals so that an analyst will have a complete picture of the event. Thus, the analyst will be better able to determine, for example, whether or not a death report was submitted by a user facility, as required by law. If a death occurred and the user facility did not report it, the analyst can notify the district offices within the Office of Regional Operations, which is responsible for monitoring compliance with SMDA reporting. The submission of timely and accurate reports of device problems is important for FDA’s early warning system to operate effectively. Generally, when FDA receives complete reports, they can be reviewed and assessed for public health risks without additional follow-up to obtain information on aspects of the reported incident. However, our review of CDRH statistics shows that many user facility reports are not submitted to FDA in a timely manner and that they frequently lack essential information on the device problem. Untimely and poor quality reports limit FDA’s ability to identify device problems and assess the risk to the public health. Several examples of such problems with reports follow. First, SMDA incomplete reports and that many of the user facility reports go directly to FDA instead of to the manufacturer. Finally, most of the adverse event reports that FDA has received from user facilities are not even required by SMDA . By increasing the agency’s workload, extraneous reports can slow CDRH’s review of adverse events that truly merit the agency’s attention. For example, the act requires user facilities to submit event reports to manufacturers when they receive information that suggests a device may have caused or contributed to a serious injury or illness. Only in instances in which the manufacturer of the device is unknown is a serious injury or illness to be reported to FDA. However, of the 5,199 serious injury and illness reports FDA had received from user facilities as of June 1995, 3,588 (69 percent) did not need to have been sent to FDA because the user facility knew the manufacturer and identified it in the report. Moreover, during fiscal years 1992 through 1995, user facilities submitted 3,678 malfunction reports that were not required by SMDA consistent with those in the tentative final regulation (that is, they provided definitions of event terminology, descriptions of educational programs to teach employees how to identify and report device-related events, internal systems for documenting and reporting device-related events, and separate medical device reporting incident files). CDRH concluded that many facilities would benefit from additional educational efforts. FDA attributed user facilities’ lack of adherence to FDA’s tentative final regulation to several additional factors. First, a CDRH official told us that before the final medical device reporting regulation became effective in July 1996, the only requirements that were legally enforceable were the requirements of SMDA , which do not provide sufficient detail on medical device reporting. As a result, user facilities had to rely on guidance in the tentative final medical device reporting regulation to establish the program’s requirements. This guidance was not enforceable, and, as the official pointed out, user facilities did not have to follow it because doing so was voluntary. In addition, FDA officials said that planning and performing compliance inspections are difficult because FDA has a limited number of investigators available to conduct the inspections that are required at over 70,000 regulated facilities. However, FDA believes that, by working closely with the Joint Commission on Accreditation of Healthcare Organizations and the Health Care Financing Administration, it will be better able to monitor user facility compliance with SMDA computer. In addition, CDRH plans to continue to publish a quarterly User Facility Reporting Bulletin that provides information to user facilities on various medical device reporting issues. Finally, CDRH held a teleconference with user facilities in May 1996 to discuss matters concerning the final medical device reporting regulation. For its early warning system to be effective, FDA must be able to rapidly process, review, and assess the potential risk of device problems to the public health. These assessments must result in an appropriate course of action to resolve device problems. Our review of a sample of adverse event reports and discussions with CDRH officials revealed that for many years FDA has not routinely documented the final corrective actions taken by manufacturers and FDA to resolve the problems identified in these reports. As a result, we were not able to determine how manufacturers and FDA have responded to user facility adverse event reports. In cases in which resolutions of problems are undocumented, FDA has little assurance that problems with devices are being corrected. FDA also has limited information both to share with other reporters who have encountered difficulties with similar devices about preventing potentially hazardous situations and for its own use in analyzing subsequent problems with similar devices. Moreover, without adequate documentation, FDA has little assurance that the many reports received are, in fact, useful and result in better protection of the public health. CDRH attributed its lack of documentation to the large volume of adverse event reports and limited staff resources. In spite of not having systematically documented the actions taken in response to reports received, CDRH did provide us with several examples of corrective actions it has taken. In addition, FDA said it plans to maintain more complete data on corrective actions that are taken in response to event reports submitted after July 31, 1996. Finally, FDA cannot assess its performance as an early warning system for device problems because it does not keep track of the length of time that it takes to review and resolve serious device problems. In previous work, we found that over two-thirds of the adverse event reports received by FDA from 1985 through 1987 lacked a clear-cut determination, such as a recall, a voluntary action by the manufacturer, or even an indication that the information submitted by the manufacturer was insufficient to process the case. To encourage greater use of medical device reporting data, we recommended that FDA fully document its use of these data in acting to correct device problems, especially by ensuring that such actions were recorded in the database. FDA agreed with our recommendation and reported that changes were under way to improve its handling of event reports. However, we found during our recent analysis of adverse event reports and discussions with CDRH officials that CDRH has not begun routinely documenting the final dispositions of device problems in individual event reports. To determine how manufacturers and FDA have responded to user facility reports, we reviewed 30 reports of events that manufacturers became aware of through user facility reports from 1992 through 1995. The reports documented 1 death, 20 injuries, and 9 malfunctions. Our initial review showed that 29 of the 30 reports contained neither the final determination of the cause of the device problem reported nor a description of the corrective action taken by the manufacturer or FDA. The remaining report described a serious injury that was allegedly caused by a faulty ventilator. FDA later found the injury to have been unrelated to the device. We reviewed the 30 reports with an FDA analyst to obtain an update on each adverse event. In 16 out of 30 cases, the cause of the event had not yet been identified, and FDA planned to continue to monitor the devices.Twelve reports were reviewed by analysts upon initial receipt, but no further action was documented. Two malfunction reports were assigned to ad hoc groups to determine whether the devices posed an immediate health risk to the public; the groups determined that no additional action was needed. A CDRH official explained that, under FDA’s medical device reporting system, the decisions that analysts make on adverse event reports are not routinely documented, and statistics are not maintained on the types of corrective actions taken by FDA and manufacturers. The official recalled that during the early 1980s, CDRH closed each case with a conclusion about the probable cause and effect of the event but that this was too resource intensive. When the number of reports increased significantly, CDRH chose to focus on reviewing the reports rather than on documenting how they were resolved. The official also emphasized that documenting problem resolutions is only an issue with regard to reports that can be or are investigated, which is a relatively small subset of all reports received. Moreover, complete documentation of the resolution of a problem is dependent upon a number of factors that FDA cannot control. According to the official, in some cases FDA has great difficulty obtaining required information from user facilities on device-related events so that it can assess the public health risks. As an example, he cited the following scenario: A manufacturer receives a report that one of its disposable devices has failed. However, the device in question has been discarded by the user facility before the manufacturer can examine it and perform tests on it. Consequently, the manufacturer is unable to adequately report pertinent information, and FDA’s ability to ascertain the problem, its causes, and any resolutions is hampered. Despite the problems associated with receiving complete information on device problems, the official acknowledged that providing a close-out record for each report could, among other things, provide reporters with feedback to encourage reporting and provide FDA with a pool of information that could be used to ascertain the impact or probable outcome of any subsequent reports on similar problems with the device. Although CDRH does not routinely link corrective actions to reported medical device problems, it provided us examples of how it has nevertheless identified and acted on serious problems with devices in several instances. The following examples show that well documented events, analysis, and corrective actions are invaluable in responding to reported problems. Between January 1990 and June 1995, FDA received 102 reports of head and body entrapment incidents involving hospital bed side rails. These reports indicated that 68 deaths, 22 injuries, and 12 entrapments without injury had occurred in hospitals, long-term care facilities, and private homes. FDA’s analysis of the reports showed that the entrapments actually involved side rails, headboards, footboards, and mattresses. The majority of these adverse events involved elderly patients who were suffering from confusion, restlessness, lack of muscle control, or a combination of these conditions. In July 1995, a CDRH ad hoc group decided that a safety alert should be issued to apprise health care professionals of the entrapment hazards associated with hospital beds and of ways to prevent them. CDRH consulted with the Consumer Product Safety Commission and the Canadian government, as well as with numerous professional organizations and manufacturers, to obtain their comments as it developed the alert. CDRH reported that 94,000 copies of the alert were distributed to the user facility community. A dialysis nurse reported an incident involving eight patients who exhibited several symptoms, including severe hypotension, during dialysis. Three of these patients died. A top priority inspection revealed the patients had high serum aluminum levels. After further investigation, it was found that the dialysis solution was being stored in a pump containing aluminum, metered to the patients through such a pump, or both, and that the aluminum had leached into the dialysate concentrate. A safety alert that discussed the potential hazard created when patients are exposed to dialysate with excessive aluminum levels was issued in May 1992. In February 1985, an infant was disconnected from its apnea monitor but the electrodes with the lead wires were left attached to the infant. A sibling plugged the lead into the power cord, electrocuting the infant. CDRH assembled a committee of experts to investigate the hazard. At that time, about 50,000 apnea monitors—of 20 different models—were on the market. The committee decided that a voluntary plan of action would be most effective because of the speed with which it could be implemented. In June 1985, CDRH issued a safety alert summarizing the reported events and outlining steps to guard against future incidents. CDRH also sent letters to 31 manufacturers of breathing frequency monitors and heart monitors for home use requesting that each firm evaluate its device for the electrode problem and, when necessary, consider design changes to prevent insertion of the lead connectors into AC power cords or outlets. All 31 device firms either changed their lead designs or explained to CDRH why their device did not present a hazard. An FDA analysis also shows that many other adverse event reports were used to resolve device problems. For example, FDA reported that from 1985 through 1995, 1,099 of its 4,365 classified recalls (25 percent) were associated with event reports. FDA also reports using information in adverse event reports for other health-related purposes, including identifying areas in which user education can be improved, analyzing premarket approval applications, developing medical device standards, and monitoring device problems in foreign countries. In the near future, CDRH expects to have better data on corrective actions taken by manufacturers in response to user facility reports. The final medical device reporting regulation requires manufacturers to list on the form 3500A a corrective action taken—such as a recall, repair, relabeling, or other modification—for each device associated with an adverse event report. According to a CDRH official, manufacturers are now also required to refer to the user facility’s unique reporting number when submitting an adverse event report. Maintaining reliable productivity indicators on the length of time FDA takes to process, review, and initiate action on device problems and on the time that passes before manufacturers correct the problems would better ensure that serious device problems are receiving prompt attention. It would also allow FDA to better measure its adverse event reporting system’s performance as an early warning system. However, CDRH does not have statistics available on these areas of performance. Thus, FDA has no reliable way of knowing how long it takes to respond to reported device problems. According to FDA, once the enhancements to the MAUDE system are fully operational, it will be able to provide FDA with better information on the time FDA takes to process and review reports. However, FDA officials told us that the MAUDE system will not be able to provide meaningful statistics on the time FDA and manufacturers require to take action on reports. According to FDA, given the complexity of the issues involved and the volume of reports received, any performance indicator based on the length of time needed to correct reported problems would not provide statistics that are reliable. FDA contends that this is an inherent attribute of any system that builds on reports accumulated over many years. While FDA may not be able to develop reliable measures of performance based on the time taken to correct device problems, it can track the time needed by FDA analysts to initiate action on reports. As a result of report reviews, FDA analysts may request additional information from manufacturers and user facilities about the severity of the event and any corrective action taken, request an inspection of the manufacturer’s facility, request ad hoc meetings to discuss issues pertaining to a problem device, or determine that a report requires no further action and archive the report for future research and monitoring. Once one of these initial courses of action is taken by an analyst, FDA can document the date the action was taken in the adverse event reporting system, thereby providing FDA with a more complete measure of its response time. Another important facet of the adverse event reporting system is the communication of trends in device-related problems and corrective actions taken to ensure the safety and efficacy of medical device products. Feedback to the medical device community on reported problems and corrective actions could increase the knowledge of user facilities and manufacturers about the performance of devices, assist users in making device purchase decisions, and improve awareness of patient safety. However, CDRH does not have a system for routinely communicating adverse event reporting trends and remedial actions taken on device problems to specific reporters of device problems and the medical device community at large. Although FDA occasionally issues safety alerts and public health advisories, which inform the medical device community about health risks associated with devices, it does not provide user facilities and other medical device reporters with direct feedback on the status and outcomes of individual device investigations. Nor does it publish composite statistics on event trends and problem resolutions. Consequently, many adverse event reporters are unaware of the dispositions of their complaints and have little assurance that the agency is taking action on the device problems reported. Both user facilities and the industry have suggested that FDA provide more feedback on how it uses adverse event reports. A CDRH official told us that FDA does not have a notification system for advising individual user facilities and other reporters about the status and outcomes of reports because significant staff time would be required to provide feedback to reporters on the more than 100,000 event reports received annually. The official said further that often no feedback is available because FDA does not follow up on each event that is reported. Voluntary reporters receive an acknowledgment letter, but it does not provide specific feedback about their report. FDA does, however, disseminate safety alerts and public health advisories regarding medical device problems to user facilities; it also periodically features alerts in its User Facility Reporting Bulletin. From the beginning of fiscal year 1994 through June 1996, FDA issued three safety alerts and seven public health advisories. User facility and industry officials believe that FDA could better protect the public health by publishing statistics on adverse event trends and corrective actions that result from medical device reports. For example, a senior official at a teaching hospital in Baltimore, Maryland, told us that although the adverse event reporting system has received an increased quantity of data, he has seen no analysis of this information that would provide device users with suggestions on courses of action that could be taken to prevent incidents from recurring. Similarly, representatives of the Medical Device Manufacturers Association (MDMA) told us that since the early phases of medical device reporting, their members have derived little benefit from the hundreds of thousands of reports stored within the agency’s databases. MDMA representatives believe the public should know what benefits have been derived from reporting. In addition, a senior executive of a New Jersey hospital said he was disappointed that a database has not been developed that can be searched for information about problem medical devices to help his hospital learn more about the performance of devices and assist in device purchase decisions. Similar views were repeatedly expressed in responses to a 1994 FDA questionnaire sent to user facilities: Over 642 of the 4,419 participating user facility officials—or 15 percent—indicated that they wanted more feedback from FDA on adverse event reports. According to FDA, the MAUDE system will be used to work closely with the device community to identify safety problems; explore the most effective strategies for resolving problems; and provide feedback to user facilities, manufacturers, and the public. Some representatives of the medical device community believe that reducing the volume of adverse event reports could help FDA more effectively manage the reporting system. Suggestions for improving reporting include (1) requiring a statistical sample of user facilities, rather than all user facilities, to report device-related events to FDA and manufacturers and (2) eliminating malfunction reporting by manufacturers to FDA. According to the President of the Emergency Care Research Institute (ECRI), a nonprofit research agency that operates a worldwide medical device reporting system, FDA’s adverse event reporting system is hampered by prolific and duplicative data that divert resources away from analysis to data entry. ECRI contends that the adverse event reporting system, as currently configured, makes it difficult for FDA to effectively recognize, track, cross reference, investigate, and follow up on significant medical device problems. ECRI believes that FDA should free all user facilities but hospitals from the reporting requirement and employ statistical sampling techniques to limit even the number of hospitals required to report device-related problems to manufacturers and FDA. Sampling, according to ECRI, would reduce duplication, speed processing and analysis, and free up resources to devote to analysis and educating hospitals about medical device reporting. NEMA members, however, believe that developing a user facility reporting program predicated on reports from only a small number of entities would pose at least two implementation problems. First, NEMA members believe, in general, that statistical sampling is beneficial only when it pertains to identical devices from one manufacturer. If statistical sampling is used in the device industry, they contend, the possibility exists that problems identified with a given type of device could be incorrectly generalized to apply to devices that do not possess the same attributes. Such a generalization could impose additional costs on the manufacturer if it had to repeatedly spend resources on investigating incident reports that turned out to be groundless. Second, statistical sampling is also problematic from the perspective of the user facility, in that not all user facilities are alike. In the opinion of NEMA members, the only useful approach to a statistical sampling program would be to confine the sample size to a small number of user facilities that share similar patient populations and operating characteristics, such as Public Health System facilities or Veterans Administration facilities. According to the safety coordinator at a hospital in Boston, Massachusetts, statistical sampling would not be a good idea because, given the demands on the user facility community to provide quality health care, if reporting were not required, facilities would not report medical device-related problems. He believes that medical device reporting is an important prerequisite for good patient care and that user facilities must be required by law to report medical device-related incidents in order for them to consistently do so. CDRH’s director told us that CDRH frequently receives adverse event reports from user facilities that are not very helpful in identifying and resolving device problems. He went on to say that CDRH would prefer to receive fewer, but more helpful reports. As a result, CDRH is planning a pilot study to determine the feasibility of adopting the statistical sampling approach to medical device reporting. Under this approach, FDA would educate a smaller population of user facilities in reporting device problems, which might improve the quality of reporting and increase manufacturers’ and FDA’s knowledge about device problems. CDRH recently issued a “Request for Proposals for a Sentinel System” that asked prospective bidders to develop a design for a pilot study involving about 10 to 20 user facilities. Bidders are required to recruit and negotiate with user facilities interested in participating in the pilot study. Staff of the user facilities that are chosen to participate will be trained in the medical device reporting requirements and user facility responsibilities. Participating facilities will be monitored, and the adverse events reported will be qualitatively evaluated for 12 months. User facilities will receive feedback and refresher training as needed. Depending on the results of the pilot study, CDRH envisions that a representative sample of user facilities could be used either to supplement the existing system or as a replacement for the universe of user facilities, if approved by the Congress. Another industry suggestion for improving FDA’s adverse event reporting system is to eliminate malfunction reporting. Currently, manufacturers are required to report to FDA malfunctions that are likely to cause or contribute to a death or serious injury should they recur. During fiscal years 1991 through 1995, reports of device malfunctions accounted for about one-third of all reports submitted by manufacturers. Industry officials contend that the medical device reporting system is so overburdened that FDA does not have an opportunity to evaluate the reports of device malfunction and that such reporting is costly and burdensome. Thus, these officials believe malfunctions should no longer be considered reportable events. They contend that manufacturers have systems in place to review and evaluate product malfunctions and that these evaluations are available to FDA during the routine inspections that FDA makes of their facilities. The purpose of the 1984 medical device regulation was to provide FDA with more information about device problems, such as malfunctions, so that the agency could learn about potential device problems before they endangered the lives of people. A CDRH official told us that deciding whether to eliminate malfunction reporting is the choice between having an adverse event reporting system that is proactive and one that is reactive. Further, he stated that if the objective of medical device reporting is to find out that a device is dangerous after it has caused or contributed to a death or serious injury, then malfunction reporting can be eliminated. However, if the objective is to become aware of problems before they have caused a death or serious injury, then malfunction reporting should not be eliminated. CDRH, he said, would prefer to retain malfunction reporting so that FDA can continue to learn of potential public health problems and resolve them before a serious injury or a death occurs. The quantity of information reported to FDA about medical device problems has increased dramatically since SMDA ’s reporting requirements became effective in 1991. Because FDA has not ensured that reported device problems receive prompt attention and appropriate resolution, however, its adverse event reporting system is not providing an early warning about device problems. Without reliable statistics that measure the length of time that FDA takes to review and initiate action on device problems and systematic documentation of how all reported problems are resolved, FDA cannot ensure that the system is serving as an early warning system for unsafe and ineffective devices. Moreover, because FDA has not identified and followed up with user facilities that may have underreported thousands of patient deaths, its ability to analyze device problems and assess the public health risk may be significantly hampered. Finally, without feedback from FDA to user facilities about device problem trends and corrective actions taken, user facilities do not receive information that could help them determine which devices to purchase, and they have little assurance that FDA is taking action on their adverse event reports. FDA’s new MAUDE system is now providing opportunities for FDA to correct weaknesses in its adverse event reporting system. In July 1996, FDA began requiring manufacturers to list on the form 3500A corrective actions that are initiated to resolve medical device adverse events. This improvement will provide the MAUDE system with the information that FDA needs to systematically document solutions to device problems and help it communicate more effectively with user facilities. In addition, once the MAUDE system is fully operational, it will be able to generate productivity data on the time FDA takes to process and review adverse event reports. If FDA expands this capability to include the time it requires to initiate action on reports, it will be able to more easily measure its performance as an early warning system. The MAUDE system will also enable FDA to identify and follow up with user facilities that do not submit reports of device-related deaths to FDA. If FDA uses the MAUDE system in this way, FDA will be able to ensure that user facilities are complying with the law and also obtain the user facilities’ perspectives on these events. Limiting the number of user facilities required to report medical device problems could improve the quality of data FDA receives without jeopardizing its ability to identify device problems. On the other hand, fewer reporters could mean that problems would be less likely to be identified and resolved, especially for devices with relatively low usage rates. An evaluation of whether the identification and correction of device problems would better be accomplished through the current system or through a smaller user facility reporting program may help FDA decide which approach is better for protecting the public health. Furthermore, although FDA’s initiatives may improve its reporting system, they do not address its difficulty in ensuring prompt resolution of device problems, compliance with SMDA document corrective actions on adverse event reports that result from analysis and investigations of device problems; and collect and disseminate adverse event trend analysis and corrective actions taken by manufacturers and FDA to the medical device community. Finally, we recommend that FDA’s study of an adverse event reporting system based on a representative sample of user facilities focus on whether this approach can provide manufacturers and FDA with the quantity and quality of information needed to rapidly identify and correct problems with devices that have varying usage rates. FDA agreed with our recommendations for improving its adverse event reporting system. However, FDA believes that the three components of its postmarket surveillance system together provide an adequate early warning system for device problems and help to ensure that the public is protected. Specifically, FDA believes that (1) medical device reports are supplemental in nature and that its entire postmarket surveillance system, its GMP regulations, and other related activities combined constitute the most comprehensive source of information regarding marketed medical devices; (2) the deficiencies in the adverse event reporting system cited in our report are being corrected; and (3) adverse event reports from all sources are promptly and thoroughly reviewed, and appropriate actions are taken to protect the public health. While we agree that FDA uses several sources of information to monitor marketed devices, we disagree with their suggestion that the adverse event reporting system serves mainly as a supplement to other components of the postmarket surveillance system. This suggestion conflicts with FDA’s response to a recent congressional inquiry in which FDA characterized the adverse event reporting system as “critically” important to its postmarket surveillance system because it provides a balance with its premarket evaluation of new medical devices. FDA also characterized the adverse event reporting system as a “safety net” that allows the agency to move new technologies into the marketplace more rapidly because problems with devices that were not detected at the premarketing stage can be identified and corrected through the adverse event reporting system. Moreover, FDA’s implication that it relies more heavily on its GMP compliance program than on the medical device reporting system to help protect the public health is worrisome. The GMP program is intended to assess the safety and effectiveness of devices before, rather than after, they reach users. Yet in an earlier study of the program, we documented that FDA did not inspect many manufacturers of medium- and high-risk devices at least once every 2 years, as required by law; the quality of the inspections that were performed was frequently poor; and the inspections did not detect quality assurance problems. While we acknowledge that FDA has recognized weaknesses in the adverse event reporting system and has instituted improvements to correct them, none of these improvements has been tested and proven effective. For example, although the form 3500A may provide FDA with the information it needs to better protect the public health, voluntary use of the form by user facilities since 1992 has shown that many data quality problems exist. Further, it is too early to tell if mandatory use of the form 3500A will result in improved reporting. Although FDA has provided some information that associates medical device reports with recalls and other administrative and regulatory activities, the adverse event reporting system does not routinely identify the actions that were initiated to correct the problems detailed in event reports. Nor does the system provide data on how long it takes the agency to respond to serious device problems. In our view, an effective adverse event reporting system should permit FDA to readily determine how each event report was handled and that all problems reported received prompt attention and resolution. FDA’s written comments on a draft of this report are reproduced in appendix III. FDA also provided technical comments clarifying aspects of its adverse event reporting system, which we have incorporated in this report where appropriate. We are sending copies of this report to other congressional committees and Members with an interest in this matter, and we will make this report available to others upon request. If you or your staff have any questions about this report, please call me on (202) 512-7119 or John C. Hansen, Assistant Director, on (202) 512-7105. Others who contributed to this report are Darryl Joyce, Lynn Filla-Clark, Barbara Mulliken, and Joan Vogel. We conducted our review of the Food and Drug Administration’s (FDA) implementation of the Safe Medical Devices Act of 1990 (SMDA and to publish the final medical device reporting regulation required by the act. We analyzed computerized data from FDA’s adverse event reporting system on trends in device-related events from fiscal years 1987 through 1995 to determine whether the volume of reporting of device problems had changed since the user facility reporting requirement became effective in 1991. We also reviewed statistics compiled by CDRH on the extent to which user facilities had filed adverse event reports with FDA during fiscal years 1992 through 1995 in accordance with the act. Specifically, we examined whether user facilities had done the following: reported deaths to FDA and manufacturers, reported serious injuries and serious illnesses to FDA only when the manufacturer’s name was unknown, reported these deaths and serious injuries and illnesses to FDA within 10 work days of becoming aware of them, and submitted a semiannual report to FDA summarizing device-related events that took place during the previous 6 months. In addition, we reviewed FDA field office inspections of user facilities’ compliance with the SMDA health care providers, two nonprofit organizations, one nursing home association, and three device manufacturer associations). We discussed with them their experiences with user facility reporting and whether changes to SMDA and FDA’s adverse event reporting system were needed to improve reporting. We identified these organizations through a review of the literature and through a list of contacts obtained from FDA. Table I.1 provides the name, location, and a brief description of each organization interviewed. Beth Israel Hospital, Boston, Mass. Columbia/HCA, Health Care Corporation, Nashville, Tenn. Johns Hopkins University Hospital, Baltimore, Md. Rahway Hospital, Rahway, N.J. New Britain General Hospital, New Britain, Conn. American Health Care Association, Washington, D.C. Mayo Foundation, Rochester, Minn. Public Citizen, Washington, D.C. Emergency Care Research Institute, Plymouth Meeting, Penn. A nonprofit health services research agency whose mission is to improve patient care, ECRI operates a Consumer Reports-like medical product evaluation program and a broader health care technology assessment program that encompasses devices, drugs, biotechnologies, and medical and surgical procedures. Medical Device Manufacturers Association, Washington, D.C. Health Industry Manufacturers Association, Washington, D.C. National Electrical Manufacturers Association, Rosslyn, Va. FDA receives adverse event and product problem reports from user facilities, manufacturers, distributors, and health care professionals. User facilities, manufacturers, and distributors use a standard form 3500A for reporting device-related events. User facilities and distributors must report patient information, the type of adverse event, a description of the event, relevant laboratory data and patient history, the name of the manufacturer, and certain other information about the device. Manufacturers must report such information as the source of reported information; the type of event reported to them; whether the device was returned to the manufacturer for evaluation; methods of evaluation and results of manufacturer review; and, if applicable, the type of remedial action taken (recall, repair, relabeling, or inspection). Health professionals report adverse events and product problems voluntarily on a form 3500. Event reports are entered into an adverse event database, with the appropriate quality control checks, by FDA’s data entry contractor, Logistics Applications, Inc. Thereafter, OSB evaluation teams consisting of 15 specialized health care professionals (14 nurses and 1 nuclear medicine technologist) retrieve the reports from the database via the computer for review. Analysts may each have responsibility for all products associated with an assigned medical specialty area, such as radiology, ophthalmology, or orthopedics, or they may be responsible for specific types of products associated with larger clinical areas, such as general hospital, general surgery, and cardiology. Analysts’ reviews focus on identifying the device problems that pose the greatest risk to the public health. Deaths are given first priority, but serious injuries and illnesses are also important concerns, unless they are not considered life threatening. To assess the nature and magnitude of a problem, the analysts use their clinical expertise to evaluate the data submitted in the adverse event report, as well as other information, such as premarket submissions on similar devices, recall information, and literature reviews on adverse events or reported problems. Known complications and problems associated with a particular device are screened by a computer and a sample of these reports is assigned to the appropriate analyst for review. Reports of particular importance, such as pediatric deaths, are routinely sent to the appropriate analyst either prior to or concurrent with the data entry process. This provides the analyst an opportunity to commence an investigation while the actual report is undergoing data entry. On the basis of their evaluation of reported events, the analysts determine if any follow-up investigation is needed. These investigations generally involve written requests for additional information from a manufacturer, user facility, or voluntary reporter on aspects of a reported incident or an inspection of either the manufacturer or the user facility. Written requests may ask for such patient data as an evaluation of the reported incident by a health care practitioner; a patient history, underlying diagnosis, or both; and autopsy results relevant to the reported event. Similarly, requests for device data may include product identifiers such as model, lot, and catalog numbers of a device; the length of time a device has been in use; the disposition of a device involved in a reported event; results of any manufacturer failure testing; and copies of device labeling and instructions for use. This information enables the analyst to better assess the cause of a reported problem. In addition, information may be requested on the number of devices manufactured, distributed, and in use, which assists in determining the exposure of the population at risk. The analyst may also request that a manufacturer provide information on the frequency and severity of a reported event, as well as any corrective action taken by a manufacturer to address a reported problem. In addition, the analyst may request an inspection of the manufacturer’s facility when immediate follow-up on a reported event is necessary or when the reported event suggests the need for an FDA investigation. Upon receipt of the results of the investigation, the analyst evaluates the data and assesses whether or not further FDA action is needed. If warranted, the adverse event report and any related information are forwarded to the appropriate group within FDA for consideration of regulatory action, such as recall or device user notification through safety alerts, public health advisories, a press release warning the public of potential hazards associated with the device in use, or all three. If the analyst determines that no further action is needed, the adverse event report is archived for future research and monitoring. Medical Device Regulation: Too Early to Assess European System’s Value as Model for FDA (GAO/HEHS-96-65, Mar. 6, 1996). Medical Technology: Quality Assurance Needs Stronger Management Emphasis and Higher Priority (GAO/PEMD-92-10, Feb. 13, 1992). Medical Device Problem Reporting: A Case Study of a Home Apnea Monitor (GAO/T-PEMD-90-10, July 17, 1990). Medical Devices: Underreporting of Serious Problems With a Home Apnea Monitor (GAO/PEMD-90-17, May 31, 1990). Medical Devices: Underreporting of Problems, Backlogged Systems, and Weak Statutory Support (GAO/T-PEMD-90-2, Nov. 6, 1989). Medical Devices: The Public Health at Risk (GAO/T-PEMD-90-2, Nov. 6, 1989). Medical Device Recalls: Examination of Selected Cases (GAO/PEMD-90-6, Oct. 19, 1989). Medical Device Recalls: An Overview and Analysis 1983-88 (GAO/PEMD-89-15BR, Aug. 30, 1989). Medical Devices: FDA’s Implementation of the Medical Device Reporting Regulation (GAO/PEMD-89-10, Feb. 17, 1989). Medical Devices: FDA’s 510(k) Operations Could Be Improved (GAO/PEMD-88-30, July 11, 1988). Medical Devices: FDA’s Forecasts of Problem Reports and FTEs Under H.R. 4640 (GAO/PEMD-88-30, July 11, 1988). Medical Devices: Early Warning of Problems Is Hampered by Severe Underreporting (GAO/T-PEMD-87-4, May 4, 1987). Medical Devices: Early Warning of Problems Is Hampered by Severe Underreporting (GAO/PEMD-87-1, Dec. 19, 1986). The first copy of each GAO report and testimony is free. Additional copies are $2 each. Orders should be sent to the following address, accompanied by a check or money order made out to the Superintendent of Documents, when necessary. VISA and MasterCard credit cards are accepted, also. Orders for 100 or more copies to be mailed to a single address are discounted 25 percent. U.S. General Accounting Office P.O. Box 6015 Gaithersburg, MD 20884-6015 Room 1100 700 4th St. NW (corner of 4th and G Sts. NW) U.S. General Accounting Office Washington, DC Orders may also be placed by calling (202) 512-6000 or by using fax number (301) 258-4066, or TDD (301) 413-0006. Each day, GAO issues a list of newly available reports and testimony. To receive facsimile copies of the daily list or any list from the past 30 days, please call (202) 512-6000 using a touchtone phone. A recorded menu will provide information on how to obtain these lists. | Pursuant to a legislative requirement, GAO reviewed user facilities' compliance with the Safe Medical Devices Act of 1990's (SMDA 90) reporting requirements, focusing on whether: (1) the enactment of SMDA 90 has led to an increase in reporting of device-related adverse events to the Food and Drug Administration (FDA); (2) the amount and quality of information from user facilities have enhanced FDA's ability to quickly identify and take action on device problems; (3) manufacturers and FDA have responded to device problems identified in user facility reports; (4) FDA routinely communicates device problem trends and corrective actions taken to user facilities and the public; and (5) changes need to be made to the user facility reporting requirements and FDA's adverse event reporting system to improve medical device problem reporting. GAO found that: (1) although the amount of information reported to FDA about medical device problems has increased dramatically since SMDA 90 was enacted, FDA does not systematically act to ensure that the reported problems receive prompt attention and appropriate resolution; (2) as a result, FDA's adverse event reporting system is not providing an early warning about problem medical devices as SMDA 90 intended; (3) during fiscal years (FY) 1991 through 1994, FDA received almost four times as many adverse event reports from device manufacturers as it did during FY 1987 through 1990; (4) however, the extent to which user facility reporting under SMDA 90 directly accounted for the increased volume of reports is unclear because, until recently, FDA did not require manufacturers to disclose whether serious injury reports originated from user facilities or from some other source; (5) this increased volume made it difficult for FDA to process and review reports in a timely manner; (6) to address this problem, FDA chose to give priority to death and serious injury reports, which resulted in its delaying for nearly 2 years processing and reviewing almost 50,000 malfunction reports, which are essential in alerting FDA to potentially serious device problems before they result in death or serious injury; (7) to better manage the reporting workload in the future, FDA has initiated several changes to the adverse event reporting system; (8) FDA has received significantly fewer adverse event reports from user facilities than it expected; (9) much of the information that user facilities did provide was of poor quality and incomplete, in part because FDA did not issue the final medical device reporting regulation in a timely manner or periodically educate user facilities about their responsibilities under SMDA 90; (10) although FDA contends that it notifies manufacturers and user facilities about imminent hazards and industrywide safety concerns, it does not routinely document the corrective actions it takes or those taken by manufacturers to address reported medical device problems; (11) FDA does not keep track of the length of time it takes to process, review, and initiate action on serious device-related problems or the time that elapses before manufacturers resolve the problems; (12) manufacturer and user facility representatives told GAO they do not know how FDA uses adverse event reports to protect the public health; and (13) FDA and representatives of both medical devise users and manufacturers believe that the reporting system is overburdened with reports and data that may not be necessary to detect and resolve device problems. |
The extent to which capital costs are reflected in the budget depends on how they are “scored.” CBO and OMB separately “score” or track budget authority, receipts, outlays, and the surplus or deficit estimated to result as legislation is considered and enacted. CBO develops estimates of the budgetary impact of bills reported by the different congressional committees. For the many individual transactions done under existing authorities (thus not requiring annual legislation), CBO’s estimates play no role in determining how much budget authority must be obligated. However, OMB interprets the scorekeeping guidelines to determine the costs that should be recognized and recorded as an obligation at the time the agency signs a contract or enters into a lease. It is not always obvious whether a transaction or activity should be included in the budget. Where there is a question, OMB normally follows the recommendation of the 1967 President’s Commission on Budget Concepts to be comprehensive of the full range of federal agencies, programs, and activities. However, under some circumstances, it may choose not to record obligations and outlays up front. Budget scorekeeping rules and OMB instructions on the budgetary treatment of lease-purchases and leases of capital assets are published in OMB Circular A-11. Revised in 2003 to address lease-backs from partnerships, among other things, these instructions consider both the government’s legal obligation and how risk is shared between the government and the contractor for three types of leases: capital leases, lease-purchases, and operating leases. The instructions state that when agencies enter into a capital lease contract or lease-purchase, budget authority is scored in the year in which the authority is first made available in the amount of the net present value of the government’s total estimated legal obligations over the life of the contract. Alternatively, for operating leases that include a cancellation clause, agencies only need budget authority sufficient to cover the first year’s lease payments, plus cancellation costs. Figure 1 summarizes the criteria and other guidelines for defining an operating lease. While we have previously reported that up-front funding permits disclosure of the full costs to which the government is being committed, OMB’s budget scorekeeping instructions allow costly operating leases to appear cheaper in the short term and have encouraged an overreliance on them for satisfying long-term needs. Partnerships must conform with OMB’s scorekeeping instructions. The instructions for partnerships consider the degree of private participation in the partnership to determine its scoring. Private participation is judged by the level of substantial private participation and private sector risk as evidenced by the absence of substantial government risk. Substantial private participation means (1) the nonfederal partner has a majority ownership share of the partnership and its revenues, (2) the nonfederal partner has contributed at least 20 percent of the total value of the assets owned by the partnership, and (3) the government has not provided indirect guarantees of the project, such as a rental agreement or a requirement to pay higher rent if it reduces its use of space. If government risk is considered high and private participation not deemed substantial, the partnership would be considered governmental for budget purposes and its transactions would be scored. Figure 2 presents OMB’s illustrative criteria for assessing private sector risk. Using ESPCs and partnerships, agencies have been allowed to spread the costs of capital assets over several years. Agencies sometimes used these financing mechanisms when they believed that timely, full, and up-front appropriations would not be made available to support capital needs. Moreover, they believe these alternative mechanisms enabled them to avoid costs, such as higher utility bills associated with waiting for appropriations. Nevertheless, several of the agencies we spoke with agree that they could acquire capital less expensively through timely, full, and up- front appropriations. ESPCs finance energy-saving capital improvements such as lighting retrofits and ventilation systems for federal facilities without the government recording the full cost up-front. According to DOE, ESPCs have been used as an alternative financing mechanism to finance over a billion dollars of energy system upgrades and installations. Federal agencies’ use of ESPCs was authorized and encouraged by both Congress and the executive branch. In Executive Order 13123, dated June 3, 1999, the executive branch defined requirements for agencies to meet specific energy reduction goals and supported the use of ESPCs to achieve them. The Energy Policy Act of 1992 and Executive Order 13123 require federal agencies to reduce their consumption of energy in federal buildings. The act set a goal for the agencies of lowering their consumption per gross square foot by 20 percent below fiscal year 1985 baseline consumption levels by fiscal year 2000. Executive Order 13123 requires a 30 percent reduction from 1985 levels by the year 2005 and a 35 percent reduction by 2010. Under the Energy Policy Act of 1992, federal agencies had the authority to enter into ESPCs for as long as 25 years with qualified ESCOs that purchase and install new energy systems in federal buildings. The ESCO assumes much of the up-front capital costs and, in return, receives a portion (nearly all) of the annual energy savings attributable to the improvements until the principal and interest have been repaid. The ESCOs guarantee the performance of the equipment installed, within certain parameters, for the term of the ESPC. The agency makes the payment to the ESCO from funds that the agency would otherwise have used to pay the higher utility costs (which are lower because of the ECM installed by the ESCO). Consequently, agencies argue that they will not need an increase in future appropriations relative to the current amount of appropriations in order to pay the ESCOs. Agencies other than DOD and GSA must transfer 50 percent of the energy savings realized from energy savings performance contracts (after paying the negotiated amount to the contractor) to the Treasury. The remaining 50 percent saved may be retained and is available for additional energy and water conservation projects until expended. According to FEMP, 18 federal agencies and departments have implemented ESPC projects worth $1.7 billion. Without ESPCs, agencies would have to reassess their budget plans to accommodate investments in ECMs and/or Congress would be asked to appropriate funds today to finance investments to meet currently required energy consumption goals. Proponents of ESPCs argue that, as an alternative financing method, these contracts help agencies overcome the problem of insufficient funding to meet federal energy reduction goals. Without ESPCs, agencies would need to adjust their program plans within expected appropriation levels to make energy efficiency improvements or possibly do nothing if the funds are unavailable in a given year. In this regard, proponents note that delays of even 1 year can result in greater utility, maintenance, and other costs. Moreover, by using ESPCs, agencies did not have to make some difficult trade-offs between purchasing ECMs and other claims on resources. Critics of ESPCs, however, point out that for any given ECM the direct purchase of more efficient energy systems would allow all future savings to accrue to the government, rather than paying out a percentage of the savings to private contractors. In addition, the government incurs certain costs in using an ESPC, such as the M&V fees paid to the contractor, that it would not necessarily incur if the energy improvements were financed up front with federal appropriations. The ESCO’s also pay a higher cost of capital than the federal government. As a result, over the long term, financing ECMs through ESPCs is likely to be more expensive than acquiring them through timely, full, and up-front appropriations. Finally, dependence on the annual budget cycle is the process by which decision makers weigh competing federal priorities. Permitting ESPCs to be recorded in the budget at less than their full cost up front affects this process, possibly resulting in lower priorities receiving funding ahead of higher priorities. Not addressing some difficult resource allocation decisions is seen as an advantage to agencies. However, long-standing budget concepts hold that a budget should be a forum for resource allocation decisions and that all competing claims should be compared on a consistent basis. CBO and OMB disagree over the appropriate budget scoring for ESPCs. CBO recognizes that the law enables agencies to use ESPCs to pay for ECMs over a period of up to 25 years without an appropriation for the full amount of the purchase price. However, the law does not prohibit scoring the full cost of the contract up front. In CBO’s view, the obligation to make payments for the energy efficient equipment and the financing costs is incurred when the government signs the ESPC. Further, CBO believes it is consistent with governmentwide accounting principles that the budget reflect this commitment as new obligations at the time that an ESPC is signed. Accordingly, CBO scored recent ESPC legislation such that the total (long-term) commitments to an ESCO would be counted in the budget at the time the ESPC delivery order is signed. In contrast, OMB recognizes obligations, budget authority, and outlays for ESPCs on a year-to-year basis. According to OMB staff, this decision was based on the savings component of ESPCs and agencies’ statutory authority to enter into a multiyear contract even if funds are available only to pay for the first year of the contract. Partnerships are designed to tap the capital and expertise of the private sector to improve or redevelop federal real property assets. Partnerships are sometimes used when excess capacity, such as unused land, exists within a federal asset. Ideally, the partnerships are designed such that each participant makes complementary contributions that offer benefits to all parties. From a budget scoring perspective, recording an agency’s full commitments up front in the budget can be difficult because the precise level of an agency’s financial commitment and control in the partnership may be unclear. Congress has enacted a variety of laws that provide agencies with authority to enter into partnerships with private firms. For instance, VA possesses enhanced use (EU) lease authority to outlease federal real property to private firms (see fig. 3). Alternatively, GSA possesses limited authority for specific situations. For example, GSA entered into a partnership with the Georgia Cooperative Services for the Blind to operate a food court within the Atlanta Federal Center, using authority provided by the Randolph Shepard Act. GSA has also used authorities granted in other legislation, such as the Public Buildings Cooperative Use Act of 1976, as amended, and the National Historic Preservation Act, as amended, to work with nonfederal partners. Despite the significance of GSA’s role in federal property management, its limited authority to enter into partnerships has prevented it from taking a substantive role in partnership activities. Proponents of partnerships argue that the approach provides a realistic, less costly alternative to leasing when planning and budgeting for real property needs. Proponents also note that federal partners benefit from improved, modernized, or new facilities plus a minority share of the income stream generated by the partnership or use of the asset at a lower cost than a commercial lease. Critics of partnerships caution that these ventures are not the least expensive means of meeting capital needs, although they may appear to be in the short term. They remind policymakers that up-front funding with appropriated funds is the least expensive way to obtain assets and results in the inclusion of the government’s long-term commitments in the budget. Our prior work has shown that, as part of a capital review and approval process, leading organizations develop decision packages, such as business case analyses, to justify capital project requests. A business case analysis is a planning and decision support tool used to ensure that (1) the objectives for a proposed facility-related investment are clearly defined, (2) a broad range of alternatives for meeting the objectives are developed, (3) the alternatives are evaluated to determine how well the objectives will be met, and (4) trade-offs are explicit. The overriding purpose of a business case analysis is to make transparent to the various decision making and operating groups all of the objectives to be met by the investment, the underlying assumptions, and the attendant costs and potential consequences of alternative questions. Business case analyses are supported by detailed economic and financial analyses such as cost- benefit, return on investment, life-cycle cost, and comparative alternative analyses, and recommend the most cost-effective option. ESPCs and partnership arrangements were authorized by Congress. With these arrangements, both the government and third parties share the risk of a long-term financial commitment. However, agencies were not required to reflect the full cost of these commitments up front in the budget when the commitments were being made. For example, ESPCs finance energy- efficient equipment over time by using savings in agencies' utility bills to repay ESCOs for the up-front equipment and installation costs. Because the ESCOs are repaid over time, the full up-front costs of ECMs are not reflected in the budget. (Fig. 8 on page 55 illustrates how ESPCs affect agencies' cash flows before, during, and after the contract term.) With respect to most of the partnerships we reviewed, scoring decisions were driven by the transfer of government land from agencies to third parties. Case study agencies sometimes leased assets in short-term increments that third parties constructed on the transferred land specifically for the government’s use and benefit. As a result, the full cost of the assets were not required to be reflected in the budget. Given that the federal budget is primarily measured on a cash and obligations basis, some of the partnerships we examined were completely invisible in the budget because they involved noncash transactions. The financial commitment of the government is illustrated in figure 4—although costs through third-party financing that appear in the budget may be initially lower, the government is committed to years of future payments. ESPCs represent long-term commitments of the government. Agencies generally retain control of capital assets acquired through ESPCs for their entire life cycle, and frequently contractors transfer title of the assets to the government after the assets are installed and accepted by the government. Moreover, the term of ESPC delivery orders spans as long as 25 years. Finally, agencies’ termination liability for ESPCs typically corresponds to their outstanding principal balance. Although these arrangements represent long-term commitments, funds for ESPCs are obligated on an annual basis. Therefore, the budget does not recognize the government’s long-term commitment up front, when decisions are made. This policy was formalized in a 1998 OMB memorandum that stated ESPC obligations, budget authority, and outlays would be recognized on an annual basis. The memorandum did not discuss OMB’s rationale for scoring ESPCs in this manner. According to OMB staff, this memorandum reflected OMB’s early examination of the issues. Specifically, the policy was based on the savings component of the contracts and the statutory authority to enter into a multiyear contract even if funds are available only to pay for the first year of the contract. Capital assets acquired through the partnership arrangements we reviewed were structured such that third parties have an ongoing, long-term relationship with the government. However, OMB’s budget scoring instructions required that only the short-term costs associated with assets acquired through case study partnerships be scored in the budget. As shown previously in figure 1, the definition of an operating lease (which permits obligations to be scored annually) specifies that the lease term may not exceed 75 percent of the estimated economic life of the asset. Assets we reviewed were constructed in areas where case study agencies have long maintained a presence and have a continuing mission. It seems unlikely that the agencies will vacate or abandon these assets before the end of their economically useful lives. To the extent agencies continue to occupy leased spaces, the 75 percent criteria for an operating lease may be exceeded. For example, through a series of transactions, DOE entered into a partnership with the nonprofit UT-Battelle Development Corporation (UTBDC) to revitalize its Oak Ridge National Laboratory (ORNL) in the state of Tennessee. ORNL was first established in 1943 and is DOE’s largest science and energy laboratory. Many of the buildings on the ORNL reservation have become obsolete, dilapidated, and expensive to maintain. Accordingly, UTBDC arranged for the sale of bonds through Keenan Development Associates of Tennessee to finance and construct three general-use office buildings at ORNL (specifically to support DOE research). UT-Battelle, LLC, on behalf of DOE, leased the buildings through a series of leases extending to 25 years and involving UTBDC and Keenan. (See app. III for a full explanation of this complicated arrangement.) DOE’s ORNL Project Manager told us that, even if ORNL’s mission was downsized, it was unlikely that DOE would terminate any of the leases of the three new, state-of-the art buildings to reoccupy the now empty, dilapidated buildings. Figure 5 shows one vacant office building and an artist’s rendition of the revitalized ORNL reservation, including the three privately financed buildings. Evidence of ORNL’s long-term commitment is further bolstered by Standard and Poor’s A+ rating of the ORNL bond issuance. The rating report stated that a strong lease revenue stream from DOE, for a period of up to 25 years, would be pledged as security for the payment of the bonds. Moreover, the unique mission of ORNL makes it unlikely that DOE will move its operations from the Oak Ridge site. DOE officials stated that the likelihood that ORNL will close during the term of the bonds is very low, so DOE is unlikely to terminate any part of the leases. According to DOE officials, DOE transferred the government-owned land on which the buildings are located to UTBDC via quitclaim deed so that appropriations for the full, up-front costs of the three buildings were unnecessary. DOE later approved the facility subleases between UTBDC and UT-Battelle, LLC. DOE then obtained the use of the newly constructed buildings from UT-Battelle, LLC, reimbursing UT-Battelle, LLC, for the sublease rents. DOE officials told us the deal was deliberately structured with a quitclaim deed to ensure that the arrangement was scored as an operating lease rather than a capital lease. Because OMB allowed DOE to record this arrangement as an operating lease, DOE needed to obligate only the annual cost of the lease payments, rather than the full cost of the construction. In another case study, VA entered into an enhanced use (EU) lease for up to 35 years with the Dekalb County Development Authority (the Authority) to finance and construct VA’s Atlanta Regional Office (VARO) building and parking area. Dekalb County issued 35-year revenue bonds to finance the project. VA officials said construction of the new building allowed the agency to collocate its regional office with an existing VA medical center and provide enhanced “one-stop” service for veterans. Although VA leases the facilities from the Authority in 2-year increments, there is no current plan to vacate the property in the near future and the leases automatically renew unless VA takes positive action to terminate. Additionally, VA agreed not to replace the regional office building financed by the Authority with another regional administration or headquarters building in Georgia using its EU leasing authority during the term of the bonds. VA may enter into another EU lease in the Atlanta region so long as the new building does not disrupt VA’s occupancy within the collocated office. VA did not need to obligate the full up-front cost of the regional office building and parking area because it used its EU lease authority to outlease the government-owned land to the Authority on which the Authority could build. VA then leased the newly constructed building and parking area from the Authority’s developer through 2-year operating leases, which automatically renew for up to nine consecutive terms unless VA takes positive action to terminate the automatic renewal clause. Accordingly, OMB only required the annual lease payments and any termination costs to be reflected in the budget. In some cases, partnerships are arranged for reasons other than an agency’s belief that appropriations are not available. For example, VA entered into an EU lease with the City of Vancouver’s Housing Authority to construct an estimated $4 million homeless shelter on VA property. In exchange, veterans receive priority placement in 50 percent of the shelter units; VA receives no cash consideration. Because VA can discharge patients into the homeless shelter rather than extending inpatient care in VA medical facilities, VA estimated that it avoids costs of roughly $1.8 million annually. Additionally, VA anticipated that the homeless shelter would provide veterans with greater outpatient services and improve the availability of affordable housing for single homeless individuals. Because the partnership involves no cash consideration, it is not reflected in the budget. A number of factors may cause third-party financing to be more expensive than timely, full, and up-front appropriations. For example, case study agencies incurred a higher rate of interest by using ESPCs and partnerships than if they had obtained that same capital through timely, full, and up-front appropriations. Also, for ESPCs, officials told us that the government likely incurred additional costs for the measurement and verification (M&V) of equipment performance. In our six ESPC case studies, use of ESPCs increased the government’s costs of acquiring ECMs by 8 to 56 percent compared to the use of timely, full, and up-front appropriations. None of the partnership case studies lent themselves to this type of cost analysis because comparable data were not available. Some of the partnerships did not involve cash consideration. For others, although the government incurred higher interest costs compared to up-front funding, we did not evaluate claims that other factors such as lower labor costs and fewer bureaucratic requirements might lower costs because data were not readily available. Thus, we were unable to judge whether partnerships could be less expensive overall. For both ESPCs and partnerships, agency officials said they did not request full, up-front appropriations to finance the specific capital projects we reviewed. Frequently, they said this was because they did not believe funds would be available in a timely manner and they had statutory authority to use the alternative mechanisms. However, there are insufficient data to measure this effect. Since the federal government’s cost of capital is lower than that of the private sector, alternative financing mechanisms may be more expensive than timely, full, and up-front appropriations. Accordingly, all case study agencies could have acquired the same ECMs less expensively through timely, full, and up-front appropriations than through ESPCs. In addition to a higher cost of capital, agencies also likely incur additional M&V costs when they finance ECMs through ESPCs rather than timely, full, and up-front appropriations. Agencies contract for M&V of energy savings financed through ESPCs because they are required to show that annual savings generated by ECMs meet or exceed annual contractor payments. M&V of savings also acts as insurance; if actual savings fall below those guaranteed by the contractor, the contractor may be obligated to take corrective actions at its own expense. Officials we spoke with said they believed that M&V resulted in higher sustained savings but is an expense that would not be incurred if the ECMs were acquired through timely, full, and up-front appropriations. Representatives from the ESCOs said that their private sector clients do not always purchase M&V, and, if they do, it is for a shorter period than contracts secured by the federal government. Table 1 presents cost comparisons using the installation and construction price of ECMs (based on delivery order files) as a proxy estimate for timely, full, and up-front appropriations costs. It shows that ECMs obtained through our six ESPC case studies might be roughly 8 to 56 percent more expensive than they could have been for the same ECMs had they been obtained through timely, full, and up-front appropriations. The percentage difference between financing through ESPCs and estimated timely, full, and up-front appropriations is shown in the far right column. The difference in costs between the two financing mechanisms is a function of (1) the higher cost of capital incurred through ESPC financing and (2) the M&V costs incurred through ESPC financing. The performance of ECMs installed through the use of ESPCs are guaranteed to reduce energy use during the term of the contract so that payments to the contractor can be made from the savings from lower utility bills. ESPCs contain assumptions for such things as hours of operation and ECM efficiency which, taken together, determine estimated savings. However, if the assumptions are incorrect and estimated savings are not achieved, the agency is still required by contract to pay the ESCO the agreed-upon savings specified in the ESPC. According to agency officials, ECMs may continue to accrue savings beyond the contract cycle as they continue to operate more efficiently than the equipment they replace. The additional savings along with the savings realized during the contract cycle may cover the entire cost of the equipment. (See app. II for additional detail on verification of ESPC savings.) As shown in figure 6, for all six ESPC case studies, contract cycle energy cost savings specified by the contractor did not fully cover total contract cycle costs (including O&M expenses) because agencies made up-front payments. All six of the case study ESPCs used a combination of funds from their existing budgets and third-party financing via an ESPC to implement packages of ECMs. The up-front payments from their existing budgets covered the difference between total contract cycle costs and savings. Accordingly, the agencies reduced the amount they had to finance through ESPCs, thereby reducing their interest payments. In the case of the ESPCs for the Bangor Naval Submarine Base and Navy Region Southwest, some of these up-front payments came out of a special appropriation provided to address energy supply shortages in the West. With respect to the ESPCs at North Carolina, Atlanta, and Patuxent River, funds used to pay down the principal on the ESPC had previously been appropriated to renovate, renew, or repair old energy consuming systems. Since implementation of the ESPC made these activities unnecessary and may be providing benefits other than costs savings, such as maintaining an acceptable level of service, the funds from the avoided costs were put toward the ESPC. According to guidance issued by DOE’s Federal Energy Management Program (FEMP), agencies are permitted to use funds generated by these types of avoided costs to pay for ESPCs. For the six ESPC case studies, up-front payments ranged between 2 and 45 percent of total contract cycle costs. None of our five partnership case studies lent themselves to a budgetary cost analysis because comparable data were not available. Two did not involve cash transfers of any kind. In the case of the other three, it was unclear how much the projects would have cost had they used timely, full, and up-front appropriations rather than partnership financing. In these cases, agencies sometimes incurred higher interest costs by using partnership financing rather than timely, full, and up-front appropriations. For example, DOE benefited from the use of a roughly $70 million private bond offering to finance the revitalization of three buildings at ORNL. The financing structure used over the course of 25 years means DOE actually will obligate funds equaling approximately $96 million, present value (PV). Similarly, VA will obligate funds equaling approximately $43 million (PV) over 35 years to pay off the approximately $33 million in bonds the Authority issued to finance the construction of an office building and parking area in Dekalb County, Ga. However, officials said that other factors associated with partnerships, such as lower labor costs and fewer bureaucratic requirements, could make partnership financing overall less expensive than financing through timely, full, and up-front appropriations. For example, officials with DOE’s M&O contractor said that, in the case of the ORNL revitalization project, greater efficiencies existed in private sector construction since the government would have had to enter into more costly union labor agreements had it financed the project through timely, full, and up-front appropriations. Similarly, a VA official said that using an EU lease to construct an energy center would be less expensive than financing the asset through timely, full, and up-front appropriations because federal labor agreements and acquisition regulations created inefficiencies in federal construction. As part of this engagement, we did not analyze these claims to determine whether the efficiencies associated with private sector construction would offset the higher interest costs of partnership financing. Some agency officials said that ESPCs and partnerships are cost effective because they allow agencies to acquire capital more quickly than through appropriations. They noted that it is uncertain when or whether timely, full, and up-front appropriations will be made available. Officials from Navy, DOE, and GSA expressed their belief that funds obtained through third parties would be available much more quickly than through appropriations. Consequently, officials said that agencies could accrue more savings and avoid more costs using ESPCs and partnerships than they would have if they had waited for appropriations. For example, Navy officials said that, had they not used ESPCs, Naval installations would have had to pay higher utility bills while waiting for appropriations to finance ECMs. Similarly, at ORNL, one DOE official pointed out that although the idea for three privately financed buildings was conceived at the same time as the highest priority federally funded building, the three privately financed buildings were completed and occupied at least a year in advance of the one funded through appropriations. Other DOE officials said that the costs of maintaining obsolete, dilapidated buildings at ORNL while waiting for appropriations would have added to the cost of waiting for full, up-front appropriations. Thus, according to these officials, capital obtained through ESPCs and partnerships may be less expensive relative to full, up-front appropriations than it seems. Since the agencies did not request additional appropriations or adjust their plans to accommodate needed capital investments, it cannot be known whether agencies were correct in assuming that timely appropriations would not be available. Agencies are responsible for establishing funding priorities to achieve their missions, including capital needs and mandated energy savings. Capital plans supported by strong analysis could help them in setting priorities for funding requests. Given the federal government’s ability to obtain capital at lower interest rates than private companies, officials from each of our case study agencies agreed that timely, full, and up-front appropriations were the least-cost alternative for financing capital acquisitions. However, officials also stated that they did not request additional appropriations for the case studies we reviewed because they were authorized to use the alternative financing mechanism. Further, they did not believe appropriations would have been available in a timely manner. For example, DOE officials said that they had not requested full, up-front appropriations for certain aspects of the ORNL revitalization project because, in the past, they had tried and failed to obtain funding for similar projects. The Director of DOE’s Office of Science stated that it was particularly difficult to obtain funding for general use office buildings compared to buildings specifically designed for scientific research. However, the poor condition of these general use buildings negatively affected DOE’s ability to recruit and retain high-quality scientists. Because the agencies never requested appropriations for these specific projects, it is impossible to know whether their assumptions were correct. GSA and Navy officials also said recent declines in up-front appropriations for ECMs affected their decision to use ESPCs. For example, according to GSA officials, GSA’s budget authority for energy efficiency projects declined from $20 million in fiscal year 1999 to $4.2 million in fiscal year 2004, and it received no funds in fiscal years 2002 and 2003. They also pointed to GSA’s $6 billion backlog of identified repair and alteration needs. According to Navy officials, appropriations for its Energy Conservation Improvement Program dropped from $21.7 million in fiscal year 1999 to zero dollars in fiscal year 2000. Although funding has increased in recent years, it still remains well below 1999 levels. According to the Director of the Navy’s Energy Programs Division, the department receives less than 10 percent of the estimated $140 million needed each year to meet energy savings goals. Navy officials said that other priorities in the Navy’s budget had taken precedence over energy reduction projects. According to FEMP, ESPC projects worth $1.7 billion have been implemented by 18 federal agencies and departments. Without ESPCs, agencies would have to reassess their budget plans to accommodate investments in ECMs and/or Congress would be asked to appropriate funds today to meet currently required energy consumption standards. Officials also pointed out that agencies had been granted statutory authority to use ESPCs and partnerships. For example, the Energy Policy Act of 1992 authorized agencies to fund ECMs through ESPCs. Additionally, OMB issued two memorandums encouraging agencies to use ESPCs to achieve long-term energy savings. In addition, the Atomic Energy Act granted DOE authority to give away land for mission purposes and enabled it to finance improvements on that land through private sector financing. Similarly, VA officials said that the agency’s EU lease authority specifically enabled it to enter into partnerships with nonfederal sector entities to finance capital. Third-party financing can make it easier for agencies to manage in the short term within a given amount of budget authority but may have additional long-term costs. With ESPCs, case study agencies relied heavily on ESCOs to recommend potential ECMs, install the equipment, and then verify that the recommended improvements yield intended results. Partnership arrangements generally entail a government agency engaging another party to, among other things, renovate, construct, operate, or maintain a public facility. Such relationships increase the need for effective implementation and monitoring by agencies to ensure the government’s interests are protected. For example, reliance on outside parties can leave the government open to problems resulting from conflicts of interest and presents monitoring challenges. The ESPCs and one of the partnerships we reviewed highlighted these vulnerabilities. An evaluation of funding alternatives was not always done to determine the most appropriate way of funding capital projects. Finally, VA has used partnership financing to engage in an activity that is not related to VA’s mission and which it ordinarily would not fund through full, up-front appropriations. As the government teams with outside parties to acquire capital, it must ensure that its welfare is protected from conflicts of interest. ESPCs introduce concerns over conflicts of interest due to the heavy reliance upon ESCOs. Partnership arrangements can also create management challenges as outside participants gain influence over projects. Active participation and scrutiny by agencies can help ensure the government’s interests are not compromised. Once agencies decide to use an ESPC and select an ESCO to work with, they must ensure that the government’s interests are protected from the potential conflicts of interest that may arise from the ESCO’s comprehensive role in recommending what ECMs are needed and then in monitoring and verifying the performance of the equipment that they recommended, installed, and guaranteed. For example, an ESCO prepares a Detailed Energy Survey (DES), which is an investment-grade audit that determines what ECMs will be installed as part of the ESPC. This serves as the basis for the project’s estimated savings, M&V, and O&M, and is used to develop the final energy project proposal. After the ESCO installs the ECMs, it measures and verifies that the contractually guaranteed savings it estimated are being achieved. To ensure the government’s interests were protected, staff at both GSA and the Navy reviewed documentation and participated throughout the ESPC process. Given its decentralized process for managing ESPCs, GSA uses a FEMP project facilitator for technical assistance on its ESPC delivery orders. To the extent desired by federal agencies using its Super ESPC, FEMP provides assistance through training, project development tools, and technical support. According to FEMP and Navy officials, the Navy’s centralized process for managing ESPCs enables it to maintain sufficient in-house technical expertise and the Navy does not typically employ FEMP’s assistance. However, the Navy frequently uses FEMP’s free services, such as reviewing proposals, and has purchased FEMP’s support in special circumstances. Although both GSA and the Navy took an active role in negotiating the case study ESPCs to protect the government’s interests, the process by which these contracts are structured can still introduce problems resulting from ESCO’s conflicts of interest. For example, case study agencies relied heavily upon the ESCOs to estimate facilities’ energy use after ECM installation compared to what baseline energy use would have been if ECMs had not been installed. Projected energy savings are calculated by subtracting estimated energy use after ECMs have been installed from baseline energy use. According to FEMP guidance, these calculations should be examined in detail because they are the basis for determining whether the contractually guaranteed savings are achieved. Nonetheless, a number of Army Audit Agency reports issued over the last several years stated that energy savings baselines established by the ESCOs were faulty, resulting in overpayments to the ESCO. For example, some baselines used incorrect assumptions such as overstated operating hours. Representatives from two ESCOs noted that the greater the experience of the government team, the greater the intensity of the negotiations. Therefore, FEMP assistance is particularly important for agencies with relatively little ESPC experience. Given agencies’ reliance on the ESCOs in the ESPC process, agencies must be diligent to ensure that the government’s best interests are protected. Employing best practices in using ESPCs also may provide opportunities to better ensure the government receives the best value for its investment. The partnership between DOE, its management and operations (M&O) contractor UT-Battelle, LLC, and UTBDC, created monitoring challenges. Although we found no evidence of fraud, waste, or abuse, these challenges were created when officers of the M&O contractor recommended that DOE transfer land, without charge, to UTBDC. The same officers of the M&O contractor that recommended this course of action to DOE also served as officers of UTBDC, the organization that received the land. UT-Battelle, LLC, contracted with UTBDC, which arranged for the private financing to construct three general-use office buildings. Accordingly, because the M&O contractor, not DOE, was directly involved in the contract, DOE was presented with monitoring challenges. DOE counsel both at Oak Ridge and headquarters told us that DOE’s risk was minimal and that monitoring of the partnership was not necessary. At Oak Ridge, counsel told us that so long as the end product was what they wanted, DOE did not have much of a role. At headquarters, counsel told us that DOE does not provide oversight or micromanage how M&O contractors work with subcontractors. Further, we were told that DOE does not question M&O contractors’ practices because DOE officials believe these contractors to be trustworthy. Nonetheless, the primary purpose of the partnership was to obtain facilities for DOE’s use and ultimately the revenue stream supporting the financing will be paid through DOE appropriations. Thus, we believe greater monitoring and oversight was warranted to ensure that the contractor operates in the government’s best interest. Our prior work has shown that, as part of a capital review and approval process, leading organizations develop decision packages, such as business case analyses, to justify capital project requests. These packages are supported by detailed economic and financial analyses such as cost- benefit, return on investment, life-cycle costs, and comparative alternative analyses, and recommend the most cost-effective option. Both OMB and our guidance stress that, when a performance gap between needed and current capabilities has been identified, it is important that organizations carefully consider how best to bridge the gap by identifying and evaluating a full range of alternatives to construct or purchase a new capital asset. This type of analysis was not always performed for the case studies we reviewed. For example, large buy-downs of ESPC principal raised questions about the need for ESPC financing. A business case analysis might have demonstrated that sufficient funds were available to purchase ECMs in smaller, useable segments, when technically feasible. In addition, not all partnerships included a business case analysis to determine whether third-party financing was the most cost-effective alternative. One key attraction for using ESPCs is that they enable agencies to acquire ECMs even if funds are available only to pay for the first year of the contract. However, three of the six case studies we reviewed obligated and paid a significant portion of the total cost of the ECMs in the first year of the contract. These large buy-downs of principal avoided repair, replacement, and renovation costs as a result of implementing the ESPC. They also imply opportunities exist to acquire ECMs in smaller, useful segments, when technically feasible with timely, full, and up-front appropriations instead of through ESPCs. For example, agencies could individually acquire an ECM such as an air chiller without bundling it into an ESPC. Navy and GSA officials indicated they typically did not consider financing ECMs through useful segments or through full and up-front appropriations. They also told us they did not did not perform a business case analysis before deciding to use ESPCs because of the administrative cost of such an analysis since they believed there was no other viable option. Officials explained that their agencies did not request full, up-front appropriations since appropriations might not have been made available in a timely manner and the use of ESPCs had been authorized. Analyzing the full range of funding alternatives would help agencies determine if acquiring ECMs in these useful segments would be a more cost-effective alternative. As previously discussed, FEMP guidance permits agencies to apply avoided repair or replacement expenses for large equipment as one-time cost savings to buy-down principal. For three of our case studies that followed this guidance, these one-time savings were approximately 7 percent, 38 percent, and 39 percent of contract cycle costs. According to GSA and Navy officials, these funds had already been appropriated for the repair or replacement of old equipment. The ESPC made this repair or replacement unnecessary and thus freed-up funds for other uses, such as buying down the ESPC principal. Although paying down principal up-front has the benefit of reducing financing costs to the government, the availability of these funds highlights the need for an analysis of the feasibility of purchasing ECMs in useful segments rather than through an ESPC. Agency officials expressed concern that acquiring ECMs in smaller, useful segments would mean that some energy inefficient equipment would be kept in use longer than if acquired in bulk through the ESPCs. In addition, they noted that buying the ECMs in smaller quantities might cause the government to lose economies of scale achieved through the larger contracts. This concern was echoed by an ESCO representative, who pointed out that fixed costs for smaller contracts would be similar to those of larger projects. Nonetheless, given the higher financing and likely additional M&V expenses, agencies should formally assess the costs, on a present value basis, to determine the most cost-effective alternative. Three of the five partnership arrangements we reviewed were undertaken to obtain project financing. Leading capital practices for capital decision- making would call for business case analyses in such cases, which include analyzing the full range of funding alternatives. However, for two of these three partnerships, agencies did not assess the full range of alternatives to determine how best to fund the project. For example, DOE officials could not provide evidence that the department had prepared or reviewed a business case analysis for the financing arrangement at ORNL. While ORNL’s M&O contractor, UT-Battelle, LLC told DOE employees that private financing of three general-use office buildings was in the government’s best interest, in our opinion the data provided to DOE were summarized at such a high level that DOE could not have done a comparative analysis of financing alternatives. Although UT-Battelle, LLC’s detailed analysis was readily available to the department, UT-Battelle, LLC officials told us that data were not requested from nor provided to DOE. This analysis contained much greater detail, including an analysis of the cost of maintaining old, dilapidated buildings but did not analyze timely up-front appropriations as an alternative. DOE staff informed us that they had a good relationship with UT-Battelle, LLC and had no reason to doubt the summary analysis provided. However, a memorandum issued by DOE’s Assistant General Counsel for General Law regarding the applicability of OMB Circular A-11 to the Oak Ridge National Laboratory land transfer proposal said that the department’s policy would require DOE to do a comparative cost-analysis between using appropriated funds to build the facilities now and the cost of funding UT-Battelle, LLC’s sublease payments. VA did not compare the cost of financing the regional office building through up-front appropriations to the cost of financing it through Georgia’s DeKalb County Development Authority. To avoid steep rent increases in GSA leased space and to collocate its regional office with an existing medical center, VA formed a partnership with the Authority to finance the construction of its new regional office building on VA-owned land. Although VA prepared a business case analysis comparing leasing from GSA to financing construction through the Authority, VA told us it did not compare the cost of financing through the Authority versus up-front appropriations. VA has used partnership financing to engage in an activity that is not related to its mission and in which it ordinarily would not fund through full, up-front appropriations. In one instance VA used its EU lease authority to construct a power plant for its North Chicago campus. VA officials said that it is doubtful that VA would ever construct and operate a power plant on its own since (1) power generation is not a core activity within VA’s mission and (2) VA does not possess the necessary expertise. However, according to VA officials, the Navy, the only provider of steam in the area, had been charging VA rates above those charged by other suppliers to consumers in neighboring areas of Chicago and this EU lease enabled VA to reduce its energy costs. ESPCs and partnerships that we reviewed were authorized by Congress. The financing approaches used in many of the case studies were structured to include features for which OMB did not require up-front budget recognition even though they established long-term commitments of the government. One or more of the following features were used by case study agencies: (1) the transfer of government land to third parties, (2) use of a third-party rather than the U.S. Treasury to finance assets over time, (3) use of short-term leases for potentially long-term needs, (4) noncash transactions, (5) contractually guaranteed savings, and (6) statutory authority to enter into ESPCs without funds to obligate the full contract price. In the case studies we reviewed, the capital assets acquired offered benefits to the government such as energy conservation and a collocated VA regional office and medical center. It is not the purpose of this report to second guess the benefits of the assets. This report focuses only on the budgetary process of justifying the means of acquiring and financing assets. Even though project financing may be obtained more quickly by using alternative financing mechanisms, these mechanisms do not disclose the federal government’s measure of long-term obligations in the budget. As a result, when resource allocation decisions are made, costs are not shown on comparable bases. This can favor capital programs financed through these mechanisms over other programs (including capital) that include their full costs up front in the budget. In our work on capital planning, we noted that leading practices include analyzing alternative approaches to financing capital by using methods, such as net present value analysis, to analyze relevant alternatives to address capital needs. OMB's capital planning guidance also suggests that agencies need to select the alternative with the most cost-effective results over the long term, based on a present value analysis. This analysis would include all relevant federal financing costs associated with the alternatives and any potential savings that can be attributed to the various alternatives. Long-standing federal budget concepts and our own work reinforce the principle that full accountability for budgetary decisions is best guaranteed by recognizing the full costs of federal initiatives at the time when the decision is made to commit federal resources. One way to ensure that costs of assets used for long-term commitments are appropriately considered in the budget would be to score up front the expected payments over the same period of time used to analyze ownership options. This would require going beyond the strict terms of a proposed transaction and scoring based on the substance of the deal. Although ensuring the validity of agencies’ long-term plans may pose implementation challenges, such as the need to validate agencies’ long-term capital requirements, such scoring could result in a better reflection of the government’s full commitment. In addition to potentially affecting budget decisions, our case studies showed that funding capital projects through alternative financing mechanisms may be more expensive to the government than funding through appropriations because the private sector’s cost of capital is generally higher than the federal government’s. Other factors such as additional M&V and lower labor costs also may affect the cost of alternative financing. Using a proxy of their cost to the government, ECMs obtained through ESPCs we reviewed at the Navy and GSA cost between 8 and 56 percent more than the same ECMs funded through up-front appropriations. Also, agencies did not specifically analyze and compare all alternatives, nor did they investigate the feasibility of purchasing ECMs in useful segments. Given the federal government’s ability to obtain capital at lower interest rates than private companies, officials at case study agencies agreed that funding through timely, full, and up-front appropriations is less expensive than third-party financing. However, with respect to partnerships, other factors such as lower labor and fewer bureaucratic requirements may offset higher financing costs. Therefore, it is uncertain whether using partnerships is more or less expensive than using up-front financing. Agencies did not adjust their capital plans to accommodate needed capital investments nor request appropriations to finance capital projects because they did not believe sufficient appropriations would be available in a timely manner. Instead, they used the authorities provided to them to finance projects over time, through third parties. By incurring potentially higher costs in the future to avoid making difficult trade-offs today, agencies merely defer the trade-offs to a later date and a subsequent Congress. These trade-offs would lead Congress to either increase appropriations to maintain the current level of investment or fund fewer projects. Agencies are faced with requirements for energy savings and need appropriations to implement energy conservation measures. At the same time, Congress is faced with allocating scarce resources for many needs across the government. Recently, Congress expressed its current priorities for energy saving projects by extending ESPC authority until October 1, 2006, to permit the financing of such projects through private companies over time. As shown in our report, this favorable budget treatment comes at a cost—a cost that Congress needs to monitor as these contracts are used during the next 2 years. Implementation and monitoring of ESPCs is a relatively uniform process. Since partnerships take a variety of forms, their implementation and monitoring is more complex. While third-party financing can make it easier for agencies to quickly finance projects within a given amount of budget authority, it also presents monitoring challenges. In a federal setting, even the appearance of a problem such as a conflict of interest is of concern because it can erode the public’s confidence in the government and ultimately degrade an agency’s ability to carry out its mission. The use of third-party participants increases the importance of ensuring that the government’s interests are protected and the performance of these third- party participants should be carefully monitored and verified. Given the competing pressures faced by Congress to support energy saving investments while at the same time seeking to ensure budgetary transparency of full program costs, Congress should consider requiring agencies that use ESPCs to present Congress with an annual analysis comparing the total contract cycle costs of ESPCs entered into during the fiscal year with estimated up-front funding costs for the same ECMs. Congress could use this information in evaluating whether to further extend ESPC authority beyond its current expiration date. First, we recommend that the Director of OMB instruct agencies that use ESPCs to report to OMB and to their committees of jurisdiction an annual analysis comparing the total contract cycle costs of ESPCs entered into during the fiscal year with estimated up-front funding costs for the same ECMs. Congress could use this information in evaluating whether to further extend ESPC authority beyond its current expiration date. Second, we recommend that the Director of OMB work with the scorekeepers to develop a scorekeeping rule for the acquisition of capital assets to ensure that the budget reflects the full commitment of the government for partnerships, considering the substance of all underlying agreements, when third-party financing is employed. Finally, we recommend the Secretaries of Energy, VA, and the Navy and the GSA Administrator perform business case analyses and ensure that the full range of funding alternatives, including the technical feasibility of useful segments, are analyzed when making capital financing decisions. In a draft of this report, we had a recommendation that the Director of OMB work with scorekeepers to develop a rule that would ensure that the full commitments of ESPCs are reflected in the budget. Several agencies did not agree with this recommendation, citing concerns that such a rule would likely discourage or prevent agencies from entering into ESPCs. In light of Congress’ recent expression of its current priorities by extending ESPC authority through fiscal year 2006, we dropped this recommendation with respect to ESPCs and included instead the first recommendation to OMB and the matter for congressional consideration described above. We obtained comments from OMB and our case study agencies—DOD, DOE, VA, and GSA. OMB agreed in concept with our second recommendation that OMB work with scorekeepers to develop a rule for partnerships that would ensure the budget reflects the full commitment of the government, considering the substance of all underlying agreements. DOE and VA disagreed with this recommendation based on concerns that such a rule would effectively make alternative financing unavailable to federal agencies. While it is not our intent to discourage or eliminate partnerships with the private sector, recognizing the full commitment up- front in the budget enhances transparency and enables decision makers to make appropriate resource allocation choices among competing demands that all have their full costs recorded in the budget. GSA did not address this recommendation in its comments. DOE, GSA, and VA agreed at least in part with our final recommendation, that case study agencies should perform business case analyses to ensure the full range of funding alternatives are analyzed when making capital financing decisions. DOD disagreed with this recommendation and OMB did not address it in its comments. Business case analyses are well accepted as a leading practice among public and private entities and OMB requires all executive branch agencies to prepare such analyses for major investments as part of their budget submissions to OMB. Therefore, we believe our recommendation is appropriate. Representatives from OMB, including staff from the Office of General Counsel, provided oral comments on our draft. These representatives stated that OMB “meets regularly with Congressional scorekeepers to review the scorekeeping rules and updates A-11 guidance in order to accurately reflect the types of transactions and obligations the government is entering into. OMB staff stated that they would take into consideration the findings of the report and the agencies’ comments on the report, including whether contractually guaranteed savings are equitably considered and given due credit when evaluating ESPCs. OMB staff also noted that recent updates in 2003 to scorekeeping guidance related to lease-backs from public/private partnerships may address some of the concerns GAO noted in the draft.” OMB staff said that the new scorekeeping guidance attempts to ensure that the substance of the entire transaction is scored. We have clarified in the report that OMB’s instructions were revised in 2003 and the possible effect on how case studies were scored. With respect to ESPCs, OMB representatives said there is no current plan to revisit the 1998 decision to obligate funds on an annual basis. They said ESPCs are treated differently from partnerships in part because of the savings component and in part because they believe doing so would negate the statutory authority provision permitting agencies to enter into a multiyear contract even if funds are available only to pay for the first year of the contract. We recognize the statutory authority enabling agencies to enter into ESPC multiyear contracts without funds available for the full contract price but note that the budget does not reflect full ESPC commitments as new obligations at the time that ESPCs are signed. In light of these circumstances and Congress’ recent action to extend ESPC authority through fiscal year 2006, we removed our scorekeeping recommendation with respect to ESPCs and are now suggesting that Congress consider requiring agencies that use ESPCs to present Congress with an annual analysis comparing the total contract cycle costs of ESPCs entered into during the fiscal year with estimated up-front funding costs for the same ECMs. Congress could use this information in evaluating whether to further extend ESPC authority beyond its current expiration date. DOD partially concurred with our recommendation (now deleted) about developing a new scorekeeping rule for ESPCs. In his letter, the Principal Assistant Deputy Under Secretary of Defense (Installations and Environment) said DOD would concur in full if the recommendation was modified to properly consider guaranteed savings. As we note in our report, recognizing the full commitment up-front in the budget when the commitment is made enables decision makers to make more informed resource allocation choices among competing demands from equally worthy projects that all have their full costs recorded in the budget. DOD stated that it did not concur with our recommendation that business case analyses should be performed when making capital financing decisions because such an analysis would only increase administrative costs to the department in the absence of a viable option to directly finance energy conservation projects. Business case analyses are well accepted as a leading practice among public and private entities and OMB requires all executive agencies to prepare a business case analysis for major investments as part of their budget submissions. Only by doing a business case analysis can the government ensure that it selects the best alternative and that taxpayers’ interests are protected. Therefore, we believe our recommendation is valid. DOD also provided technical comments on the draft. DOD’s complete comments and our responses are contained in appendix IV. The Acting Under Secretary for Energy, Science and Environment agreed with our recommendation that agencies should perform business case analyses and we commend DOE for drafting a policy that will require a business case analysis for public/private partnerships. However, DOE strongly disagreed with our recommendation on scoring ESPCs (now deleted) primarily because it believes it would negate the congressional objective of promoting energy conservation through the use of ESPCs. It is not the intent of this report to discourage or to eliminate energy conservation efforts. We do not believe that up-front funding would necessarily lead to reduced support as long as energy conservation was viewed as a priority within the appropriations process. However, recognizing the full commitment up front in the budget when the commitment is made enhances transparency and enables decision makers to make more informed resource allocation choices among competing demands that all have their full costs recorded in the budget. We believe our recommendation that OMB require and our suggestion that Congress consider requiring agencies to provide an annual analysis comparing total contract cycle costs of ESPCs with estimated up-front funding costs for the same ECMs would be an appropriate balance between budget transparency and energy savings at this time. DOE’s complete comments and our responses are contained in appendix V. Because GSA does not normally engage in public/private partnerships, its comments were confined to ESPCs. The GSA Administrator noted that GSA’s policy is to perform business case analyses, but that such analyses do not always consider the full range of funding alternatives for ECMs. An official from GSA’s Atlanta region noted that, given GSA’s $6 billion alterations and repair backlog, other financing alternatives may not be viable. GSA also said it has decided to revise its energy conservation project evaluation process to include consideration of useful segments. We commend GSA’s decision to do so. Finally, GSA pointed out that, aside from ancillary up-front costs that must be incurred to carry out the project, ESCOs guarantee that project savings will be met or exceeded during the contract term and that GSA enforces these guarantees. Because these up- front payments are part of the costs in the delivery orders we reviewed, we included them in our analysis of total contract cycle costs—the payments ranged between 2 and 45 percent of the total contract cycle costs. For each of the three GSA ESPCs we reviewed, total contract cycle costs exceeded contract cycle savings. GSA’s written comments and our complete response are contained in appendix VI. VA disagreed with our report’s conclusions and recommendation to OMB. Although our report only looked at VA partnerships, VA chose to comment both on partnerships and ESPCs. In the Secretary’s comments, he noted that implementation of the recommendation to develop a new scorekeeping rule would limit, discourage, and possibly eliminate the enhanced-use lease program, thus resulting in a loss of benefits and services to veterans. Again, it is not the intent of this report to discourage or to eliminate energy conservation efforts or partnerships with the private sector. However, from a budgetary standpoint, recognizing the full commitment up front in the budget when the commitment is made enables decision makers to make more informed resource allocation choices among competing demands. With respect to our second recommendation regarding the need for business case analyses, VA noted that it had a process for this to occur for capital investments above a threshold amount. VA’s complete comments and our responses are contained in appendix VII. As agreed with your office, unless you release this report earlier, we will not distribute it until 30 days from the date of the letter. At that time, we will send copies of this report to the Ranking Minority Member of the Senate Committee on the Budget and the Chairman and Ranking Minority Member of the House Committee on the Budget. We will also send copies to the Chairmen and Ranking Minority Members of the House and Senate Appropriations Committees, House and Senate Veterans Committees, and House and Senate Energy Committees. In addition, we are sending copies to the Secretaries of Defense, Energy, and Veterans Affairs as well as the Administrator of the General Services Administration and the Director of the Office of Management and Budget. Copies will also be made available to others upon request. In addition, the report is available at no charge on GAO’s Web site at http://www.gao.gov. This report was prepared under the direction of Susan J. Irving, Director, Federal Budget Analysis, Strategic Issues, who can be reached at (202) 512-9142 or [email protected] and Mark L. Goldstein, Director, Physical Infrastructure Issues, who can be reached at (202) 512-6670, [email protected]. Questions may also be directed to Christine Bonham, Assistant Director, Strategic Issues, at (202) 512-9576 or [email protected]. Other key contributors to this report are listed in appendix VIII. The objectives of this study were to determine (1) what specific attributes of energy savings performance contracts (ESPC) and public/private partnerships (partnerships) contributed to budget scoring decisions, (2) the costs of financing through ESPCs and partnerships compared to the costs of financing via timely, full, and up-front appropriations, and (3) how ESPCs and partnerships are implemented and monitored. To obtain the detail necessary to respond to this request, we used a case study approach. Accordingly, our findings cannot be used to generalize across the government. We selected case study agencies based on our August 2003 report on alternative approaches to finance capital. In total, we analyzed 11 case studies—6 ESPCs and 5 partnerships—across 4 agencies. For ESPCs, we selected case studies at the General Services Administration (GSA) and the Department of the Navy (Navy). We chose these two agencies because they had awarded the largest dollar volume of delivery orders under the Department of Energy’s (DOE) super ESPC program. In addition, our discussions with DOE's Federal Energy Management Program (FEMP) officials, who administer the Super ESPC program, indicated that the differences in the way GSA and the Navy administer ESPCs (decentralized versus centralized, respectively) might provide some interesting insights. Finally, the Committee’s request specifically asked us to include a military department in our review of ESPCs. For partnerships, we selected case studies at the Departments of Veterans Affairs (VA) and Energy. We chose VA because of its broad authority to enter into enhanced use (EU) lease partnerships and the significant number of EU leases that have been awarded. We selected one case from DOE based on the preliminary work on the Oak Ridge National Laboratory (ORNL) partnership done for our August 2003 report. Also, it was our understanding that this type of transaction might be replicated at other DOE facilities. The initial selection of case studies within each agency was based on (1) project costs, (2) availability/location of data, and (3) time frame of the project. These criteria narrowed the number of available case studies and we judgmentally selected cases from this pool. We chose three ESPC projects each from GSA and the Navy. Also, we chose to review one partnership case study from DOE and four from VA. Table 2 lists the case studies reviewed at each agency. Case studies were selected based on their cost and data availability. Data for the selected cases were in Washington, D.C., for VA cases; Atlanta, Georgia, for GSA cases; Port Hueneme, California, for Navy cases; and Oak Ridge, Tennessee, for the DOE case study. We selected ESPCs for which contracts/delivery orders were awarded no later than fiscal year 2001 so that the respective agencies would have had opportunities to analyze whether cost savings realized to date approximate expected savings. To understand the features of the selected ESPCs and partnerships, we reviewed laws authorizing the agencies to enter into ESPCs and partnerships, relevant GAO products, and ESPC files and partnership agreements. We interviewed officials and/or staff from the Office of Management and Budget (OMB) and agencies involved in the development of the selected ESPCs and partnerships. We interviewed officials from FEMP in order to understand the general features of ESPCs. In addition, we met with officers of UT-Battelle, LLC—ORNL’s management and operations (M&O) contractor—to gain a better appreciation of the DOE partnership. To gain an understanding of how the selected ESPCs and partnerships were scored and the reasoning behind the scoring, we reviewed relevant portions of OMB’s Circular A-11, analyzed the terms and conditions of the selected case studies relative to the budget scoring rules, reviewed relevant Congressional Budget Office (CBO) scoring reports, and met with agency, CBO, and OMB officials and staff. All of the partnership case studies we reviewed were executed before OMB's 2003 changes to its instructions on the budgetary treatment of lease-purchases and leases of capital assets. According to OMB staff, some of these partnerships may have been scored differently under the revised instructions. To analyze ESPC costs, we reviewed the final delivery orders of each of our six ESPC case studies. Cash flow schedules associated with these delivery orders specified the case studies' expected savings and costs, such as principal payments, interest payments, measurement and verification (M&V) fees, operations and maintenance (O&M) fees, and energy service company (ESCO) mark-ups. Using these documents, we identified costs, on a present value (PV) basis (using A-94 guidance), that agencies would not necessarily have incurred had they financed the asset acquisition through timely, full, and up-front appropriations instead of ESPCs. Although we had planned to perform a similar cost analysis of our partnership case studies, we were unable to do so because comparable data were not available. To allow us to describe how ESPCs and partnerships are implemented and monitored, we met with OMB, GSA, VA, Department of Defense (DOD), and FEMP officials and staff. We also spoke with representatives of certain ESCOs to help us understand how agencies negotiate and monitor ESPC contracts. Finally, we reviewed agencies’ documentation of how ESPC baselines were estimated and how actual savings would be determined. Written comments from DOD, DOE, GSA, and VA are included and addressed in appendixes IV through VII. OMB provided oral comments. We have incorporated changes as a result of these comments throughout, as appropriate. Our work was done in accordance with generally accepted government auditing standards, from September 2003 through November 2004, in Washington, D.C., Atlanta, Ga., Oak Ridge, Tenn., and Port Hueneme, Calif. The Energy Policy Act of 1992 and Executive Order 13123 require federal agencies to reduce their consumption of energy in federal buildings. The act set a goal for the agencies of lowering their consumption per gross square foot by fiscal year 2000 to a level 20 percent below fiscal year 1985 baseline consumption levels. Executive Order 13123 requires a 30 percent reduction from 1985 levels by the year 2005 and a 35 percent reduction by 2010. ESPCs allow federal agencies to acquire energy conservation measures (ECM) to meet these goals and implement energy-efficiency projects without having to request the full amount of appropriations from the federal budget. Under an ESPC, the ESCOs assume much of the up- front capital costs associated with the improvements. The government then uses a portion of annual energy-related cost savings attributable to the improvements to repay the ESCO for its investment over time, which may be as long as 25 years. This means that, although the government’s energy use may drop immediately, its expenses are generally not significantly reduced until after the ESPC is paid off (see fig. 8). The ESCOs guarantee the performance of the equipment, within certain parameters, for the term of the ESPC. Agencies frequently acquire multiple or “bundled” ECMs through ESPCs so that ECMs yielding more dollar savings can subsidize those yielding less savings. Within DOE, the FEMP provides assistance to agencies seeking project financing through a number of methods, such as ESPCs. According to FEMP guidance, energy-related savings result from reduced energy use, improved patterns of energy use, avoided renovation, and reduced operations, maintenance, and repair costs. Thus, if agencies can avoid scheduled renovations or maintenance of older equipment by implementing ESPCs, they may use those avoided costs to “buy-down” the ESPCs. To streamline the procurement process, agencies have awarded multiple- award, indefinite-delivery-indefinite quantity (IDIQ) contracts to a number of ESCOs in different regions of the country. With these multiple-award contracts in place, federal agencies can place and implement delivery orders against the contracts in a fraction of the time it takes to develop a stand-alone ESPC because the competitive selection process has already been completed and key terms of the contract, such as maximum markup ceilings, have already been negotiated. FEMP’s IDIQ contract, known as a super ESPC, is used by many agencies. Figure 9 shows the distribution of agencies using FEMP’s super ESPC from fiscal years 1998 through 2003. The bar on the right of the figure shows in more detail the 25 awards at other agencies using FEMP’s super ESPCs. GSA generally writes delivery orders against FEMP’s super ESPC, while the Navy writes delivery orders against a variety of IDIQ contracts, referred to as contracting vehicles. Figure 10 shows the distribution of Navy ESPC awards by contract vehicle from fiscal years 1998 through 2003. FEMP has issued guidelines and offered training and other support to help agencies use its Super ESPC. A typical suite of FEMP services, costing an estimated $30,000, includes, but is not limited to, a review of the ESCO submittals and advice on: detailed energy surveys (DES) and related energy baseline data; appropriateness of (M&V) plan for proposed ECMs; technical and economic feasibility of proposed ECMs; pricing and financing of ECMs and post-installation services submitted in price schedules; issues to address during agency/ESCO negotiations; commissioning and postinstallation M&V reports and advice on project annual M&V reports to verify annual energy savings or issues to resolve before resuming payments. GSA sometimes uses FEMP’s services. Because the Navy has a centralized technical and contracting team that is familiar with ESPCs, it uses its own staff rather than FEMP's contracting officers and facilitators to support projects. However, the Navy has used some FEMP’s services, such as reviews of initial project proposals, free of charge, and has purchased other FEMP support in special circumstances. The process for selecting and implementing ESPCs varies among agencies. GSA and the Navy generally delegate the decision of whether to finance ECMs through full, up-front appropriations or ESPCs to regional coordinators and installations’ commanding officers, respectively. Once the decision to use an ESPC has been made, GSA and the Navy build support and consensus for the project inside the agency. FEMP guidance also suggests agencies meet informally with prequalified ESCOs before selecting an ESCO for the contract. The Navy may invite vendors to participate in oral presentations covering a range of topics, including their qualifications and past performance with ECMs as well as their technical approach for projects. Based on these presentations, the local facility makes its selection. After the contractor has been selected, the project team schedules an initial meeting, referred to as a “kick-off” meeting, to discuss, among other things, the scope of an initial energy survey, payback terms and restrictions, O&M requirements, M&V approaches, and site-specific information. The contractor then performs a preliminary site survey, based on a building walk-through and spot metering as well as an analysis of various data, such as utility rate structure and energy consumption statistics. Upon completion of the energy audit, the contractor submits an initial proposal that includes a summary of ECMs investigated and cost and savings estimates. Based on a review of this initial proposal, the agency decides whether or not to proceed with the ESPC. If it decides to go forward, the agency transmits a letter confirming its intention to award the delivery order to the ESCO (the Notice of Intent to Award) and issues a delivery order request for proposal. It is only after the agency issues the Notice of Intent to Award that the ESCO’s expenses may be recoverable from the government. The contractor then performs a DES and submits a report that is the basis for the project’s contractually guaranteed savings, M&V, and O&M. The DES is the ESCO’s comprehensive audit of facilities and energy systems at the project site. The DES augments, refines, and updates the preliminary site survey data and provides the information needed to update the feasibility analyses of the various ECMs under consideration for the project. The agency’s project team reviews the proposal and submits its comments to the ESCO. Based upon these comments, the ESCO develops a final energy project proposal. For projects with a cancellation ceiling in excess of $10 million, the agency must notify Congress of the project no later than 30 days before the task order award. After the agency approves the project and negotiates the price or determines the price to be fair and reasonable, the project is awarded. During the project execution phase, the contractor completes the project design and then installs the ECMs. Title of the equipment and systems built or installed under the delivery order is transferred from the ESCO to the agency at the time of delivery order award, installation, or contract closeout. ESPCs do not involve change orders since contractors guarantee certain levels of performance and are obligated to make changes necessary to achieve those levels at their own expense. However, the agency and the contractor may modify the delivery order to, for example, authorize the installation of additional ECMs. Once the project has been successfully completed and accepted by the government, payments begin. Contractors are required to guarantee equipment performance; therefore, some level of M&V is required to ensure guaranteed performance is realized. M&V is performed by the ESCO that installs the equipment. The level of M&V is negotiated between the government and the contractor and must be specified in the signed delivery order. Agency officials said that the type of M&V employed depends on the interaction of various factors, including climate, the people using the facilities, the facilities’ mission, and the operation of the equipment. The contractor may also perform the O&M for the ESPC-installed equipment. Facilities with in-house expertise may take on these responsibilities themselves. As part of the DES, the ESCO and agency negotiate a responsibility matrix specifying the O&M duties to be performed by each party. FEMP guidance calls for negotiating a responsibility matrix across a comprehensive set of issues, O&M duties being only one. During the term of the contract, an ECM’s energy cost savings are used to pay the ESCO. If annual savings resulting from the ESPC exceed annual contractor payments, agencies other than the DOD and GSA may retain 50 percent of this excess; the other 50 percent must be returned to Treasury. GSA may deposit all of the excess savings in the Federal Buildings Fund. As of fiscal year 2004, the Navy may retain 100 percent of its excess funds, a change from the previous requirement to return one third of the excess savings to Treasury while retaining the other two thirds. The Navy is required to use one half of the retained savings for energy reduction projects or water conservation activities and the other half for Navy welfare, morale, and recreation projects, among other things. An official responsible for the Navy’s Shore Energy program said that, prior to 2004, the Navy had not returned funds to Treasury since, to their knowledge, there were no cases in which actual ESPC savings exceeded those guaranteed by the contractor. However, according to other Navy officials, the Navy’s Comptroller has not issued guidance on the return of savings to Treasury. Because the Navy does not maintain a central system to track savings, it would be difficult to determine whether the actual savings generated by an ESPC have ever exceeded guaranteed savings. In other words, the Navy does not know if it should have paid some portion of its energy savings to Treasury. Implementing M&V strategies is required for ESPCs to verify the achievement of guaranteed energy cost savings each year. According to FEMP, M&V involves three major steps: baseline definition, postinstallation verification, and regular-interval verification. Annual M&V only needs to show that the overall savings guarantee has been met, not determine actual savings for each ECM. M&V methodologies are grouped into four categories and may vary depending on the ECM installed. When choosing among M&V methodologies, agencies must balance the accuracy of their energy savings estimates with the costs of verifying those estimates. For example, where the performance of the installed equipment is relatively certain, as is the case for lighting retrofits, it may not be cost effective to measure actual energy use throughout the term of the contract. In this case, postinstallation and baseline energy use is estimated using engineering calculations or system models. As long as the potential to perform is verified, the savings are as originally claimed and do not vary over the contract term. Alternatively, for projects with large elements of uncertainty, such as chillers and chiller plants, contractors might continually measure the energy use of equipment throughout the contract. Continuous monitoring may greatly reduce uncertainty that savings are actually being achieved, but will also cost more than less rigorous methods of M&V. M&V strategies allocate risk between the ESCO and the agency in advance. Both ESCOs and agencies are reluctant to assume responsibility for factors they cannot control. For example, the ESCO generally does not assume responsibility for risk related to operational factors, such as weather, how many hours the equipment is used, and maintenance practices. Alternatively, the agency typically does not assume the responsibility for risk associated with equipment performance since the ESCO selects, designs, and installs the equipment. If the actual annual savings are less than the annual guaranteed savings amount, the ESCO must correct or resolve the situation or negotiate a change in the contract. For two ESPCs, an annual M&V report identified performance problems with installed ECMs. In these cases, the ESCOs resolved the performance problems by either replacing or installing new equipment. Even without the ESPC’s guarantee, the manufacturer’s warranty would have indemnified the government in at least one of these cases. However, according to Navy officials, without the M&V process of ESPC, the equipment deficiencies might have gone unnoticed during the equipment warranty period. The rest of this appendix contains summaries of our six case studies from GSA and the Navy. Following is a list of these ESPCs. The primary contractor for the ESPC for the Navy Region Southwest, California, was NORESCO, ERI Services Division. The delivery order for the contract was awarded on September 26, 2001, and specified that title to all equipment installed by the contractor would be transferred to the government upon project acceptance. As of December 18, 2003, all ECMs had been physically installed and accepted by the government and were operating and yielding savings. NORESCO and the Navy share responsibility for the proper O&M of ECMs installed under this delivery order. According to the final delivery order, the Navy Region Southwest ESPC consists of five ECMs: microturbine, heat recovery, and variable frequency drives; an irrigation systems upgrade; a compressed air systems upgrade; heating, ventilating and air conditioning systems improvements; and a solar photovoltaic system. In addition to reductions in energy use and operating costs, NORESCO claimed the ESPC provided the following ancillary benefits: A world-class solar photovoltaic system that was, at one time, the largest photovoltaic installation in the United States and the largest covered parking solar photovoltaic system in the world. This covered parking also allows sailors to leave their cars in a protected environment while at sea (see fig. 11). A demonstration project for the Navy to determine the environmental benefits of microturbine technology. The term of the contract is 10 years, with an interest rate of 9.32 percent. As shown in table 3, the PV cost of the ECMs financed through an ESPC is approximately $14.7 million, approximately $1 million more than the estimated cost of the ECMs financed through timely, full, and up-front appropriations. The PV guaranteed cost savings specified in the delivery order was about $6.8 million less than the PV of the ESPC’s total contract cycle costs, including O&M payments. However, according to Navy officials, over the life of the equipment, the projected cost savings will exceed the projected costs. Navy Region Southwest used the $6.9 million in special energy project funds it received from the Office of the Secretary of Defense (OSD) and the Navy to buy down the project’s principal balance upon acceptance. The OSD funds were appropriated to help offset the cost of energy projects in California, in an effort to address the energy supply shortages in the state. The ECMs under this delivery order were installed and accepted over a number of months, with final acceptance of all ECMs in December 2003. An initial M&V report issued in March 2004 provided a baseline to ensure that all installed ECMs were performing as guaranteed. The initial verification process did not reveal any major maintenance or operational issues that would negatively affect performance. Verified savings through the end of the first year amounted to roughly $1.4 million, which exceeded the savings guaranteed in the delivery order. The prime contractor for the ESPC for Patuxent River Naval Air Station was Energy Assets; the prime subcontractor was Co Energy Group. The delivery order for the contract was awarded on September 28, 2000, and specified that title to all equipment installed by the contractor would be transferred to the government upon project acceptance. As of April 10, 2002, all ECMs had been physically installed, were operating, and were yielding energy savings. The Patuxent River ESPC consists of three ECMs: ground source heat pump (GSHP) installation at nine buildings; process cooling water system modification at one building; and lighting efficiency improvements at seven buildings. In addition to energy savings and capital improvements, Energy Assets claimed the ESPC provided ancillary benefits: There was enhanced personnel safety and landscape aesthetics in the station’s Logistic Industrial Complex. Prior to the ESPC, steam distribution piping leaks created a safety hazard and were an eyesore. There was environmental compliance for one building at the station. Prior to the ESPC, a cooling water system at the building was configured to discharge chlorinated water into the Chesapeake Bay. The term of the contract is 20 years, with an interest rate of 9 percent. As shown in table 4, the PV cost of the ECMs financed through an ESPC is approximately $5.8 million, approximately $1.4 more than the estimated cost of the ECMs financed through timely, full, and up-front appropriations. The PV guaranteed cost savings specified in the delivery order was about $1.9 million less than the PV of the ESPC’s total contract cycle costs, including O&M payments. However, according to Navy officials, over the life of the equipment, the projected cost savings will exceed the projected costs. To reduce financing costs, the Navy made a $2.3 million down payment on the project after awarding the delivery order. According to Navy officials this down payment was equivalent to the sum of one-time avoided costs resulting from the project, such as avoiding environment- related upgrades to existing cooling water systems. According to the postimplementation and first annual monitoring and verification reports issued by the contractor in August of 2002 and December of 2003, respectively, all ECMs were operational and performing as expected. Although energy savings goals were met in the first year, one ECM did not perform according to the performance requirements of the contract. During the summer of 2002, it was reported that a process cooling water system installed under the ESPC did not meet the demands of Navy laboratory test equipment. The Navy and the contractor agreed that the resolution of the problem was the responsibility of the contractor and that the contractor would not, at any time, bill the government for costs incurred to resolve the problem. The prime contractor for the ESPC at the Bangor Submarine Base in Washington was Johnson Controls. The delivery order for the contract was issued on September 27, 2001. As of March 1, 2003, all ECMs had been installed, were operating, and were yielding savings. Upon government acceptance of the completed project, title to the equipment installed under the ESPC was transferred to the government. Six ECMs were installed at the Bangor Submarine Base, including chiller plant modifications, air handling unit modifications, chilled water supply and pumping modifications, and lighting modifications for various buildings. The term of the contract is 9 years, with an interest rate of 7.44 percent. As shown in table 5, the PV cost of the ECMs financed through an ESPC is approximately $5.34 million, approximately $1 million more than the estimated cost of the ECMs financed through timely, full, and up-front appropriations. The PV guaranteed cost savings specified in the delivery order was about $1.3 million less than the PV of the ESPC’s total contract cycle costs, including O&M payments. However, according to a Navy official, over the life of the equipment, the projected cost savings will exceed the projected costs. The Navy was authorized by the Office of the Secretary of Defense (OSD) to use a fiscal year 2001 supplemental appropriation for the western power grid crisis to make an up-front payment of roughly $1 million to reduce ESPC-related financed costs. The government also made a roughly $214,000 up-front payment using savings generated during the construction period. According to the postimplementation report issued by the ESCO, the projected cost savings for the first year of the project were roughly $752,000, exceeding the ESCO’s savings guarantee of about $634,000. These projected cost savings include about $734,000 from reduced energy consumption and about $17,000 from avoided O&M costs. The prime contractor for the ESPC at GSA’s Federal Courthouse in Gulfport, Mississippi, was Sempra Energy Services. Unlike our other ESPC case studies, the Gulfport ESPC did not retrofit existing systems but installed ECMs in new construction. GSA’s Office of General Counsel determined that using ESPCs to finance ECMs was appropriate for the costs of improvements over the “baseline” design (e.g., the difference in cost between a standard chiller and a highly efficient chiller) rather than the entire cost of the improved system. The delivery order for the contract was awarded on September 28, 2001. As of September 19, 2003, all ECMs had been physically installed and were operating and had the potential to deliver the guaranteed annual savings as reflected in the ESPC delivery order. According to the final delivery order, the ESPC for the Gulfport Federal Courthouse consists of 14 ECMs, including variable frequency drives for chilled water pumps and hot water pumps, lighting controls, energy efficient chillers, and occupancy controlled ventilation. The term of the contract is 17 years, with an interest rate of 8.4 percent. As shown in table 6, the PV cost of the ECMs financed through an ESPC is approximately $2.5 million, approximately $0.9 million more than the estimated cost of the ECMs financed through timely, full, and up-front appropriations. The PV guaranteed cost savings specified in the delivery order was about $90,000 less than the PV of the ESPC’s total contract cycle costs, including O&M payments. However, according to GSA officials, over the life of the equipment, the projected cost savings will exceed the projected costs. The government also made an $88,000 up-front payment to cover certain O&M expenses. Since GSA installed ECMs in new construction, there was no historical baseline to which the performance of the Gulfport Federal Courthouse equipment could be compared. Thus, GSA hired a consulting firm to model a conceptual building and, from that model, determined baseline energy consumption for the new building with less efficient equipment. The first annual M&V report for the project was issued in December 2004, after we had completed our analysis. GSA awarded the ESPC for multiple GSA-owned buildings in North Carolina, the Greensboro IRS Building, the Greensboro Federal Courthouse, the Raleigh Federal Building and Courthouse, the Winston- Salem Federal Building and Courthouse, and the Wilmington Federal Building to DukeSolutions (now AmerescoSolutions). The delivery order for the contract was awarded on September 27, 2000. As of November 2001, GSA found the work performed under the ESPC to be sufficiently complete. According to the September 20, 2000, contract, the ESPC involved multifaceted ECMs for multiple federal buildings within North Carolina. The 10 ECMs include lighting retrofits, the installation of energy management systems, replacement of motors for mechanical equipment and air flow fans, and replacement of chillers. The term of the contract is 19 years, with an interest rate of 8.59 percent. As shown in table 7, the PV cost of the ECMs financed through an ESPC is approximately $1.93 million, approximately $0.54 million more than the estimated cost of the ECMs financed through timely, full, and up-front appropriations. The PV guaranteed cost savings specified in the delivery order was about $1.1 million less than the PV of the ESPC’s total contract cycle costs, including O&M payments. However, according to GSA officials, over the life of the equipment, the projected cost savings will exceed the projected costs. As part of the $3.1 million contract cycle costs, GSA made a $1.2 million up-front payment. These funds had already been appropriated for energy efficiency improvements to GSA buildings involved in the project. However, the improvements became unnecessary after GSA accepted the ESPC. According to the M&V report issued in April 2003, all ECMs were operating and would continue to operate as intended. GSA awarded an ESPC for multiple sites in Atlanta, Georgia, including the Richard B. Russell, Peachtree Summit, and Court of Appeals buildings, to NORESCO (formerly ERI Services, Inc.). The delivery order for the GSA Atlanta “bundled sites” was awarded on September 30, 1999, and as of May 31, 2000, all ECMs had been installed, were operating, and were yielding energy savings. Upon acceptance of the project, GSA took title to all equipment, and NORESCO will be responsible for maintenance and repair services for all ECMs. The Atlanta bundled sites ESPC consists of five ECMs: energy efficient lighting upgrades, variable frequency drives, two chiller plant upgrades, and outside air reduction. The term of the contract is 20 years,with an interest rate of 8.50 percent. As shown in table 8, the PV cost of the ECMs financed through an ESPC is approximately $7.8 million, approximately $1.6 million more than the estimated cost of the ECMs financed through timely, full, and up-front appropriations. The PV guaranteed cost savings specified in the delivery order was about $500,000 less than the PV of the ESPC’s total contract cycle costs, including O&M payments. However, according to GSA officials, over the life of the equipment, the projected cost savings will exceed the projected costs. A one-time energy-related operations and maintenance payment in the amount of $900,000 was paid upon completion and acceptance of all ECMs. The $900,000 represented funds that had already been appropriated to replace a chiller for one of the buildings involved in the project. NORESCO submitted annual verification reports for the first 3 years of the project. Based on postinstallation and annual M&V activities, project savings were verified and exceeded the guaranteed actual savings by approximately 5 percent in years 1 and 2, and 1.6 percent for year 3 of the contract. Three of the ECMs installed under the ESPC experienced problems at one point during the first 3 years of the contract. According to the M&V reports, the contractor worked with GSA Atlanta to resolve two of these problems. However, absent the ESPC’s guarantee, it may be that the manufacturer’s warranty would have covered the problems. The contractor determined that the third problem was part of a larger issue and, consequently, was outside of the scope of the ESPC. According to a GSA official, GSA does not always receive the savings guaranteed by the ESCO. When actual savings fall below the guaranteed level, the ESCOs might claim that they are not at fault and, consequently, are not financially responsible. Unlike ESPCs, which are fairly uniform in their structure, the term partnership can be used to describe many different types of arrangements since partnerships may take a variety of forms. For the purposes of this report, these arrangements typically involve a government agency contracting with a third party to renovate, construct, operate, maintain, or manage a facility or system, in part or in whole, which provides a public service. Under these arrangements the agency may or may not retain ownership of the public facility or system, but the private party generally invests its own capital to design and develop the properties. Congress has already enacted legislation that provides specific agencies with statutory authority to enter into partnerships. Four of the five partnerships we reviewed were done under a specific law that enabled VA to enter into a type of partnership known as enhanced use (EU) leases. An EU lease is an asset management tool used by VA that includes a variety of different leasing arrangements (i.e., lease/develop/operate, build/develop/operate). EU leases enable VA to outlease VA-controlled property to the private sector or other public entities to be improved for either VA’s use or non-VA uses. In return, VA receives fair consideration (monetary or in-kind) that enhances its mission or programs. Agencies without specific partnership authority, such as DOE, have used other authorities as the basis for partnerships. Potential benefits of partnerships include attainment of efficient and repaired federal space, reduction of costs incurred from using functionally inefficient buildings, development of underutilized federal real property, access to private sector expertise. Critics of partnerships caution, however, that these ventures are not the least expensive means of meeting capital needs, although in the short term they may appear to be. For example, OMB staff have indicated that where there is a long-term need for property by the federal government, it is doubtful that a partnership would be a more economical means of financing than directly appropriating funds for renovation. Partnerships must conform to budget scorekeeping rules and OMB instructions published in OMB Circular A-11. According to A-11, partnerships should not be used solely or primarily as a vehicle for obtaining private financing for federal construction or renovation projects. Ultimately, partnerships need to be evaluated on a case-by-case basis to determine the best economic value for the government. In some instances, case study agencies used partnerships to acquire capital assets without having to obtain congressional appropriations for the full costs up front. For example, one agency used existing authority specifically to work around OMB budget scorekeeping instructions, allowing the agency to obligate annual lease payments rather than the full cost of the project it would have otherwise needed to obligate up front. This appendix contains summaries of our five case studies from two agencies: DOE and VA. Oak Ridge National Laboratory, Tennessee Atlanta Regional Office Collocation, Georgia Medical Campus at Mountain Home, Tennessee Vancouver Single Room Occupancy, Washington North Chicago Energy Center, Illinois For each case study, we describe the background and structure of the partnership, its risks, costs and benefits, and budget scoring issues. We were unable to compare the costs agencies would have incurred had they financed the assets through timely, full, and up-front appropriations instead of partnerships. Although the government incurs higher interest costs compared to up-front financing, we were unable to evaluate claims that other factors, such as lower labor costs and fewer bureaucratic requirements available to private partners, may have reduced costs. Thus, we were unable to judge whether partnerships could be less expensive overall. DOE used existing law to structure a partnership that enabled it to obtain the use of facilities for up to 25 years without recording large up-front obligations and outlays. DOE’s contractor, UT-Battelle, LLC, obtained about $70 million in private financing for new office and research facilities at Oak Ridge National Laboratory (ORNL). ORNL is DOE’s largest science and energy laboratory. ORNL was established in 1943 as part of the Manhattan Project to pioneer a method for producing and separating plutonium. Today, ORNL leads the development of new energy sources, technologies, and materials and the advancement of knowledge in the biological, chemical, computational, engineering, environmental, physical, and social sciences. Since April 2000 ORNL has been managed and operated by a private, limited liability partnership between the University of Tennessee and Battelle Memorial Institute, UT-Battelle, LLC. As ORNL’s management and operations (M&O) contractor, UT-Battelle, LLC’s primary client is DOE. The M&O contract with DOE is a 5-year performance-based contract with an option for DOE to renew for an additional 5-year term. Shortly upon winning the M&O contract, UT-Battelle, LLC, submitted a Strategic Facilities Revitalization Plan for construction of a total of 11 new facilities and renovation of existing facilities at ORNL during the first 5-year phase of the program. Given the magnitude of needed facilities improvements and the historical funding levels, this plan proposed a partnership to secure funding for new construction and renovation of existing space through a combination of federal, state, and private funds— about $225 million, $26 million, and $70 million, respectively. One key component of this proposal was the transfer of land ownership from DOE to a special-purpose entity to allow for construction and lease of buildings by the private sector. Section 161(g) of the Atomic Energy Act permitted DOE to transfer at no cost, via quitclaim deed, 6.6 acres of land at ORNL to a special-purpose entity, UT-Battelle Development Corporation (UTBDC), for the construction of three buildings. UTBDC, a 501(3)(c) nonprofit corporation, was created for the sole purpose of implementing the privately financed elements of the revitalization project, and the selection of UTBDC was not based on a competitive process. However, upon receiving the land, UTBDC issued a 25-year ground lease for the 6.6- acre site to Keenan Development Associates, of Tennessee, LLC (Keenan), a private developer competitively selected to build the new facilities. As described below, UTBDC provided design specifications and construction oversight and functioned essentially as a pass-through entity for the land, financing, and leasing of the three buildings reviewed in this case study. Once private financing (bonds) was obtained and construction of the three buildings was completed, Keenan implemented three prenegotiated facility leases for these buildings with UTBDC for a term of 25 years. UTBDC, in turn, implemented subleases of the three facilities to UT-Battelle, LLC, for DOE’s ultimate use, with a lease-term up to 25 years. Accordingly, DOE reimburses UT-Battelle, LLC, for the sublease payments, which flow back to Keenan to pay off the outstanding bonds. Figure 12 depicts the full partnership arrangement used to revitalize ORNL, including the financing just described. Ultimately, the principal and interest on the bonds are covered by DOE’s sublease payments (if the subleases run for their full 25-year term), as specifically recognized by Standard and Poor’s (S&P) A+ rating of the bonds. However, DOE officials told us they neither reviewed the private bond-offering memorandum nor asked to see it. According to DOE’s Counsel, a DOE review of the bond-offering memorandum would not have been consistent with the fact that this was a private transaction between Keenan and private investors. In addition, UTBDC’s Counsel said he was careful to make clear that the sublease contained a 1-year termination clause to ensure DOE’s involvement was not misrepresented; instead UTBDC and its backers bear the risk associated with the bond repayments. Furthermore, UTBDC officials told us that in excess of $1 million of UTBDC private funds were expended in support of the construction effort. Although UT-Battelle officials were unwilling to provide us a copy of the bond-offering memorandum, S&P’s A+ bond rating report states that its rating was based, in part, on a pledge of DOE rent payments, since DOE was unlikely to vacate the facilities. DOE officials could not provide us with any documentation showing that the agency had performed an independent cost-benefit or business case analysis of the private financing arrangement. The Chief Financial Officer (CFO) of DOE’s Oak Ridge Operations office asserted that private financing and construction would be less expensive than appropriations because the accelerated completion time would enable them to more quickly vacate dilapidated buildings that were expensive to operate and maintain. According to DOE officials, in addition to dollar costs, the obsolete buildings were affecting the recruitment and retention of top-quality scientists needed to further DOE’s mission. Although no appraisal was made of the land prior to turning it over via quitclaim deed, which was given to UTBDC free of charge, several DOE officials said they believed the land was without value. Moreover, although unable to provide supporting documentation, several officials said they believed that DOE’s then CFO would have looked into the costs and benefits. According to UT-Battelle, LLC’s Deputy Director for Operations, the former CFO received summary analyses addressing the cost-benefit study performed by UT-Battelle, LLC. The Deputy Director further explained that the former CFO visited ORNL for a full day briefing and walk-around to review the proposed project. The summary information provided by UT-Battelle, LLC, to the former DOE CFO was, in our opinion, not sufficient for a detailed, business case analysis. The type of underlying data needed to perform such an analysis had been prepared by UT-Battelle, LLC, and was readily supplied to us upon request. UT-Battelle, LLC, officials said that DOE also would have been provided this data had it been requested. According to UT-Battelle, LLC’s estimates prior to the start of the project, the privately-contracted construction that was used would have cost about $45 million compared to about $101 million had DOE contracted directly for the construction itself. The value of the bonds issued by Keenan to construct the three buildings totaled about $70 million. However, the actual cost to construct, according to UTBDC’s analysis, was about $54 million. Our analysis of DOE’s subleases shows that the 25-year PV that DOE will pay to lease the three privately financed buildings will total about $96 million. According to DOE and UT-Battelle officials, a key concern of the financing arrangement was ensuring that it would score as an operating lease and thus only require the annual sublease payments (plus cancellation costs) to be obligated and shown in the budget. Had it not met the operating lease criteria, DOE would have had to obligate in the first year of the sublease sufficient budget authority to cover the PV of the government’s sublease payments over the full 25-year lease term. Given this concern, the terms of the partnership were carefully constructed to ensure it would be scored as an operating lease. For example, by giving the land to UTBDC, DOE ensured that the project would not be located on government property. Also, by establishing short-term subleases, UT-Battelle, LLC, ensured the lease term did not exceed 75 percent of the estimated economic life of the asset. Had the buildings been constructed on government land or the lease term exceeded 75 percent of the economic life of the asset, the arrangement might have been treated as a capital lease and DOE would have had to obligate the full costs of the project up front. In 1998, VA used its EU lease authority to leverage more than $32 million in private financing for the collocation of the Atlanta VA Regional Office (VARO) on department-owned property adjoining the VA Medical Center in Dekalb County, Georgia. The collocation provides both benefits and medical services on a single campus resulting in increased convenience to veterans receiving services from VARO and the VA medical center. Previously, the Atlanta VARO had been located in a GSA-controlled building in midtown Atlanta. With its lease scheduled to expire, VA considered moving the VARO into a new GSA-controlled building in downtown Atlanta, known as the Atlanta Federal Center (AFC). However several factors prompted VA to research other alternatives. The move to the AFC would have (1) tripled VARO’s rent to GSA; (2) separated VARO’s offices over more space than required; and (3) according to the Georgia VA Commissioner, provided inadequate parking access for disabled veterans. VA ultimately collocated the VARO onto property adjoining the VA Medical Center in Dekalb County by entering into a 35-year partnership with the Dekalb County Development Authority (the Authority). According to the EU lease, the VARO project would increase employment and expand economic development in Dekalb County. Under the partnership, VA outleased six acres of VA-owned property to the Authority for a 35-year period. In exchange for the lease, the Authority agreed to finance, develop, own, operate, and maintain a furnished and equipped office building and parking garage. To finance the project, the Authority issued revenue bonds in excess of $32 million. VA then leased back the office space needed from the Authority’s developer through 2-year operating leases, which automatically renew for up to nine consecutive terms unless VA takes positive action to terminate the automatic renewal clause. At each renewal of the lease, VA maintains the right to reduce the amount of office space it occupies if its requirements change. According to the EU lease, the construction of the VARO building and parking was a private undertaking of the Authority and not an undertaking of VA. Additionally, the Authority bears the risk and responsibility to operate, maintain, repair, and replace assets in the event of a causality loss, and holds the title to the office building and parking garage as long as the revenue bonds are outstanding. At any time during the ground lease, VA has the right to acquire the improvements from the Authority for a purchase price equal to the sum necessary to make the payment of the bonds. Upon expiration or termination of the EU lease, title to all improvements on the land automatically transfers to VA. To mitigate the risks to the Authority if VA does not renew the lease or reduces the amount of space it occupies in the VARO building, VA deposited $1.8 million into a “renovation reserve fund” when the lease was executed. The Authority may draw from this fund to renovate or reconfigure rental space for new tenants should VA vacate some part of the VARO building during the term of the bonds. VA officials said that by agreeing to a reserve fund, VA’s rent would be reduced because bonds were sold to investors at a lower interest rate, thus reducing the Authority’s debt service and, in turn, VA’s rental payments. VA also mitigated the Authority’s risk by agreeing not to replace the VARO building with another regional administration or headquarters building in Georgia using its EU lease authority during the term of the bonds. According to VA, the Authority passed on additional risk mitigation savings to the department by obtaining bond insurance that guaranteed timely payment of principal and interest to bondholders. Thirty-five-year PV life-cycle costs for the project were estimated to total about $43 million, while the Authority bond issue totaled about $33 million. Although VA compared the cost of the collocation to the costs of moving into the AFC, the department decided not to compare the costs of construction via EU lease to full, up-front financing. According to VA officials (1) VA did not believe it would receive up-front appropriations for VARO construction and (2) internal VA protocol did not require economic comparisons between all possible acquisition alternatives. Because the VARO collocation project was scored as an operating lease, VA’s 2-year lease payments to the Authority are the only aspects of the arrangement reflected in the budget. VA officials said this scoring treatment is appropriate since VA may decide to vacate part or all of the building before the 35-year ground lease expires. The officials explained that VA may need less office space when electronic filing systems eventually replace existing paper-based systems. Also they noted that a short-term lease provides flexibility in the event that VA’s field structure changes over time. However, it is not clear that VA’s need for the space is necessarily short-term. For example, prior to the collocation of the Atlanta regional office with the medical center, the regional office had occupied offices in the Atlanta area for over 25 years. Scoring the EU lease as an operating lease assumes that its need is short-term, even though VA has no current plans to vacate the space. In 1998, VA entered into an EU lease with its local affiliate, James H. Quillen College of Medicine of East Tennessee State University (ETSU), and the State of Tennessee. Under the EU lease, VA transferred to ETSU the long-term maintenance and development responsibilities of 31 acres of land, including nine buildings, on VA’s medical campus property in Mountain Home, Tennessee, for a term of 35-years. After the expiration of the lease, VA may transfer the fee simple title to the property to the State of Tennessee; however, VA made no guarantees to any such transfer. The EU lease superseded existing leases of buildings and land where ETSU occupied the facilities while VA was responsible for the maintenance and capital improvements, without reimbursement from ETSU. Under the EU lease, the federal government retains a fee simple ownership interest in the property. However, during the term of the lease, VA is not responsible for damages to the property or for injuries to persons on the property, except as provided for by applicable law. In the event that any part of the property is damaged or destroyed, other than as a result of VA’s negligence, the state is obligated to repair, restore, or rebuild the property. VA projected that the initiative would result in a cost avoidance of approximately $34.6 million (PV) in capital management costs over the lease term. Also, through the term of the lease, an additional $6.3 million (PV) of “in kind consideration” medical services and possible groundskeeping services would be provided to VA by ETSU staff and residents each year. According to VA’s capital asset management study, these benefits were equivalent to the $40.9 million value of the capital assets to be leased to ETSU. According to VA officials, ETSU assumed responsibility for the maintenance of the buildings so that it could make capital improvements that VA was unwilling to undertake, such as the renovation of labs and heating, ventilation, and air conditioning systems. VA’s business case states that VA would also benefit from the improved medical school facilities since the improvements would increase funding of research, including equipment, supplies, and technicians for VA physicians working at the medical school, where such resources are not provided by grants. Because the arrangement did not involve cash transfers, the EU lease is not reflected in the budget. In 1998, VA outleased about 1.4 acres of vacant, undeveloped land adjacent to the Vancouver Division of the Portland VA Medical Center. The 35-year, no-cost outlease was awarded to the City of Vancouver’s Housing Authority (Housing Authority). The Housing Authority subsequently financed, designed, and built a 126-bed single room occupancy (SRO) structure on the property in order to provide transitional and permanent housing for single homeless individuals of southwest Washington. The Housing Authority agreed to give veterans referred by the Portland VA Medical Center priority placement for at least 50 percent of the occupancy of the SRO property. The EU lease required the Housing Authority to bear all costs and responsibility for developing and constructing the SRO. In addition, the lease made the Housing Authority (1) responsible for all repair and maintenance costs associated with the SRO and (2) subject to the risk of loss or damage occurring on the property. Unless VA decides to dispose of the property, the Housing Authority must surrender the SRO and other improvements on the property to VA upon termination or expiration of the lease. The Authority is responsible for the development, construction, repair, and maintenance of the SRO. Although in our opinion VA bears minimal risk, the construction on the property represents an opportunity cost to VA. According to a VA official, the property would likely have remained unused without the EU lease arrangement. Although priority placement enables VA to reduce costs by expediting the release of patients from its medical center, VA stated it had not previously considered using the land until the Housing Authority approached VA with the SRO idea. Because the transaction did not involve cash consideration, it was not reflected in the budget. In 2002, VA used its EU lease authority to initiate the development of a cogeneration facility that could provide chilled water, electricity, and steam to its 190-acre campus in North Chicago, Illinois. Prior to this EU lease, VA purchased electricity from the local utility and steam from an adjacent Navy facility. According to a study, VA determined that VA’s energy costs in North Chicago were 60 percent higher than average and VA determined that the rates charged by the Navy for steam were above market rates. According to VA’s analysis, VA determined that using an EU lease for the development, construction, and O&M from a third party of an energy center on the campus would be the most efficient and cost-effective way to meet the energy requirements of the North Chicago VA Medical Center, compared to federally contracted construction or purchasing energy (steam and electric) from local sources. In 2002 VA signed a 35-year EU lease with Cole Taylor Bank as trustee of the North Chicago Energy Trust (Trust) to lease approximately 1 acre of land appraised at $110,000. In return the Trust hired Energy Systems Group as the developer to (1) develop, design, equip, construct, operate, and maintain the Energy Center; (2) engage in sales of energy services to third parties; (3) provide energy- related services including operating and maintaining the VA Medical Center’s systems for chilled water, electricity, steam, and its respective distribution systems; and (4) undertake energy savings initiatives at the VA Medical Center and other VA facilities in the area. The Trust’s trustee borrowed on behalf of the Trust through the Illinois Development Finance Authority (IDFA) about $37 million in bonds, secured by the leasehold interest and its improvements. VA is the sole beneficiary of the Trust. The energy service agreement between VA and the Trust sets the standards and terms for VA to purchase steam and electricity generated by the energy center. VA may terminate the agreement under default provisions if the developer cannot complete the development or perform and supply energy as specified in the agreement. According to a VA official, VA then would in sequence (1) request that the Trust select another firm to run the center or (2) take over operation of the center. The bonds were issued by IDFA and the Owner Trust is responsible for repayment of the bonds in the event of a failure to perform or any other breach of the agreement. The EU lease holds the developer responsible for any loss, cost, or liability of an environmental nature that arises out of the developer’s acts or omissions in conjunction with the property. The Owner Trust is responsible in the event there is a loss of assets, such as through fire. If VA vacates the campus as part of its mission, VA has no responsibility or liability for any future payment of the bonds. In accordance with its legislative authority, VA may elect to transfer its interest in the land that the energy center was built on to the Owner Trust, so that the Trust may continue operations or pay off the bonds. According to VA officials, they initiated the Trust arrangement for this EU lease to protect the government in the event of bankruptcy or foreclosure of a developer/operator and if the developer did not or could not complete the project. By using a trust, the bond revenues belong to the Trust and are paid to the developer. The Trust maintains title to improvements during the lease term, afterwards title transfers to VA at the end of the lease term. VA contributed no funding for the development of the energy center. According to VA officials, constructing and running energy centers is not within VA’s mission and it would not have put forward a request to do so. VA estimated that a new energy center would save VA about $12.7 million (net present value) over 10 years compared to its current costs for electricity and steam. The new energy center system runs parallel to the local utility, which gives VA a backup source of electricity. At one point before VA entered into the EU lease, it was paying the Navy over $3 million for steam and the local utility over $1 million for electricity. VA accounted for 14 percent of the steam generated by the Navy facility and, according to VA’s business plan, VA could end its steam purchases without creating a substantial loss to the Navy. The Navy would be able to reduce its steam pressure and in turn increase its efficiency. Navy officials confirmed that while the Navy had lost revenue, VA steam consumption was not a significant portion of its business. The utility costs for the VA complex are reflected in the budget on an annual basis but no other scoring for this project is reflected in the budget. After this EU lease was signed, OMB has stated that under new scoring instructions the costs associated with trusts should be scored up-front since (1) VA maintains control of the assets acquired through the trust and (2) VA bears the risk for these assets. The following are GAO's comments on the Department of Defense's letter dated October 25, 2004. 1. We do not agree that our recommendation needs to be modified to further consider savings. We compared acquisition costs for a given set of ECMs. Therefore the savings should not vary. Regardless of how they are financed, the same given set of ECMs acquired for the same energy reduction projects should yield the same energy savings. 2. Only by doing a business case analysis can the government ensure that it selects the best alternative and that taxpayers’ interests are protected. Life-cycle cost analysis is only one part of a business case analysis, which includes economic and financial analyses such as cost- benefit and comparative alternative analyses. We recognize that using full, up-front appropriations to fund ECMs would likely affect some other aspect of the budget. It is not the intent of this report to discourage or to eliminate energy conservation efforts or partnerships with the private sector. However, recognizing the full commitment up- front in the budget enhances transparency and enables decision makers to make appropriate resource allocation choices among competing demands that all have their full costs recorded in the budget. One of the primary purposes of budgeting is to make resource allocation decisions among competing claims that all have their full costs recorded in the budget. 3. Measuring opportunity costs requires estimates of how long the delay in obtaining ECMs would be and the cost of that delay. To do that, GAO would have to make an assumption about when obtaining an ECM would be of sufficiently high priority in comparison to the other programs for which an agency would request full funding. Our report does not address agencies’ resource allocation decisions, but points out that the decision to acquire ECMs through ESPCs is more expensive than through timely, full, and up-front appropriations—a point with which agency officials agreed. We believe that such an analysis is more appropriately conducted by agencies as part of the business case analysis of alternatives. 4. Given our case study approach, our report does not imply a statistical relevance to any of our case study findings. We selected case studies based on their cost and data availability. The case study result that DOD questions is a delivery order awarded by GSA. Because this ESPC involved new construction, GSA noted that the result of this case would be unique but interesting; GSA agreed with our selection of cases. We note DOD’s comment that these ESPCs usually increase the government’s costs by 25 to 35 percent. While this is less than the 56 percent in the GSA case study, it is not an insignificant cost differential. 5. Our report acknowledges that M&V of savings acts as a type of insurance and that M&V strategies allocate risk between the agency and the ESCO. M&V is an explicit cost in ESPCs. However, agencies could choose to purchase M&V for ECMs financed through full, up- front appropriations if, after conducting a business case analysis, they believed it was in the best interest of the government. With respect to the savings guarantee, as discussed on p. 29, ESPCs contain assumptions that determine estimated savings. If the assumptions are not correct and savings are not achieved, the agency is still required to pay the ESCO the agreed-upon savings specified in the contract. Finally, we clarified that the M&V comparison is to estimated savings. 6. We agree that appropriations are recognized in the budget. However, ESPC commitments are not in fact fully recognized up front in the budget. OMB has scored the acquisition costs of assets acquired through ESPCs annually, over time, even though ESPCs represent long- term commitments of the government. For example, agencies generally retain control of the assets acquired for the entire life of the asset. Also, agencies’ termination liabilities for ESPCs typically correspond to the outstanding principal balances due to the ESCOs. 7. We did not analyze the validity of DOD’s claims because DOD could provide no data supporting its claims. For example, the Navy does not maintain a central system to track savings. Therefore, it could not provide data on the amount of cost savings attributable to the use of ESPCs. DOD also did not provide sensitivity analysis reflecting the opportunity costs of waiting for appropriations. We did review the one Oak Ridge National Laboratory cost study recommended to us, Evaluation of Federal Energy Savings Performance Contracting— Methodology For Comparing Processes and Costs of ESPC and Appropriations-Funded Energy Projects (March 2003). In addition to our own review of the study, we interviewed the authors of the study and talked with agency officials about the study’s methodology. Based on our analyses we found two major flaws with the study: (1) we agreed with the study authors that the sample size was too small and was not applicable to the entire federal sector and (2) the study compares the costs and savings across various types of ESPCs installed in several different federal facilities, making it difficult to compare energy savings because the savings would depend upon too many unpredictable factors. Also, as discussed on pages 29 and 30, we did discuss with GSA and Navy officials their historical funding experiences. We note that DOD itself (see comment 4) says that ESPCs increase the cost to the government by 25 to 35 percent compared to timely, full, and up-front funding. 8. Our analysis recognizes the value of the technical expertise provided by ESCOs by assuming that detailed energy surveys would be needed and purchased under either funding scenario. We include the cost of this type of service in our proxy for the amount Congress would have to appropriate had ECMs been financed through timely, full, and up-front appropriations. Further, our report notes that agencies’ heavy reliance on the ESCOs to recommend, install, and perform M&V to verify results on their recommended ECMs creates potential conflicts of interest that require active participation and scrutiny by agencies. 9. See comment 3. 10. See comment 5. 11. This information was taken directly from a FEMP document that FEMP provided in one of its training courses offered to agencies (Super ESPC Agency Project Binder, July 2004). On page 6 of the chapter entitled, “Introduction to M&V for DOE Super ESPC Projects” it says, “In the event that the stipulated values overstate the savings or reductions in use decrease the savings, the agency must still pay the ESCO for the agreed-upon savings.” 12. In our opinion, because large buy-downs indicate the availability of funds in the first year of the contract, they imply there may have been opportunities to purchase ECMs in smaller, useable segments, when technically feasible. However, because DOD prepared no business case analysis to determine the viability of this alternative, it cannot be known whether this would have been cost effective or not. Business case analyses are well accepted as a leading practice among public and private entities. OMB requires all executive branch agencies to prepare business case analyses for major investments as part of their budget submissions to OMB. 13. For our case studies, buy-downs did not always represent an “extremely small percentage of the overall contract.” As discussed on page 39 of the report, three of the six case studies we reviewed obligated and paid a significant portion of the total cost of the ECMs in the first year of the contract. These three case studies used one-time savings to pay down about 7 percent, 38 percent, and 39 percent of contract cycle costs. We believe this shows that opportunities exist to acquire ECMs in smaller, useful segments when technically feasible. The other three case studies are not used to support our conclusion because the up-front payments on these delivery orders stemmed from federal funding unexpectedly made available to mitigate energy shortages in California during fiscal year 2000 or because the up-front payment was minimal. We are not asserting that these opportunities exist in every case but we remain of the view that they should be explored as part of a business case analysis. 14. As stated on pages 35 and 36, we found that GSA and the Navy took an active role in negotiating case study ESPCs to protect the government’s interest. However, the potential for problems has been demonstrated through numerous Army Audit Agency reports issued over the last several years on ESPCs awarded by the Army. These reports stated that energy savings baselines established by the ESCOs were faulty, resulting in overpayments to the ESCO. Accordingly, we believe our conclusion is both warranted and relevant. The following are GAO's comments on the Department of Energy's letter dated October 25, 2004. 1. Our report does not state that the 1967 Commission on Budget Concepts explicitly addressed operating leases such as those at Oak Ridge. As stated, the budgetary principle advanced by the 1967 Commission on Budget Concepts is that the federal budget should be as comprehensive as possible; that is, all activities of the federal government should be shown within a unified budget. GAO has long supported an inclusive budget that discloses up-front the full commitments of the government. 2. Ensuring that the full commitment of the government is recognized in the budget will provide greater transparency for effective congressional and public oversight. Moreover, it ensures that decision makers have the information needed to make the trade-offs inherent in allocating resources among competing demands. Further, this report recognizes the difficulty in ensuring the validity of agencies’ long-term plans, but scoring that is based on the substance of a transaction could result in a better reflection of the government’s full commitment. 3. It is not the intent of this report to discourage or to eliminate energy conservation efforts or partnerships with the private sector. Given recent congressional action to extend ESPC authority through fiscal year 2006, we have revised our draft to recommend that OMB require, and suggest that Congress consider requiring agencies that use ESPCs to present to Congress an analysis comparing total contract cycle costs of ESPCs entered into during the fiscal year with estimated up-front funding costs for the same ECMs. However, recognizing the full commitment up-front in the budget enhances transparency and enables decision makers to make appropriate resource allocation choices among competing demands that all have their full costs recorded in the budget. 4. In our August 2003 report (Budget Issues: Alternative Approaches to Finance Federal Capital, GAO-03-1011) we identified 10 capital financing approaches that have been used by federal agencies to finance capital. Subsequently, as requested by the Senate Chairman, Committee on the Budget, we analyzed in greater detail two examples of these alternative approaches: public/private partnerships and Energy Savings Performance Contracts. Although this report includes our findings both on ESPCs and partnerships, our analysis of these two financing mechanisms was prepared separately and considered the unique circumstances of each case study. 5. Financing asset acquisition through the United States Treasury always has a lower interest cost than third-party financing. We looked only at acquisitions because we recognize that if the need for an asset is short- term, the government would not need to acquire it. Also, see comment 2. 6. In a constrained budget environment, agencies need to prioritize their projects needing resources and request funds for those of the highest priority. The excerpt DOE cites from our 1998 Executive Guide recognizes—as we do on page 2 of this report—that from an agency’s point of view the ability to record acquisition costs of a capital asset over the life of that asset can be very attractive. However, from the point of view of the government as a whole, these provisions may increase costs. It is the Congress’ role to allocate resources across agencies. The same paragraph cited by DOE further states, “some strategies currently exist at the federal level that allow agencies a certain amount of flexibility in funding capital projects without a loss of fiscal control. These strategies include budgeting for stand-alone stages….” 7. Our report does not suggest excluding the status quo from consideration when agencies evaluate the full range of alternatives in business case analyses. Our focus is on acquisition costs and whether or not alternative financing arrangements increase or decrease the total cost of capital acquisition. We do not question agencies’ decisions to acquire assets and assume that the same assets would be acquired regardless of how they are financed. 8. DOE and VA officials have stated that lower labor costs and fewer bureaucratic requirements could make partnership financing overall less expensive than financing through full, up-front appropriations. Despite this assertion officials were not able to provide documentation to support these claims. DOE contractors did provide a cost-benefit analyses for the financing arrangement at ORNL; however, it was inconclusive because the analyses compared private financing versus receiving federal appropriations over a 10-year period and did not compare receiving full, up-front appropriations. 9. We commend DOE on drafting a policy that will require a business case analysis for public/private partnerships. 10. As we have testified and reported in the past, we believe the budget should reflect the full commitment of the government, considering the substance of all underlying agreements, when third-party financing is employed. According to OMB staff, some of the partnerships we reviewed may have been scored differently under the revised A-11 guidelines. However, even given the 2003 revisions, we believe the scorekeeping rules should continue to be refined to ensure that the full commitment of the government is considered in the budget. In its comments on our draft report, OMB agreed in concept with this recommendation and stated that reflecting the full commitment of the government has always been its goal. In our conclusions, we discuss agencies’ long-term capital plans as indicative of their long-term capital requirements and as useful in determining the substance of underlying agreements to obtain capital. We recommend that the scorekeepers develop rules that would include consideration of these plans. We recognize that ensuring the validity of such plans may pose implementation challenges such as the need to validate agencies’ long-term capital requirements. 11. The report has been changed to indicate the partnership was scored according to OMB’s interpretation. 12. We recognize that DOE did not purchase the three privately financed buildings at ORNL. However, the buildings were clearly constructed for DOE’s benefit and we do not believe it likely DOE would abandon these state-of-the art buildings to reoccupy the currently dilapidated buildings. 13. See comments 3 and 10. We disagree with DOE about whether only the legal commitment should be reflected in the budget or whether the underlying substance of the deal should be reflected. 14. As discussed throughout our report, we believe up-front recognition of the full cost enhances budget transparency. Further, we believe the specific standards to be incorporated in any change in scorekeeping guidelines would most appropriately be established by the scorekeepers. Consideration of the substance of all underlying agreements should be part of any specific standards, as we recommend. 15. GAO suggests that agencies’ long-term capital plans be considered in determining the substance of the underlying agreement. 16. We fully understand that the ORNL transactions were deliberately structured to be considered operating leases. As is clear from DOE’s earlier comments, we simply disagree with DOE about whether only the legal commitment should be reflected in the budget or the underlying substance of the deal. During our review DOE and UT- Battelle, LLC, officials reviewed and agreed with our description of the ORNL transaction included as figure 12, “Partnerships and Financing of ORNL’s Revitalization.” 17. Standard and Poor’s A+ bond rating analysis explicitly discussed “a strong lease revenue stream” from DOE for a period up to 25 years and that the trustee would have a valid security interest in the rent stream.” Therefore, the private sector clearly viewed this as a long-term commitment by DOE. 18. See comment 16. Also, neither DOE nor its contractors provided GAO with documentation to support its assertion that reserve funds were established by the private sector Bond Trustee to cover any shortfall in rent beyond the 1-year period in the event of termination. Additionally, Standard and Poor’s bond rating did not state reserve funds were established to cover any shortfall in rent beyond the 1-year period in the event of termination. Rather, it cites a “debt service reserve fund equal to one month’s base rent.” 19. See comments 14 and 15. 20. Our report did not seek to analyze ESPCs from a traditional government contracts perspective. Our report does analyze ESPCs and partnerships from a budget scorekeeping perspective. Also, see comment 3. 21. Whether or not Standard and Poor’s was correct in citing that DOE had pledged a lease revenue stream as security for the payment of the bonds, such a statement could have affected bond investors’ decisions to purchase. Furthermore, clearly the private sector considered the substance of the underlying agreements in making this assessment. We have clarified in figure 7 that the Development Corporation arranged for the private financing which, as shown in figure 12, was secured by Keenan Development Associates of TN, LLC, through Banc of America. 22. All of our six ESPC case studies paid more to obtain energy conservation measures through ESPCs than they would have paid through full, up-front appropriations. Given FEMP’s assertions that 18 federal agencies and departments have implemented ESPC projects worth $1.7 billion, we believe that “no cost to federal customers” is a misnomer. Furthermore, agencies do acquire assets through ESPCs. As stated in FEMP guidance, ownership of the asset usually transfers from the ESCO to the agency when the equipment has been installed and accepted and after initial confirmation of the guaranteed savings. Nonetheless, given recent congressional action to extend ESPC authority through fiscal year 2006, we have revised our draft such that ESPCs have been deleted from the first recommendation. Instead, we have suggested that Congress should consider requiring agencies that use ESPCs to present to Congress an analysis comparing total contract cycle costs of ESPCs entered into during the fiscal year with estimated up-front funding costs for the same ECMs. 23. Given the mandates to reduce energy consumption, we do not believe the ability of the government to invest in needed capital improvements would be crippled by the requirement to recognize costs up front in the budget. Congress can decide what constitutes priority claims on resources. Also see comment 3 and 22. 24. We acknowledge that waiting for funds to be appropriated may result in opportunity costs. However, DOE did not provide sufficient documentation to support its assertion that waiting for appropriations before proceeding with the ESPC process will cause serious, costly, and irreparable harm to federal energy and infrastructure goals. As stated in our report, we recommend to the heads of case study agencies, including DOE, that business case analyses be performed and that the full range of funding alternatives be analyzed. Such an analysis could include the effect of not obtaining timely appropriations. 25. Our report does not state that DOE acquired any of the assets that were the subject of the Oak Ridge transaction, nor did our analyses look at UT-Battelle’s modernization program implemented through the State of Tennessee. Rather our report states that DOE used existing law to structure a partnership that enabled it to obtain the long-term use of facilities that was arranged through private financing. 26. Our report takes a broad definition of partnerships. Also, we specifically identified the transactions at Oak Ridge National Laboratory as an example of a public/private partnership in our report, Budget Issues: Alternative Approaches to Finance Federal Capital, GAO-03-1011 (Washington, D.C.: Aug. 21, 2003), pages 5, 48, and 52-53. 27. We clarified our report to remove any implication that the 75 percent criteria for operating leases was violated. 28. We disagree. Our draft report states the financing approaches used in many of the case studies were structured to include features that do not require up-front budget recognition even though they established long- term commitments of the government. As stated in our report, UTBDC implemented subleases of three facilities to UT-Battelle, LLC, for DOE’s ultimate use, each with a lease term of up to 25 years. 29. According to a UT-Battelle, LLC, official, UTBDC was created for the purpose of securing private financing. Thus, our report does assert that the ORNL transaction was undertaken to obtain private financing. We do not see this as inconsistent with DOE’s comment that the “transaction was undertaken…as a means by which DOE could obtain something of value to it—the use of a new building.” 30. References to DOE legal opinions in our draft are based on documentation given to us by the DOE Chief Counsel in Oak Ridge based on the relevance to the Oak Ridge National Laboratory public/private partnership. All statements in our report are within the context of how the citations were written. We clarified the author of the legal opinion and the subject of the memo. 31. Our report does not say that a conflict of interest and potential for fraud or wrongdoing existed in the Oak Ridge National Laboratory partnership. Rather, our report states that partnerships require monitoring because of the complicated relationships involved. 32. Our report states we used a case study approach and notes that this does not allow us to generalize our findings across the government. To analyze ESPC costs, we reviewed the delivery orders, given to us by GSA and the Navy, for each of our six ESPC case studies. In the course of our audit work we reviewed the ORNL study (Oak Ridge National Laboratory, Evaluation of Federal Energy Savings Performance Contracting-Methodology For Comparing Processes and Costs of ESPC and Appropriations-Funded Energy Projects, March 2003), interviewed the authors of the study, and talked with agency officials about the study’s methodology. Based on our analyses we found two major flaws in the study: (1) as agreed with the study authors the sample size was too small and was not applicable to the entire federal sector and (2) the study compares the costs and savings across various types of ESPCs installed in several different federal facilities, making it difficult to compare energy savings because the savings would depend upon too many unpredictable factors. Also, as discussed on page 30, we did discuss with GSA and Navy officials their historical funding experiences. 33. It is the executive branch’s long-standing position that the levels of internal executive branch funding requests are predecisional deliberative documents and therefore unavailable to us. 34. We acknowledge in our report that officials we spoke with said they believed M&V results in higher sustained savings. In this report, we take no position on whether M&V should be purchased, but agency officials said that measurement and verification is an expense that would not be incurred if the energy conservation measures were acquired through full, up-front appropriations. Additionally, representatives from energy service companies said that their private sector clients do not always purchase M&V and verification, and if they do, it is for a shorter period than contracts secured by the government. The lack of M&V being purchased in the private sector suggests it is worth exploring whether the amount of M&V purchased is a necessary expense for the government to incur whether the project is directly funded or obtained with an ESPC. 35. We include M&V in ESPCs costs because they are a required component of ESPCs to demonstrate that annual savings generated by ECMs meet or exceed contract payments. However, we exclude M&V from our proxy estimate of the cost if the ECMs were acquired through timely, full, and up-front appropriations because agency officials told us that M&V is an expense that would not be incurred if the ECMs were acquired through timely, full, and up-front appropriations. See also comment 34. 36. While it may be that ESPCs do not result in an increase in agencies’ utility bills, the ECMs acquired by all of our six ESPC case studies were more expensive than if ECMs had been acquired through timely, full, up-front appropriations. Thus, we do not consider ESPCs to be budget neutral over the long-term. 37. Our analyses were based on data obtained from final awarded delivery orders from case study contract files given to us by the Navy and GSA and was reviewed as part of technical comments on the appendixes by both the Navy and GSA. 38. It is unclear to us how DOE derived the “maximum possible percent increase (PV) financed through ESPCs over cost if direct funded.” Using the data contained in the case studies’ delivery orders, we attempted to replicate DOE’s “best case assumptions” by subtracting M&V costs out of the comparison. We found that M&V represented a relatively small percentage of the ESPC contract cycle costs and thus did not significantly affect the increase in the costs attributed to ESPC financing versus timely, full, and up-front appropriations. For example, in the case of the federal courthouse in Gulfport, Mississippi, removing M&V costs from the comparison caused the percentage difference to decline from 56 percent to 51 percent, not to 26 percent as DOE suggests. The 51 percent difference reflects interest costs that GSA must pay to the ESCO over the course of the contract. 39. Funds for ESPCs are obligated on an annual basis; therefore, the budget does not recognize the government’s full long-term commitment up front, when the decisions are made. 40. Since we used the delivery order to derive our proxy estimate, any avoided costs that were counted as a saving in that delivery were also counted as a saving in our proxy estimate. Our analysis assumes agencies acquire the same assets and avoid the same costs regardless of funding approach. Also, the savings from the avoided costs were used to make up-front payments in the contracts. 41. We do not contest agencies’ use of simplified assumptions in M&V strategies. Rather, our concern is focused on the statement contained in FEMP’s July 2004 Super ESPC Agency Project Binder. On page 6 of the chapter entitled, “Introduction to M&V for Super ESPC Projects” it says, “In the event that the stipulated values overstate the savings or reductions in use decrease the savings, the agency must still pay the ESCO for the agreed-upon savings.” It does not discuss other remedies against the ESCO nor does DOE’s comment elaborate on what these remedies might include. 42. Our report acknowledges agencies’ past experiences on page 33. Also see comment 32. 43. Large buy-downs indicate the availability of funds in the first year of the contract and so imply opportunities exist to acquire ECMs in smaller, useful segments, when technically feasible, with full, up-front appropriations instead of through ESPCs. Navy and GSA officials indicated to us that they typically did not consider financing ECMs through useful segments before deciding to use ESPCs. Moreover, we did not include the up-front payments made by Navy Region Southwest or Naval Submarine Base Bangor in this statement because these payments were made from an unexpected federal appropriation, which will not likely occur again. 44. As stated in our draft report agencies did not request full, up-front appropriations for the case studies reviewed in our report. Thus, it cannot be known how much might have been needed to develop surveys and studies to define projects in order to request direct appropriations. Business case analyses are well accepted as a leading practice among public and private entities. OMB requires all executive branch agencies to prepare business case analyses for major investments as part of their budget submissions to OMB. Also see comment 32. 45. See comments 24, 34, and 35. The following are GAO's comments on the General Services Administration's letter dated November 5, 2004. 1. While we recognize GSA’s current procedures to perform life-cycle cost analyses as part of its ESPC evaluation process, life-cycle costing is only one aspect of a business case analysis. Both OMB’s guidance and our Executive Guide to Leading Practices in Capital Decision- Making stress the importance of alternatives analysis as another component of building a business case. Such an analysis would consider the full range of funding alternatives. GSA does not analyze the full range of funding alternatives and therefore has an incomplete business case analysis. 2. We asked GSA staff in Atlanta whether GSA had requested appropriations for any of the case study ESPC projects we reviewed and were told that the field office had not submitted a request to headquarters because, given the $6 billion backlog of repairs and alterations needed, the field office considered it unlikely that such funding would be approved. At headquarters, GSA budget officials told us that they do not specifically request funds up-front for ECMs because they are financed over time through ESPCs. 3. We recognize that it is not always possible to undertake energy conservation measures as stand-alone projects. Accordingly, our recommendation asks that the technical feasibility of useful segments be considered when making capital financing decisions. We commend GSA’s decision to revise its energy conservation project evaluation process to include consideration of useful segments. 4. We agree that ESPC delivery orders are written to specify that project savings meet or exceed financed costs. However, the ancillary up-front costs also are specifically included in the contract and thus are a part of total contract cycle costs. The following are GAO's comments on the Veterans Affair's letter dated October 25, 2004. 1. Given recent congressional action to extend ESPC authority through fiscal year 2006, we have revised our draft to recommend that OMB require, and suggest that Congress should consider requiring agencies that use ESPCs to present to Congress an analysis comparing total contract cycle costs of ESPCs entered into during the fiscal year with estimated up-front funding costs for the same ECMs. We have better emphasized and clarified in the report that OMB updated and revised its instructions in 2003 to address lease-backs from public/private partnerships. According to OMB staff, some of the partnerships we reviewed may have been scored differently under the revised guidelines. However, we still believe the scorekeeping rules should continue to be refined to ensure that the full commitment of the government is considered in the budget. 2. We have added language to clarify further that our report looked at the government’s cost of acquiring assets. Evaluating the benefits of the assets was not one of our objectives. We assume that the same assets would be acquired regardless of how they are financed and thus they would have identical benefits and operating costs. Given our objectives, focusing our analysis on the government’s cost of financing the assets’ acquisition was the appropriate approach for this report. Recognizing costs up front does not prohibit discussion of future benefits when requesting appropriations. 3. The statement that ESPC commitments are not fully recognized up- front in the budget does not refer to VA’s enhanced use leases. Further, although congressional notification is an important and valuable process, it does not constitute recognition in the budget. 4. Our report does not state that VA or other agencies included in our review have deliberately hidden budgetary information from Congress. Nor do we dispute that Congress has continued to encourage VA’s use of enhanced-use leasing. Clearly, enhanced-use leases were explicitly authorized by law. Rather, when these leases are structured such that developed property is leased-back in short-term increments, OMB’s interpretation of the budget scoring rules permitted only the short-term costs associated with these assets to be scored in the budget. Finally, with respect to prior requests for appropriated funds, VA officials explained to us that while requests had been submitted for regional offices, requests had not been submitted for the Atlanta regional office or other case studies in our review. 5. The lease-back agreements we reviewed had features that indicated a long-term commitment by the government. They were structured such that the government’s legal commitment was confined to short-term periods. Accordingly, OMB’s interpretation of the budget scorekeeping rules required that only these short-term costs to be recognized up- front in the budget. However, recording only the 2-year legal commitment understates the likely longer term costs of the government. For example, prior to the enhanced-use lease used to develop a collocated regional office in Atlanta, the regional office had occupied offices in that area for over 25 years. While it is certainly possible that VA may choose to discontinue operations in the Atlanta area, in our opinion reflecting zero cost beyond the 2-year legal commitment overstates the chances of this occurring. In addition to the contact person named above, Carol Henn, Maria Edelstein, Sandra Beattie, Dewi Djunaidy, Scott Farrow, Hannah Laufe, David Nicholson, and Adam Shapiro also made significant contributions to this report. The Government Accountability Office, the audit, evaluation and investigative arm of Congress, exists to support Congress in meeting its constitutional responsibilities and to help improve the performance and accountability of the federal government for the American people. GAO examines the use of public funds; evaluates federal programs and policies; and provides analyses, recommendations, and other assistance to help Congress make informed oversight, policy, and funding decisions. GAO’s commitment to good government is reflected in its core values of accountability, integrity, and reliability. The fastest and easiest way to obtain copies of GAO documents at no cost is through GAO’s Web site (www.gao.gov). Each weekday, GAO posts newly released reports, testimony, and correspondence on its Web site. To have GAO e-mail you a list of newly posted products every afternoon, go to www.gao.gov and select “Subscribe to Updates.” | ESPCs finance energy-saving capital improvements, such as lighting retrofits for federal facilities, without the government incurring the full cost up front. Partnerships tap the capital and expertise of the private sector to develop real property. This report describes (1) what specific attributes of ESPCs and partnerships contributed to budget scoring decisions, (2) the costs of financing through ESPCs compared to the costs of financing via timely, full, and up-front appropriations, and (3) how ESPCs and partnerships are monitored. Using case studies, GAO reviewed GSA and Navy ESPCs and DOE and VA partnerships. Energy savings performance contracts (ESPC) and public/private partnership arrangements we examined were authorized by Congress and did not require reporting of the full, long-term costs up front in the budget. ESPCs are financed over time through annual cost savings from energy conservation measures (ECM) and only their initial-year costs must be recognized up front. OMB policy determined how agencies obligated ESPCs in their budgets. With partnerships, agencies sometimes used short-term leases to acquire assets constructed for the government's long-term use and benefit. As a result, budgetary decisions may favor alternatively financed assets. However, spreading costs over time enabled agencies to acquire capital that might not have been obtainable if full, up-front appropriations were required. A number of factors may cause third-party financing to be more expensive than timely, full, and up-front appropriations. For example, a higher rate of interest is incurred by using ESPCs and partnerships than if the same capital is acquired through timely, full, and up-front appropriations. For our six ESPC case studies, the government's costs of acquiring assets increased 8 to 56 percent by using ESPCs rather than timely, full, and up-front appropriations. However, officials noted that there are opportunity costs, such as foregone energy and maintenance savings, associated with delayed appropriations, but there are insufficient data to measure this effect. For ESPC and partnership case studies, agency officials said they did not specifically consider or request full up-front appropriations because they did not believe funds would be available in a timely manner and because alternative mechanisms were authorized. An evaluation of funding alternatives on a present value basis could have helped agencies determine the most appropriate way of funding capital projects. Implementation and monitoring of ESPCs is a relatively uniform process. Since partnerships take a variety of forms, their implementation and monitoring is more complex. Although third-party financing can make it easier for agencies to manage within a given amount of budget authority, it also increases the need for effective implementation and monitoring by agencies to ensure the government's interests are protected. |
Since 1993, GSA has built 79 new courthouses that replaced or supplemented 66 old courthouses. GSA considers 15 of the new courthouses to be annexes—additions that are often larger than the old courthouses. The judiciary identifies potential courthouse projects based on a capital-planning process that involves consultation with GSA. GSA is responsible for reviewing these projects and completing a feasibility study to further analyze and determine the best option, which may differ from the judiciary’s preferred option, before forwarding projects it approves to the Office of Management and Budget (OMB). If approved by OMB, GSA is responsible for submitting requests to congressional authorizing committees in the form of detailed descriptions or prospectuses, hereafter referred to as “new courthouse proposals.” Following congressional authorization and the appropriation of funds for the projects, GSA manages the site, design, and construction phases. After the tenants occupy the space, GSA charges federal tenants, such as the judiciary, rent for the space they occupy and for their respective share of common areas. In fiscal year 2012, the judiciary’s rent payments to GSA totaled over $1 billion for approximately 42.4 million square feet of space in 779 buildings that include 446 federal courthouses. When new courthouses are built, GSA sometimes retains the buildings for occupancy by the judiciary or other federal tenants or GSA, which has custody and control of the federally-owned buildings, disposes of them as surplus real property. GSA works with the Administrative Office of the U.S. Courts (AOUSC), the judiciary’s administrative office, in addressing courthouse space needs and issues. The rent that federal tenants pay GSA is deposited into the Federal Buildings Fund, a revolving fund that GSA uses to finance the operating and capital costs associated with federal space such as repairs and alterations, new construction, and operations and maintenance. When the costs of a project’s capital improvements exceed a specific threshold, currently set at $2.79 million, GSA must submit a prospectus to certain congressional committees for approval prior to the appropriation of funds to meet repair or new construction needs. The judiciary leases more space in federally-owned buildings than any executive or legislative branch agency. Judiciary components housed in courthouses may include a U.S. court of appeals (court of appeals judges, senior circuit judges, and staff); U.S. district court (district judges, magistrate judges, and clerk’s office staff); U.S. bankruptcy court (judges and clerk’s office staff); probation and pretrial services staff; or the office of the federal public defender. In addition to these judicial components, certain executive branch agencies integrally involved with U.S. court activities often lease space in federal courthouses, including the Department of Justice’s U.S. Marshals Service, U.S. Attorney’s Office, and the Office of the U.S. Trustee. In some cases, GSA also leases space for the judiciary in private office buildings. The district courts are the trial courts of the federal court system and occupy the most judiciary space. There are 94 federal judicial districts—at least one for each state, the District of Columbia, and four U.S. territories—organized into 12 regional circuits. Each circuit has a court of appeals whose jurisdiction includes appeals from the district and bankruptcy courts located within the circuit, as well as appeals from decisions of federal administrative agencies. When a new courthouse is built, GSA—rather than the judiciary—decides whether to retain the old courthouse and, when the building is retained, determines how it should be reused. In determining whether to retain an old courthouse, GSA considers the building’s condition; its historic or architectural significance; the judiciary’s interest in occupying the building; local market conditions, such as prevailing lease rates for commercial space; and the existing and projected base of other prospective federal tenants within the area. According to GSA, if the agency determines that the government no longer needs the building, the agency generally uses the Federal Property and Administrative Services Act of 1949, as amended, (Property Act) to dispose of it, following the process shown in figure 1. In addition, GSA has other authorities to dispose of old courthouses, such as the Public Buildings Act of 1959, as amended, which follow a different process. As shown in figure 1, GSA may dispose of federal real property through public benefit conveyances (PBC) to state or local governments and certain nonprofits for approved public benefit uses or negotiated sale to state and local government entities, but not before screening the property for use by other federal agencies and homeless service providers if the Department of Housing and Urban Development (HUD) has determined the property suitable for homeless assistance. If no interest is received from eligible public or nonprofit entities, the agency concludes that there is no public benefit use for the property and proceeds with plans to market it for competitive public sale. Forty of the 66 old courthouses replaced or supplemented by new courthouses since 1993 were retained for reuse by the government. GSA disposed of most of the remaining old courthouses through PBCs or sales to state and local governments, eligible nonprofits, or private sector entities. As figure 2 illustrates, of the 40 retained old courthouses, 36 were being reused by the judiciary and other federal tenants; 3 were vacant; and 1 was largely closed for a major renovation. Appendix II contains detailed information about the 66 courthouses, including their status, disposal method, proceeds, and current uses or major tenants. Among the retained and reused old courthouses, the judiciary had the largest share of space in 25, some space in 5, and occupied no space in the other 6. The various judiciary tenants are sometimes co-located within the same old courthouse. As of June 2013, of the retained old courthouses, the U.S. district courts occupied space in 15 and the U.S. bankruptcy courts occupied space in 19. The U.S. courts of appeals were using five old courthouses to hear cases. In addition, the judiciary and other federal agencies are sometimes co-located in the same old courthouse. Executive branch agencies, particularly the U.S. Department of Justice, had the largest share of space in 11 of the retained and reused old courthouses. Among the retained old courthouses we reviewed, excluding one building that was under major renovation, about 14 percent of the total space (nearly 1-million square feet) in them was vacant as of May 2013— significantly higher than the 4.8 percent overall vacant space among federally-owned buildings in 2012. Eleven of these old courthouses were more than 25 percent vacant, including three (Miami, FL; Buffalo, NY; and Austin, TX) that were completely vacant. GSA officials told us that replacing tenants in old courthouses can be challenging due to the buildings’ condition and needed renovations, among other reasons, as will be discussed later in this report. For example, the old courthouse in Miami has been vacant since 2008 because, according to GSA, of the high costs to renovate it for reuse. The agency plans to either dispose of the building or lease it to nonfederal tenants. The old courthouse in Buffalo has been vacant since 2011 because, according to GSA, it requires renovations that were not requested in the new courthouse proposal, as will be discussed in further detail later in this report. According to GSA officials, the old courthouse in Austin was vacated in December 2012 and GSA is working with the judiciary on a possible plan to reuse the building for the U.S. Court of Appeals for the Fifth Circuit. Forty-one percent of the old courthouses were classified by GSA in 2013 as “nonperforming”—i.e., buildings that do not cover their operating expenses and require moderate to significant renovation. In 2012, 30 percent of all federally-owned buildings were classified by the agency as “nonperforming.” Among other factors, GSA considers net operating income in classifying buildings as “nonperforming.” Buildings with net- operating-income losses drain the Federal Buildings Fund, which is GSA’s main source of funding used to maintain, operate, and improve federally-owned buildings. Therefore, old courthouses with net-operating- income losses subtract financial resources that could have been used for other buildings and projects. According to GSA, the financial performance of old courthouses may be affected by vacancy rates, low local commercial-market rental rates on which GSA bases its rates for federal tenants, as well as operational and administrative expenses associated with the buildings. Of the 41 federally-owned old courthouses, 31 (76 percent) had positive net operating income, totaling about $119 million in fiscal year 2012. The remaining 10 old courthouses had net-operating- income losses totaling about $13 million, most of which was the result of an approximately $9-million loss at the old courthouse in New York City (the Thurgood Marshall U.S. Courthouse) that was wholly vacant for major renovations, followed by the vacant old courthouses in Miami and Buffalo, which had net-operating-income losses of about $1 million and $695,000, respectively. According to GSA officials, the agency focuses on “nonperforming” buildings by developing strategies to address their problems, such as high rates of vacancy. Many old courthouses cannot be easily reconfigured to meet current federal space needs, and thus replacing previous tenants can prove difficult. For example, current U.S. courthouse security standards require the construction of three separate circulation patterns for judges, prisoners, and the public, which many old courthouses do not have. In addition, because of their age, old courthouses often need costly renovations, new mechanical systems, and other improvements before they are suitable for reuse. Further, because many of old courthouses have official historic status—that is, they are listed on the National Register of Historic Places or are eligible for listing—renovations by federal agencies to reuse these buildings for modern office space, for example, must follow the requirements of the National Historic Preservation Act of 1966, as amended, including, among others, compliance with Department of the Interior’s historic preservation standards. Although an Executive Order and GSA regulations encourage executive branch agencies to seek federally-controlled space, especially in centrally located historic buildings, we found several cases in which GSA faced challenges replacing tenants in old courthouses. For example, according to GSA officials, it took more than 10 years to fill the old courthouse in Sacramento, California, after the judiciary moved to a new courthouse in 1999. The officials said that although the old courthouse is centrally located adjacent to California state office buildings in the downtown area, the building needed renovations before it could be reused by other federal tenants, and that limited parking made it difficult to attract new tenants. In Portland, Oregon, GSA officials told us that the 66-year-old courthouse was not extensively renovated after the judiciary moved to the new courthouse in 1998 and, as a result, some space remains vacant, including three former district courtrooms. Other old courthouses have experienced greater difficulty in attracting new tenants after the judiciary moved out. The old courthouse in Reno, Nevada, for example, remained nearly half vacant for almost 20 years after the U.S. district court moved to the new courthouse in 1996 and the bankruptcy court remained. GSA officials also said that it takes time––sometimes years––for federal agencies’ leases in commercial buildings to expire before they could re- locate to federally-owned space. Moreover, in some cases, we found that GSA has been unable to find enough tenants to justify retaining buildings. For example, in Springfield, Massachusetts, although GSA initially planned to retain the old courthouse, the agency decided to dispose of it after the federal tenants that were expected to occupy the building changed their plans, which GSA determined would have resulted in a long-term vacancy rate of at least 40 percent. Even when federal tenants, such as the judiciary, rent space in old courthouses, the space may sometimes be un-used or underutilized. In Trenton, New Jersey, for example, we found that the judiciary paid rent to GSA for space that, according to the judiciary, was used as a district courtroom until the construction of the new courthouse in 1994. However, the judiciary only released this space to GSA in 2012. In addition, the judiciary was also paying rent for 3 other courtrooms in the same building but using them as office and meeting space instead of using them to conduct trials (fig. 3). According to the judiciary, these rooms were not used as courtrooms because, among other reasons, they did not meet modern security standards. We have previously raised concerns about the amount of space that the judiciary occupies. The judiciary plans to return 2 of the 3 courtrooms to GSA in October 2013. Similarly, in Camden, New Jersey, we found that the judiciary paid rent to GSA since 1994 for courtroom space that has not been built, underscoring the importance of effective space planning in new and old courthouses to reduce the government’s real property costs. The judiciary plans to return that space to GSA in October 2013. We also found the judiciary’s space planning in old courthouses may need to further consider changes in technology and trends in court operations. For example, in Camden, a U.S. bankruptcy court official told us that the need for file space had been reduced with growth in electronic filing. In Richmond, Virginia, judiciary officials told us that the use of law libraries has decreased with the growing popularity of online legal research. In addition, we found that the old courthouse in Richmond was mostly retained for use by the U.S. courts of appeals even though it is unclear whether the caseload at this location justified that amount of space. Specifically, an appellate judge in Richmond told us that the court has reduced how often it uses the courthouse for oral arguments (4-day periods known as “court weeks”) from eight times per year to six times per year due to improvements in efficiency. We found the appeals court in Richmond generally uses its six courtrooms simultaneously about 16 percent of the time. We have previously noted that older courthouses are suitable for use by the U.S. courts of appeals, given their comparatively lower security needs. Judiciary officials added that reuse of old courthouses with historic features, such as in Richmond, is an ideal arrangement given limited opportunities for other reuses. However, we have previously raised concerns about the lack of space allocation criteria for the U.S. courts of appeals and will review space utilization by the appeals court in a future study. The difference between the U.S. Courts Design Guide (Design Guide) baseline for libraries in new courthouses, about 9,200 square feet, and the existing library space in Richmond, about 17,000 square feet, raises questions about whether the entire space is needed. The Design Guide does not specify how much space should be allotted for judiciary functions, such as clerk space, libraries, and courtrooms, in existing buildings. According to judiciary officials, space configurations in existing buildings make them difficult to retrofit consistent with current design standards. As a result, the judiciary does not apply its space planning tool, which uses Design Guide specifications, for space planning in old courthouses. However, AOUSC officials told us that the judiciary’s annual $1-billion rent costs are unsustainable and that they are developing a program, called Right Fit, to examine opportunities to reduce the amount of space leased from GSA. GSA disposed of 25 of the 66 old courthouses we reviewed by PBCs, sales, or exchanges. As shown in figure 4, GSA disposed of most courthouses through sales or exchanges (65 percent) followed by PBCs (31 percent). Of the 17 old courthouses that GSA sold or exchanged, 14 were sold and 3 were exchanged for land used for the new courthouse. From buildings GSA sold, it realized a total of about $20 million in proceeds. Sales prices for these buildings ranged from $200,000 for the old courthouse in Greeneville, Tennessee, to $5.4 million for the old courthouse in Minneapolis, Minnesota, with an average sale price of $1.5 million. Purchasers of the 14 old courthouses disposed by sale included state and local governments as well as private sector entities. Most old courthouses disposed by PBC were disposed using historic monument conveyances, which, according to GSA, provide the greatest flexibility with regard to the future use of the building. Specifically, as long as the buildings’ historic features are preserved in accordance with the Secretary of the Interior’s Standards for Rehabilitation, the recipients may develop plans for a wide variety of uses. For example, old courthouses that were disposed of by historic monument conveyance included buildings that are being reused or plan to be used as affordable housing, a hotel, and for state and local government functions. Other old courthouses that were disposed of by PBCs were being used for educational and for criminal justice purposes such as juvenile justice centers. Although PBCs do not typically generate any financial proceeds for the federal government, the public continues to realize a benefit from the buildings because they are conveyed with deed restrictions that ensure the building will be used for the approved public benefit purpose. According to GSA, cost savings and cost avoidance is often realized with the disposal of unused or underutilized property, including properties disposed of via PBC. We found that it took GSA an average of 525 days, or 1.4 years, to dispose of the old courthouses we reviewed. This excludes any time the buildings may have been vacant—sometimes years—before they were declared excess, the point at which GSA decides to dispose of them. GSA officials said that the disposal process can be lengthy because old courthouses often (1) have a high level of congressional and public interest that can generate competing inquiries regarding their future use; (2) are historic and, thus, subject to lengthy reviews; and (3) have specialized designs that make the buildings difficult to reuse for other purposes. We attempted to compare how long it took GSA to dispose of the old courthouses with the length of time it took to dispose of all types of properties from its nationwide portfolio of federally-owned buildings, but were unable to make such a comparison due to data reliability issues. GSA’s data on disposal times for all properties in its portfolio included “holds” when the disposal times were suspended to account for situations that GSA deemed to be out of its control, such as pending legislation, litigation, environmental concerns, and historic preservation reviews. To attempt to review comparable data, we asked GSA to provide information on the length of holds and the reasons for the holds that were placed on the disposal times for old courthouses in our review. However, the data were incomplete, and in some cases, the explanations for the holds did not fall within the categories that GSA defined as being out of its control. As noted above, we found that during the disposal process, buildings might remain vacant for extended periods of time and, thus, do not earn any revenue to help offset the costs to operate mechanical systems and perform maintenance to help prevent deterioration, for example: Hammond, Indiana: Disposal of the old courthouse took 2 years. According to GSA, after the judiciary vacated the old courthouse in 2002, GSA and the City of Hammond conducted extensive discussions regarding the possibility of exchanging the building for city-owned land that could be used for parking space at the new courthouse. Those negotiations, however, were unsuccessful. After remaining vacant for 6 years, in 2006, GSA declared the property excess at which point the City of Hammond expressed interest in purchasing it through a negotiated sale. When the city subsequently decided it did not want the building, GSA decided against holding a public auction, given the minimal demand for property in the local market. In 2009, GSA sold the building through a negotiated sale to the First Baptist Church of Hammond, which owned a complex of buildings near the old courthouse, for $550,000. Kansas City, Missouri: Disposal of the old courthouse took 3 years. After the judiciary vacated the old courthouse in 1998, GSA initially tried to retain the building, which opened in 1939, because of its historical significance and location, but after studying alternative uses, found that it was impractical for the federal government to reinvest in the building. In 2003, GSA retained a private development company to explore and promote public uses of the building by local governments and institutions, but none demonstrated the ability to make full use of the old courthouse. As a result, after remaining vacant for 7 years, in 2005, GSA determined that the building was excess property and it was screened for PBC use. Subsequently, the City of Kansas City applied for a historic monument PBC and the building was conveyed to the city in 2008. According to GSA officials, the length of time between the report of excess by GSA and its conveyance to the city was partly caused by the complexity of the project’s financing. Nearly half of the 25 disposed old courthouses were historic buildings and listed on the National Register of Historic Places. According to GSA, any actions, including disposal, of buildings that are listed or eligible for listing on the National Register of Historic places, as required by National Historic Preservation Act, may be very lengthy. Disposing of old courthouses also involves the screening of properties for potential use by organizations for the homeless. More specifically, under the McKinney- Vento Homeless Assistance (McKinney-Vento) Act, as amended, HUD is to solicit information on a quarterly basis from federal landholding agencies regarding federal buildings that are excess property, surplus property, or that are described as unutilized or underutilized in surveys by the heads of landholding agencies. HUD is then to identify and publish in the Federal Register those buildings that are suitable for use to assist the homeless. The Secretary of Health and Human Services is then to evaluate applications by representatives of the homeless for the use of such properties. In general, upon an approved application, such property is to be disposed of with priority consideration of surplus property given to potential uses to assist the homeless. Although excess real property, including old courthouses, must be reported to and evaluated by HUD for suitability for homeless use, we found no instances in which old courthouses were conveyed for this purpose. We found only one case, in Coeur d’Alene, Idaho, in which a homeless services provider’s application to use the old courthouse was approved, but the organization subsequently withdrew its application after determining that the expense of renovating, maintaining, and operating the building would have been too costly. The old courthouse in Coeur d’Alene was eventually conveyed to the county government under a historic monument PBC and is now used as a juvenile justice facility. In 1997 and 2000, GSA disposed of two old courthouses (St. Louis and Ft. Myers) using an authority known as the “35 Act.” The agency interpreted the “35 Act” as not being subject to the surveying and reporting requirements of the Property Act and, in turn, the homeless-assistance screening process established by the McKinney-Vento Act because according to the GSA, the “35 Act” did not require GSA to declare a property as excess or surplus. As a result, GSA allowed the properties to be sold to local governments without reporting such property to HUD and did not undergo the homeless-assistance screening process. However, an April 2000 federal district court opinion regarding the potential sale of a Lafayette, Louisiana, courthouse under this authority rejected GSA’s interpretation of the law, ruling that property transferrable under the “35 Act” is subject to the surveying and reporting requirements of the Property Act and the McKinney-Vento Act. In addition, we found that GSA’s decision to dispose of old courthouses may be subject to change. For example, in Reno, Nevada, GSA initially decided to dispose of the old courthouse, but later decided to retain it after the judiciary raised objections and GSA further studied its decision. According to GSA, the agency had decided to dispose of the old courthouse because of the high cost of reinforcing the building against potential earthquake damage, but subsequently determined that it was the least costly alternative for housing the U.S. bankruptcy court, which was already occupying space in the building and preferred to stay. Moreover, the agency determined that tenants could reasonably accept the seismic risk of occupying the building through 2022. Other alternatives that GSA considered for housing the U.S. bankruptcy court in Reno included constructing a new building or expanding the existing new courthouse, which would likely have required additional congressional appropriations. Potential new owners of old courthouses face some challenges similar to those that GSA faced in re-using old courthouses. These challenges can affect the agency’s ability to dispose of the buildings. Representatives of the new owners of six old courthouses we reviewed told us that the buildings were being used––or will be used––for an art center, hotel, bank, affordable housing, church administration, and office space. In adapting the old courthouses to their current uses, these representatives told us they faced various challenges, including securing financing, making renovations, and meeting historic preservation requirements. However, several representatives said they were interested in acquiring the old courthouses for reasons such as their locations, architectural style, the quality of the construction materials, historic significance, and because they were able to purchase them at prices that were lower than the cost of constructing new buildings. In addition, two representatives said that historic preservation tax credits are sometimes an important incentive in redeveloping historic buildings that the government is disposing of. For example, the developer’s representative for the old courthouse in Tampa, which is being converted into a hotel, said his company specifically became interested in the building because it qualified for federal historic-preservation tax credits. Those tax credits authorize a 20 percent credit in any taxable year on qualified rehabilitation expenses with respect to certified historic structures. Below are examples of old courthouses converted for alternate uses. (Additional examples are provided in Appendix III.) Former U.S. Courthouse, Kansas City, Missouri, now the Courthouse The former U.S. Courthouse in Kansas City, Missouri, built in 1940, is now an apartment building (see fig.5). In 2008, after finding no other tenants or uses for the building, GSA conveyed it by PBC to a Kansas City redevelopment agency. The city worked with a developer to convert the old courthouse into an affordable-housing development that opened in 2011. An official from the city agency that acquired the old courthouse said the building’s conversion to affordable housing was part of downtown revitalization efforts. A representative of the building’s developer told us that the building has 176 loft-style apartments and offices of a law firm. The representative added that because the retained former courtrooms are not frequently used, the company is exploring having them used as a law library or as a venue for mock trials. Former George W. Whitehurst Federal Building in Ft. Myers, Florida, now the Sidney & Berne Davis Art Center The former George W. Whitehurst Federal Building in Ft. Myers, Florida, built in 1933, is now used as an art center and event space. In 2000, GSA sold the building to the City of Ft. Myers for $215,000 (see fig. 6). In 2003, after soliciting proposals to use the building, the city leased it to Florida Arts, Incorporated and is now known as the Sidney & Berne Davis Art Center. According to an art center representative, the building is now used for events such as musical, dance, and theatrical performances. The representative added that the two former courtrooms were not historic and were not retained. While old courthouses are often retained to meet federal space needs, potential renovations key to re-using old courthouses are often not included in GSA’s proposals to Congress for new courthouses. GSA is not specifically required by statute to include plans for old courthouses in its proposals to Congress for new buildings. According to GSA officials, it can be challenging to include these plans because new courthouses often take many years to complete and reliable cost estimates for renovations are not always available when they are proposed. However, GSA’s proposals are required under statute to include, among other things, a “comprehensive plan” to, in general, provide space for all federal employees in the locality of a proposed new building “having due regard” for suitable space that may continue to be available in nearby existing government buildings. In addition, OMB and we have previously reported that complete cost estimates are a best practice in capital planning, Moreover, while old courthouse plans may not be available when a new courthouse is initially proposed, GSA periodically updates Congress after the initial proposal to obtain additional authorizations. Since fiscal year 1993, Congress has appropriated a total of more than $760 million for courthouse renovations and with 12 new courthouses planned to replace or supplement existing courthouses, more funding requests for renovations will likely be forthcoming. GSA officials told us that renovations are often necessary to effectively reuse old courthouses and that several old courthouses were underutilized because they need renovating. We found that new courthouse proposals often included plans for the old courthouses, but few discussed whether renovations were needed to realize these plans. For 33 of the 40 old courthouses retained by GSA, the new courthouse proposals specified that the old courthouses would be reused for federal tenants. However, only 15 of the 40 of new courthouse proposals addressed whether renovations were needed in the old courthouse and only 11 included estimates of the renovation costs. Nearly all of the proposals that included a renovation cost were annexes to the old courthouses and, in such cases, costs related to courthouse renovation are often included in the cost of constructing the annex because GSA cannot separate out the costs. Among the retained old courthouses that we visited, seven required renovations to be reused; three still require renovations; and one neither had nor requires renovations. For seven of those we visited, the new courthouse proposal included no discussion of the need to renovate the existing courthouse. Moreover, for eight, the new courthouse proposal did not include discussion of federal tenants in commercially leased space near the old courthouses, and none included discussion of the long-term costs associated with federal tenants staying in commercially-leased space versus occupying space in the old courthouses. In contrast, we found that most of the 40 new courthouse proposals we reviewed included discussion of the 30-year costs associated with using commercially-leased space versus building a new courthouse. We have previously reported that leasing commercial space is often more costly than using government-owned space. Examples of old courthouses we visited for which the new courthouse proposal did not include discussions of renovations or federal tenants in nearby commercially-leased space include: Portland, Oregon: About 21 percent of the old courthouse (approximately 33,000 square feet) was vacant as of May 2013, including three courtrooms. (See fig. 7.) The new courthouse proposal specified that the U.S. bankruptcy court would move into the old courthouse. However, according to judiciary and GSA officials, this plan was contingent on renovation needs and costs, which we found were not included in the new courthouse proposal. These renovations have not been completed and the bankruptcy court instead leases space in a commercial building at an annual cost of about $1.3 million. Richmond, Virginia: About 15 percent of the old courthouse (approximately 26,000 square feet) was vacant as of May 2013. Although the new courthouse proposal specified that the existing courthouse would be used by the U.S. court of appeals, it did not specify that renovations would be needed to fully realize this plan. As a result, although the U.S. district court re-located from the building in 2008, a U.S. court of appeals office has remained in commercially- leased space in the city at an annual cost of about $362,000. In 2013, GSA requested $3.9 million to renovate the vacant space so that it can be reused by the U.S. court of appeals. Orlando, Florida: The new courthouse opened in 2007, but the old courthouse remained mostly vacant for several years until renovations not specified in the new courthouse proposal were completed. Specifically, according to GSA, about 85 percent of the old courthouse remained vacant until a $48 million renovation project was completed with funding provided under the American Recovery and Reinvestment Act of 2009. As of May 2013, the vacancy rate fell to about 23 percent (approximately 45,500 square feet). Judiciary officials noted that when new courthouse space is constructed as an annex, such as in Orlando, the old courthouse must be retained for use by the judiciary either in full or in part. The Orlando case illustrates the importance of planning for the old courthouse when the new courthouse will be an annex to the old building. In addition to the courthouses that we visited, we also found that other old courthouses were wholly or mostly vacant due to needed renovations not included in the new courthouse proposals. In Miami, the new courthouse proposal specified that the U.S. bankruptcy court and other tenants would move into the old courthouse. (See fig. 8.) However, according to GSA, renovation needs totaling about $60 million prevent this plan from proceeding, and, as a result, the building remains vacant. GSA indicated that more than $10 million would be required to separate the old courthouse in our review (David W. Dyer Federal Building and U.S. Courthouse) from another old courthouse built in 1983 (C. Clyde Atkins U.S. Courthouse), which share building systems, a common courtyard, and underground parking facility. In Buffalo, the new courthouse proposal specified that the U.S. bankruptcy court and other government tenants would relocate to the old courthouse. However, while tenants relocated from the old courthouse in 2011, it remains vacant pending $25 million in renovations that were not included in the new courthouse proposal. According to GSA, numerous federal tenants remained in commercially leased space in Buffalo, including the U.S. bankruptcy court, at an annual cost of about $360,000. In Columbia, South Carolina, about 73 percent of the old courthouse was vacant as of May 2013, including large areas designed for court use, which, according to GSA, would cost about $38 million to renovate for other uses. The new courthouse proposal specified that the U.S. bankruptcy court would move into the old courthouse, yet the bankruptcy court instead occupies another old federal courthouse, leaving GSA with court-configured space in the old courthouse that the agency has had difficulty re-using. Given the government’s multibillion-dollar investment in new courthouses and the challenges inherent to re-using or disposing of old courthouses, comprehensive planning regarding both the new and old courthouses is critical to ensure that federal operations are housed in the most cost- effective manner. We believe that comprehensive planning includes identifying challenges associated with re-using or disposing of the old courthouses, including renovation needs and estimated costs when the buildings are expected to be reused. By not consistently including the need for renovation and estimates of renovation costs in its new courthouse proposals, GSA is not providing Congress and other stakeholders with key information needed to make informed decisions about new courthouse projects. Although there may be challenges to providing accurate costs for future renovations to the old courthouses, estimates of these costs and, as necessary, periodic updates of changes in these costs would provide greater transparency to congressional decision makers regarding the full costs of courthouse projects. Further, although neither federal statute nor GSA specifically requires proposals for courthouses to include plans for old courthouses, federal statute does require GSA’s proposals to include a comprehensive plan considering space that may continue to be available in nearby existing government buildings. To the extent that the agency’s plans for housing federal tenants include using both the old and new courthouses, we believe such related renovation plans should be viewed as an integral part of the comprehensive plan. Moreover, when the plans involve re-locating federal tenants from commercially-leased space to the old courthouses, a comprehensive plan would include estimates regarding long-term costs versus continuing to use commercially-leased space. To improve the transparency of cost information regarding the retention and reuse of old courthouses, we recommend that when proposing new courthouses, the Administrator of the General Services Administration, in consultation with the judiciary as appropriate, include plans for re-using or disposing of the old courthouses; challenges with implementing those plans, including any required renovations and related cost estimates, to be updated as needed; and when the plans involve re-locating federal tenants from commercially- leased space to the old courthouses, estimates of the long-term costs of occupying the old courthouses versus continuing to occupy commercially leased space. We provided copies of a draft of this report to GSA and AOUSC for review and comment. GSA concurred with the recommendation and AOUSC agreed that GSA and the judiciary should continue to work together to address the judiciary’s housing needs, but indicated that it is important not to delay the authorization and funding of new projects. GSA’s letter can be found in Appendix IV. AOUSC’s letter can be found in Appendix V. As agreed with your offices, unless you publicly announce the contents of this report earlier, we plan no further distribution until 30 days from the report date. At that time, we will send copies of this report to the Administrator of GSA and the Director of the AOUSC. In addition, the report is available at no charge on the GAO website at http://www.gao.gov. If you or your staff have any questions about this report, please contact me at (202) 512-2834 or [email protected]. Contact points for our Offices of Congressional Relations and Public Affairs may be found on the last page of this report. GAO staff who made major contributions to this report are listed in appendix VI. Our objectives were (1) how the government is re-using old courthouses that were retained and the challenges involved; (2) how GSA disposed of old courthouses, the process involved, and the results; and (3) the extent to which GSA’s proposals for new courthouses considered the future use of the old courthouses. To determine how the government is re-using old courthouses that were retained and the challenges involved, we collected and analyzed GSA data on the 66 old courthouses that were replaced or supplemented by new courthouses from 1993 to 2012. With regard to old courthouses that GSA retained, we reviewed GSA data on the buildings’ current uses, tenants, financial performance, and vacancy rates. For comparison purposes, we analyzed GSA data on the percentage of old courthouses that the agency categorized as “nonperforming” with the percentage in the agency’s national real estate portfolio during 2012. To determine how GSA disposed of old courthouses, the process involved, and the results, we reviewed the authorities that GSA used to dispose of the buildings, data on the length of time it took to dispose of them, the proceeds, and interviewed representatives of the new owners of selected disposed old courthouses. We attempted to compare how long it took for GSA, on average, to dispose of the old courthouses in our review with how long GSA took to dispose of all types of properties from its nationwide portfolio of federally-owned buildings, but were unable to make such a comparison due to data reliability issues. GSA’s data on disposal times for all properties in its portfolio included “holds” when the disposal times were suspended to account for situations that it deemed to be out of its control, such as pending legislation, litigation, environmental concerns, and historic preservation reviews. To attempt to review comparable data, we asked GSA to provide information on the length of holds and the reasons for the holds that were placed on the disposal times for old courthouses in our review. However, the data were incomplete, and in some cases, the explanations for the holds did not fall within the categories that GSA defined as being out of its control. We also reviewed other GSA data for completeness and determined that they were sufficiently reliable for the purposes of this report. To verify the data, we obtained information from GSA about how the data were collected, reviewed our prior evaluation of similar GSA data, and corroborated certain data with current and previous owners of old courthouses and through our research. We also interviewed GSA officials about the factors they considered when deciding whether to reuse or dispose of old courthouses and the challenges involved, and reviewed building retention and disposal studies and applicable laws, regulations, and agency policies. In order to provide greater insight on reuses and disposals of old courthouses, we focused on 17 old courthouses as case studies, including 13 that we visited (Boston, MA; Camden, NJ; Eugene, OR; Ft. Myers; FL; Orlando, FL; Portland, OR; Reno, NV; Richmond, VA; Sacramento, CA; Springfield, MA; Tallahassee, FL; Tampa, FL; and Trenton, NJ) and 4 about which we interviewed GSA officials by phone (Coeur d’Alene, ID; Greeneville, TN; Hammond, IN; and Kansas City, MO). For all of our case studies, we reviewed GSA data and other documents and interviewed GSA officials. In 10 locations, we also interviewed judges and judiciary officials about their use of the old courthouses or disposal of those buildings. We selected the 17 old courthouses that represented a mix of retained and disposed buildings located in geographically diverse areas. We interviewed GSA officials about the old courthouse in Coeur d’Alene, Idaho, because, among the 66 old courthouses in our review, it was the only instance in which a homeless services provider’s application to use the old courthouse was approved. We interviewed representatives of new owners of six old courthouses that were converted for alternate uses (Ft. Myers, FL; Greeneville, TN; Hammond, IN; Kansas City, MO; Springfield, MA; and Tampa, FL) about challenges involved in the disposal process and buildings’ reuse. In three locations (Ft. Myers, FL; Springfield, MA; and Tampa, FL) we also visited the former courthouses. Because this is a nonprobability sample, observations made based on our review of the 17 case studies do not support generalizations about other old courthouses. Rather, the observations provided specific, detailed examples of selected old courthouse reuses. To determine the extent to which GSA’s proposals for new courthouses built from 1993 through 2012 considered the future use of the old courthouses, we reviewed the proposals submitted to Congress for new courthouses in locations where the old courthouses were retained and appropriations made for renovating those old courthouses. We also reviewed pertinent laws, GSA regulations and policies on courthouse construction planning and space utilization, and prior GAO reports on courthouse construction and the cost of federal tenants’ use of leased versus federally-owned space. In addition, we interviewed GSA about new courthouse proposals and renovations needed to reuse old courthouse space. We conducted this performance audit from November 2012 through September 2013 in accordance with generally accepted government auditing standards. Those standards require that we plan and perform the audit to obtain sufficient, appropriate evidence to provide a reasonable basis for our findings and conclusions based on our audit objectives. We believe that the evidence obtained provides a reasonable basis for our findings and conclusions based on our audit objectives. Old courthouse (year built) Frank M. Johnson Jr. Federal Building and U.S. Courthouse (1933) Disposal method (year disposed) Proceeds ($) Federal Building and U.S. Courthouse (1968) PBC (2012) County school administration (Central Office for the Tuscaloosa County School System) Richard Sheppard Arnold U.S. Post Office and Courthouse (1932) Phoenix Federal Building and U.S. Courthouse (1962) James A. Walsh Courthouse (1930) B.F. Sisk U.S. Courthouse (1968) PBC (2007) State courthouse (B.F. Sisk Courthouse) John E. Moss Federal Building (1961) Edward J. Schwartz Federal Building and U.S. Courthouse (1976) Santa Ana Federal Building (1975) Byron Rogers Federal Building and U.S. Courthouse (1965) (Mostly vacant due to major renovations) Elijah Barrett Prettyman U.S. Courthouse (1952) George W. Whitehurst Federal Building (1933) Sale (2000) Art center (Sidney & Berne Davis Art Center) U.S. Post Office and Courthouse (1933) Sale (2002) David W. Dyer Federal Building and U.S. Courthouse (1933) George C. Young Federal Building and Courthouse (1975) U.S. Courthouse (1937) U.S. Tampa Classic Courthouse (1905) PBC (2003) U.S. Post Office-Courthouse (1912) Sale (2002) Property exchange (2010) City government (City Hall) Federal Building and Courthouse (1928) PBC (2009) County courts (Juvenile Justice Building) Federal Building and U.S. Courthouse (1910) U.S. Courthouse (1977) Property exchange (2010) County courts (Winnebago County Juvenile Justice Center) Federal Building and US Courthouse (1904) PBC (1991) County cultural center (Springer Cultural Center) Federal Building and U.S. Courthouse (1906) Sale (2009) Church administration (First Baptist Church of Hammond Administrative Office Building) Federal Building-Post Office- Courthouse (1959) PBC (1995) County courts (Correctional and Court Services Building) Federal Building and U.S. Courthouse (1933) Lafayette Federal Building & Courthouse (1960) Sale (2001) John W. McCormack Post Office and U.S. Courthouse (1933) Federal Office Building (1982) Sale (2009) Sale (1999) State courts (Family Justice Center) Cape Girardeau Federal Building and Courthouse (1967) Sale (2012) U.S. Courthouse (1940) PBC (2008) Apartment building (Courthouse Lofts) U.S. Court and Customhouse (1935) Sale (1997) State courts and city offices (Carnahan Courthouse) James O. Eastland Federal Building – Courthouse (1933) Sale (2011) James F. Battin Federal Building and U.S. Courthouse (1965) Sale (2013) Federal Building/Courthouse (1931) Edward Zorinsky Federal Building (1960) James C. Cleveland Federal Building (1966) U.S. Post Office and Courthouse (1932) Clarkson S. Fisher U.S. Courthouse (1933) D. Chavez Federal Building (1965) Runnels Federal Building (1974) Foley Federal Building and U.S. Courthouse (1967) C. Clifton Young Federal Building and U.S. Courthouse (1965) Emmanuel Celler U.S. Courthouse (1963) Michael J. Dillon U.S. Courthouse (1936) Thurgood Marshall U.S. Courthouse (1936) Howard M. Metzenbaum U.S. Courthouse (1910) Thomas D. Lambros Federal Building and U.S. Courthouse (1995) Eugene Federal Building (1974) Gus J. Solomon Courthouse (1933) Federal Building and Courthouse (1938) William J. Nealon Federal Building and Courthouse (1931) Strom Thurmond U.S. Courthouse (1978) Federal Building-U.S. Courthouse (1904) Sale (2002) Commercial bank (Greeneville Federal Bank Main Office) Brownsville U.S. Post Office and Courthouse (1933) Property Exchange (1996) City government (City Hall/Old Federal Courthouse) Corpus Christi Courthouse (1918) Sale (2002) Post Office and U.S. Courthouse (1906) Martin V.B. Bostetter Courthouse (1931) Lewis F. Powell Jr. U.S. Courthouse and Annex (1858) William Kenzo Nakamura Courthouse (1940) Beckley Federal Building (1933) PBC (2001) Regional education service agencies (RESA 1 Building) Post Office and Courthouse (1961) Sale (1999) Federal Building and U.S. Courthouse (1907) GSA did not have information on whether financial proceeds were received regarding the property exchange involving the old courthouse in Brownsville. Former Federal Building and U.S. Courthouse, Hammond, Indiana, now the Administrative Office Building of the First Baptist Church of Hammond The former Federal Building and U.S. Courthouse in Hammond, Indiana, built in 1906, is now used by a church for office and meeting space (see fig. 9). In 2009, GSA sold the old courthouse to the First Baptist Church of Hammond for $550,000. According to a church representative, one of the building’s three former courtrooms is mainly used as a meeting room, but also for church services, weddings, and funerals, and that the other two former courtrooms have few or no remnants of their prior use. Former Federal Building-U.S. Courthouse, Greeneville, Tennessee, now the Greeneville Federal Bank Main Office The former Federal Building-U.S. Courthouse in Greeneville, Tennessee, built in 1904, is now being used as a bank (see fig.10). In 2002, GSA sold the old courthouse to the Greeneville Federal Bank for $200,000. According to a bank representative, of the building’s three former courtrooms, one is now used as an employee training room and the other two were reconfigured for lobby, teller, and conference room space. Former U.S. Tampa Classic Courthouse, in Tampa, Florida, and The former U.S. Tampa Classic Courthouse in Tampa, Florida, built in 1905, is being converted into a hotel (see fig. 11). In 2003, after finding no other tenants or uses for the building, GSA conveyed the old courthouse to the City of Tampa as a PBC. In 2012, the city leased the building to a developer that proposed to convert the building into a hotel. According to a representative from the developer, the hotel will have 130 rooms. The representative said that the building’s two historic former courtrooms will be used for a restaurant and ballroom/banquet facility. The hotel is expected to open in 2014. In addition to the contact named above, Keith Cunningham, Assistant Director; Lindsay Bach; Lorraine Ettaro; Geoffrey Hamilton; Bob Homan; and James Leonard made key contributions to this report. Federal Real Property: Excess and Underutilized Property Is an Ongoing Challenge. GAO-13-573T. Washington, D.C.: April 25, 2013. Federal Courthouses: Recommended Construction Projects Should Be Evaluated under New Capital-Planning Process. GAO-13-263. Washington, D.C.: April 11, 2013. Federal Courthouse Construction: Nationwide Space and Cost Overages Also Apply to Miami Project. GAO-13-461T. Washington, D.C.: March 8, 2013. Federal Real Property: Improved Data Needed to Strategically Manage Historic Buildings, Address Multiple Challenges. GAO-13-35. Washington, D.C.: December 11, 2012. Federal Buildings Fund: Improved Transparency and Long-term Plan Needed to Clarify Capital Funding Priorities. GAO-12-646. Washington, D.C.: July 12, 2012. Federal Real Property: National Strategy and Better Data Needed to Improve Management of Excess and Underutilized Property. GAO-12-645. Washington, D.C.: June 20, 2012. Federal Courthouse Construction: Better Planning, Oversight, and Courtroom Sharing Needed to Address Future Costs. GAO-10-417. Washington, D.C.: June 21, 2010. Federal Real Property: Authorities and Actions Regarding Enhanced Use Leases and Sale of Unneeded Real Property. GAO-09-283R. Washington, D.C.: February 17, 2009. Federal Real Property: Strategy Needed to Address Agencies’ Long- standing Reliance on Costly Leasing. GAO-08-197. Washington, D.C.: Jan. 24, 2008. Federal Courthouses: Rent Increases Due to New Space and Growing Energy and Security Costs Require Better Tracking and Management. GAO-06-613. Washington, D.C.: June 20, 2006. Courthouse Construction: Information on Project Cost and Size Changes Would Help to Enhance Oversight. GAO-05-673. Washington, D.C.: June 30, 2005. | During the last 20 years, GSA built 79 new courthouses for the judiciary that replaced or supplemented 66 old courthouses. Retaining and re-using or disposing old courthouses can be challenging for GSA because many of them are more than 80 years old, do not meet current court security standards, and have historic features that must be preserved by federal agencies in accordance with historic preservation requirements. GAO was asked to review how GSA and the judiciary are planning and managing the reuse or disposal of old courthouses. GAO examined (1) how the government is re-using old courthouses that were retained and the challenges involved; (2) how GSA disposed of old courthouses, the process involved, and the results; and (3) the extent to which GSA's proposals for new courthouses considered the future use of old courthouses. As case studies, we selected 17 old courthouses to represent a mix of retained and disposed buildings located in geographically diverse areas. Of the 66 old federal courthouses that GAO reviewed, the General Services Administration (GSA) retained 40, disposed of 25, and is in the process of disposing of another. Of the retained old courthouses, the judiciary occupies 30 of them, 25 as the main tenant, most commonly with the district and bankruptcy courts. When determining whether to retain and reuse or to dispose of old courthouses, GSA considers, among other things, a building's condition, the local real estate market, and the existing and projected base of federal tenants. GSA officials said that after the judiciary moves to new courthouses, old courthouses often require renovations to be reused. Moreover, GSA officials said that it can be challenging to find new tenants for old courthouses due to the buildings' condition and needed renovations, among other reasons. Among the retained old courthouses GAO reviewed, excluding one building that was under major renovation, about 14 percent of the total space (nearly 1-million square feet) in them was vacant as of May 2013--significantly higher than the 4.8 percent overall vacant space in federally-owned buildings in 2012. GAO found that GSA took about 1.4 years to dispose of old courthouses that the agency determined were no longer needed. GSA officials told us that multiple parties' interest in re-using the old courthouses, the historic status of many buildings, and their specialized designs can slow the disposal process. GSA is not specifically required by statute to include plans for old courthouses in its proposals to Congress for new courthouses. However, as with other building proposals over a certain dollar threshold, GSA is required to include, among other things, a "comprehensive plan" to provide space for all federal employees in the area, considering suitable space that may be available in nearby existing government buildings. In addition, GAO and the Office of Management and Budget have previously reported that complete cost estimates are a best practice in capital planning. GAO found that renovations needed to reuse the old courthouses, totaling over $760 million to date, were often not included in GSA's new courthouse proposals. Specifically, for 33 of the 40 retained old courthouses, the new courthouse proposals described plans for reuse by federal tenants, but only 15 proposals specified whether renovations were needed to realize these plans, and only 11 included estimates of the renovation costs. GAO found that some old courthouses were partially or wholly vacant while awaiting renovation funding, sometimes resulting in money spent leasing space in commercial buildings for the judiciary. In proposing new courthouses, GSA, in consultation with the judiciary, should include plans for re-using or disposing of old courthouses, any required renovations and the estimated costs, and any other challenges to re-using or disposing of the buildings. GSA concurred with the recommendation and AOUSC agreed that GSA and the judiciary should work together to address the judiciary's housing needs. |
VA pays Dependency and Indemnity Compensation to surviving spouses, children, and parents. The surviving spouse of a veteran may qualify for this compensation if the veteran died on or after January 1, 1957, (1) from a service-connected disability, or (2) after being rated as totally disabled due to service-connected conditions for a continuous period of 10 years, or for at least 5 continuous years after discharge from military service. The surviving spouse of a servicemember qualifies for this compensation if the servicemember died while on active duty. Some children aged 18 and older may receive separate DIC payments if they are in school or are unable to care for themselves. Parents may receive these benefits if they were dependent on the veteran or servicemember for financial support. Veterans, servicemembers, and federal employees may receive disability benefits from various sources including VA, DOD, and the Social Security Administration. These disability benefits terminate upon the death of the disabled person. Veterans may receive disability compensation payments through VA. A veteran’s qualification for, and amount of, disability compensation is not dependent on the veteran’s military rank or current income. If a veteran has one or more service-connected disabilities—conditions incurred or aggravated by military service—VA assigns a disability rating. This rating is intended to represent the average earnings loss the veteran would experience in civilian occupations due to the disabling conditions. Ratings range from 0 to 100 percent, in 10 percent increments. Basic monthly payments for a veteran with a spouse range from $123 for a 10 percent rating to $2,823 for a 100 percent rating (i.e., totally disabled or unemployable). A veteran rated at 60 to 90 percent also can receive VA compensation at the 100 percent level if also determined to be unable to work. The veteran may receive additional compensation if he or she meets certain other criteria; for example, loss of a limb or requiring assistance in performing the functions of everyday living. For a veteran with a spouse, total compensation may be as much as $7,800 per month. DOD also provides disability retirement payments to servicemembers who are separated from service because they are unfit to continue to serve, provided that their disabilities were incurred in the line of duty. Some veterans may receive disability retirement pay and VA disability compensation simultaneously; for example, if their VA disability rating is 50 percent or higher. In addition, servicemembers who are enrolled in the military’s life insurance program, Servicemembers’ Group Life Insurance (SGLI), may also receive financial assistance for certain losses resulting from certain traumatic injuries. Disabled servicemembers receive lump-sum payments, ranging from $25,000 to $100,000, depending upon the nat the qualifying loss. Disability benefits for federal employees are provided through their retirement and workers’ compensation programs, and payment amounts are generally tied to the employee’s salary. The Civil Service Retirement System (CSRS) generally covers employees who began federal employment prior to 1984. The Federal Employees’ Retirement System (FERS), established to eventually replace CSRS, generally covers federal employees who began their term of employment in 1984 or later. The Federal Employees’ Compensation Act (FECA) provides the workers’ compensation program for federal employees who suffer injuries or illnesses while on the job, or whose preexisting conditions are aggravated by their jobs. An eligible employee may elect to receive disability retirement benefits under CSRS or FERS instead of under FECA, but cannot receive both. Additionally, servicemembers and federal employees are eligible for Social Security disability benefits. As part of its Old Age, Survivors, and Disability Insurance program, the Social Security Administration pays Social Security Disability Insurance (SSDI) benefits to individuals who are unable to work. To be eligible for SSDI, an individual must have a condition that will last at least one year or will result in death, and meet certain age and work requirements, which may include military service. SSDI benefit amounts are calculated on average earnings indexed to national wage levels. SSA also pays Supplemental Security Income (SSI) to qualifying adults with limited income and resources who have disabilities or are blind, or are age 65 or older, and to children who have disabilities or are blind. In addition to DIC benefits, survivors of servicemembers and veterans can receive cash payments and other types of benefits. DOD provides a lump sum death gratuity of $100,000 to the survivors of a servicemember who dies on active duty or in training, or due to a service-related disability. DOD also provides up to $8,800 for burial expenses. The deceased may have had Servicemembers’ Group Life Insurance (SGLI) coverage, which can pay surviving family members a lump sum of up to $400,000. A surviving spouse and children may also receive monthly payments after the death of an active duty or retired servicemember through the Survivor Benefit Plan (SBP). These payments equal 55 percent of the servicemember’s retirement pay. In addition to cash payments, survivors may also be eligible for health care, housing assistance, and education benefits. Survivors of federal employees can receive benefits through retirement programs, workers’ compensation, and life insurance. CSRS provides benefits to the surviving spouses of retired employees. The maximum CSRS survivor benefit is 55 percent of the retired employee’s monthly payment. CSRS also provides payments to the survivors of covered employees who die while employed, with survivors receiving a percentage of the employee’s calculated retirement annuity. FERS offers similar survivor benefits, but the maximum is 50 percent of the retired employee’s monthly payment. Under FECA, the federal workers’ compensation program, benefits may be provided to the survivors of federal civilian employees who die as a result of work-related injuries and illnesses. Payment amounts are based on the deceased’s last salary and, unlike other federal employee programs, FECA provides additional benefits to the spouse for dependent children. A surviving spouse is eligible to receive 50 percent of the deceased’s salary, or 45 percent plus 15 percent for each dependent child, up to a maximum of 75 percent. Survivors of federal employees who die of a work-related injury or disease may receive benefits under either FECA or the employee’s retirement program, CSRS or FERS, but if eligible for more than one benefit, survivors typically choose the more generous FECA benefit. FECA benefits are not subject to federal income taxes. Survivors also may receive a lump sum benefit from the employee’s Federal Employees’ Group Life Insurance policy. Survivors may also collect Social Security benefits through the Old Age, Survivors, and Disability Insurance program. These benefits are paid to the surviving spouse, children, and dependent parents of any worker with a qualifying work history, including military servicemembers and federal employees under FERS. Survivor benefits may also be paid to the survivors of veterans and some CSRS-covered federal employees, if the veteran or federal employee had sufficient Social Security earnings credits. For the surviving spouse, eligibility for full benefits may occur at the spouse’s normal retirement age, while partial benefits can be paid as early as age 60. Also, a surviving spouse can receive survivor benefits at any age if caring for a child who is receiving Social Security benefits and is younger than age 16 or disabled. Unmarried children may receive benefits if they are under age 18. For more than half the survivors who began collecting benefits in fiscal years 2004-2008, DIC replaced between 35 and 55 percent of the VA disability compensation or military pay previously paid to the veteran or servicemember. Most of the DIC recipients in this group survived a totally disabled veteran or a low- to mid-grade enlisted servicemember, such as an Army sergeant. Overall, the most common DIC recipient was a woman over the age of 50 with no minor children who was the widow of a In this most common case, the totally disabled totally disabled veteran. veteran would have received $2,823 per month in VA compensation in 20 and, after his death, the surviving spouse would have received $1,154 month—the basic flat-rate DIC payment—for a replacement rate of 41 percent. Under DIC, survivors receive benefits without regard to the veteran’s or servicemember’s prior income. This prior income can include VA disability compensation and military pay, which cease upon the death of the veteran or servicemember. Because DIC benefits are generally paid at the same flat rate, the replacement rate depends upon the amount of prior income. While survivors of 6 out of 10 veterans and servicemembers received 35 percent to 55 percent of prior compensation, there are examples of DIC recipients at both ends of the replacement scale (see fig. 3). On the low end of the replacement scale, for about 1 of 10 survivors DIC replaced less than 35 percent of the veteran’s prior disability compensation or the servicemembers’ military pay. Many were survivors of veterans who received special compensation in addition to disability compensation due to the seriousness of the disability, for example, the loss of a limb. Some of the survivors of these veterans experienced a large drop in monthly compensation. For example, a severely disabled veteran could receive as much as $7,800 per month in disability and special compensation prior to death, but the surviving spouse would receive $1,400 per month in DIC, or 18 percent of the prior amount (see fig. 4). Another group which sees a large drop is survivors of higher ranked servicemembers, such as officers. DIC’s flat rate replaces less of their military pay than it does for servicemembers in lower pay grades. A Navy lieutenant, for example, earned about $6,000 per month in 2009. If the lieutenant died on active duty, the surviving spouse would receive the basic DIC benefit—$1,154—which replaces about 19 percent of the lieutenant’s pay. On the high end of the replacement scale, about 3 out of 10 survivors received DIC payments that replaced more than 55 percent of previous disability compensation or military pay, with many receiving 100 percent or more of the prior compensation. Many were survivors of veterans who received relatively low VA compensation prior to their death because they were considered partially disabled. For example, a veteran with a spouse and a 30 percent rated disability received $421 per month in VA disability compensation in 2009. Upon the veteran’s death, the surviving spouse received the DIC basic payment of $1,154 per month, which represented well over 200 percent of the prior compensation (see fig. 4). Some survivors of active duty servicemembers also fell into this group. Generally, these were servicemembers in lower pay grades whose survivors received additional DIC benefits to support children or parents. While DIC serves to replace some of the financial support lost due to a service-connected death, the law does not define a specific percentage of income that DIC should replace. In contrast, laws governing some other types of survivor benefits establish set replacement rate percentages. For example, a provision in federal law stipulates that most employment-based pensions must provide surviving spouses with 50 percent of the deceased’s pension payment, unless both the employee and spouse opt out. However, DIC is not a pension program, and there is no consensus among experts on an adequate or ideal replacement ratio for survivors. The amount paid by DIC to survivors of disabled veterans and servicemembers is generally higher than the amount paid by CSRS and FERS retirement programs to survivors of comparably paid federal employees. Such comparisons are difficult, however, because DIC provides a flat rate payment while CSRS and FERS survivor payments are determined by the salary and years of employment of the deceased employee. As a result, there is a range of payment amounts for survivors of federal employees. The monthly payment to a survivor of a federal employee with more years on the job and a higher salary will be larger than that to a survivor of a federal employee with fewer years or a lower salary. When we looked at veterans/servicemembers and federal employees with comparable pay and experience, we found that for most survivors, DIC provides higher benefits than the federal retirement programs because it gives more money to survivors of lower-paid individuals. About 82 percent of veterans or servicemembers whose survivors receive DIC were lower ranked during their time of service. Personnel in these lower ranks made less than $63,000 a year in 2009, and their survivors would have fared better under the DIC program than they would have under the federal retirement survivor programs. The following examples illustrate how DIC generally provides higher payments to the survivors of those who die after a period of disability than CSRS for a majority of its recipients. Under DIC, the surviving spouse of an Army sergeant who was disabled for a prolonged period before dying in 2009 would be eligible for a monthly payment of $1,400. In contrast, the surviving spouse of a federal employee, also disabled before his or her death and with the same years of experience and salary as the Army sergeant, would be eligible for a monthly CSRS payment of $606. The surviving spouses of a private first class, a sergeant first class, and a captain would also receive higher payments under DIC than would the surviving spouses of federal employees with comparable pay and experience under CSRS. Although they represent a small portion of DIC recipients, survivors of higher-paid servicemembers would likely receive less compensation than their federal employee counterparts. In 2009, for example, the survivor of an Army lieutenant colonel who was totally disabled for a prolonged period would receive the same DIC payment of $1,400 per month, but the survivor of a comparable federal employee would receive over $1,700 per month. (See fig. 5.) (See fig. 5.) The following examples illustrate how DIC generally provides higher payments than FERS for a majority of its recipients. For instance, the spouse of an Army sergeant who died in 2009 after a period of disability would receive the flat DIC payment of $1,154 a month. The spouse of a federal employee with equal pay and years of employment who died in 2009 would receive $732 a month under FERS. Similarly, the surviving spouses of a private first class and a sergeant first class would receive higher payments under DIC than the surviving spouses of comparable federal employees would under FERS. This trend generally holds true for both employees who die while employed by the government and those who die after a period of disability: DIC survivor benefits are higher than FERS for the majority of individuals. Although they represent a small portion of DIC recipients, survivors of higher-paid servicemembers may receive lower payments than their federal employee counterparts. While the spouse of a higher-paid Army captain would still receive the basic DIC payment of $1,154 per month after the captain’s death in 2009, the spouse of a federal employee with equal amounts of pay and years of employment would receive nearly $1,300 under FERS. (See fig. 6.) In contrast to CSRS and FERS, DIC survivor payments are generally lower than payments to survivors of comparably paid federal employees under the federal workers’ compensation program known as FECA. FECA provides survivor benefits to the families of federal employees who die as a result of injuries sustained on the job. FECA survivor payments are generally higher than those under CSRS or FERS and, like DIC, are not subject to federal income tax. A surviving spouse receives the equivalent of half the federal employee’s salary at the time of death. This payment would be larger than the basic DIC payment if the employee had an ending salary of at least $27,697 in 2009. Almost all servicemembers earn more than this salary in military pay, so their survivors would receive less under DIC than their civilian federal counterparts would receive under FECA. For example, under DIC, the surviving spouse of an Army sergeant who died while on active duty would receive DIC’s basic payment of $1,154 per month. The surviving spouse of a comparably paid federal employee would receive $1,722 under FECA for a death due to a work-related injury. Similarly, the spouse of a federal employee with pay comparable to an Army captain would receive over $3,000 per month under FECA compared to DIC’s $1,154. (See fig. 7.) g. 7.) Survivors of both veterans/servicemembers and civilian federal employees may draw on other government benefits and additional sources of income concurrently. For example, Social Security may allow spouses of veterans, servicemembers, and federal employees to collect survivor benefits based on the deceased’s employment earnings, and also may provide survivor payments to the deceased’s unmarried children. In addition, past reports on DIC indicate that some DIC benefit recipients also receive survivor payments from the Survivor Benefit Plan, a survivor benefit available to those collecting a military pension. Military survivors may also receive burial assistance, and health and education benefits. Finally, survivors of both military personnel and civilian federal employees may draw income from their own employment and receive life insurance payments. We provided a draft of this report to VA for its review and comment. The agency provided comments that were technical in nature and we incorporated them as appropriate. We are sending copies of this report to relevant congressional committees, the Secretary of Veterans Affairs, and other interested parties. In addition, the report will be available at no charge on GAO’s Web site at http://www.gao.gov. If you or your staff have any questions regarding this report, please contact me at (202) 512-7215 or at [email protected]. Contact points for our Offices of Congressional Relations and Public Affairs may be found on the last page of this report. Key contributors to this report are listed in appendix II. Our review focused on (1) the extent to which Dependency and Indemnity Compensation (DIC) replaces Department of Veterans Affairs (VA) disability compensation or active duty military pay lost due to the death of a veteran or servicemember, and (2) how DIC benefits compare to benefits for survivors of civilian federal employees. To address these objectives, we obtained and analyzed data on DIC benefits, VA disability compensation, and military pay. We also obtained information on programs that provide survivor benefits to federal employees and compared these survivor payments to DIC payments. To obtain additional context, we reviewed past evaluations of DIC and interviewed officials at VA and several organizations representing veterans, servicemembers, and their survivors. We conducted this performance audit from February 2009 to November 2009, in accordance with generally accepted government auditing standards. Those standards require that we plan and perform the audit to obtain sufficient, appropriate evidence to provide a reasonable basis for our findings based on our audit objectives. We believe that the evidence obtained provides a reasonable basis for our findings based on our audit objectives. We obtained and analyzed data from VA’s Benefits Delivery Network (BDN) data system on all survivors who received DIC payments in September 2008, the last month of fiscal year 2008. These data included information on individual DIC recipients, such as the recipient’s age and the level of DIC payments the recipient received. To determine the extent to which DIC benefits replaced prior VA disability compensation, we obtained additional data on survivors who began receiving DIC payments during a 5-year period: fiscal years 2004-2008. Specifically, we obtained data on the amount of monthly VA disability compensation received by the disabled veteran prior to death. We focused on those who recently began collecting DIC benefits due to VA’s limited historical data on disability compensation payments to veterans. For these recent recipients, we compared their monthly DIC payments with the amount of VA disability compensation received by the veterans. To determine the extent to which DIC replaces military pay lost due to the death of a servicemember on active duty, we estimated the pay of the servicemember prior to death. VA’s data included the servicemember’s last military grade, but not his or her last military pay rates. To estimate pay rates, we obtained military pay information from DOD and used the midpoint in the pay ranges for the servicemember’s grade in the year he or she died, including the basic pay and housing and subsistence allowances applicable to the servicemember’s grade. We compared this estimated pay with the actual amount of DIC benefits received by the servicemember’s survivors. For purposes of this analysis, when referring to survivors, we mean one or more persons (family members) surviving a single veteran or servicemember. We assessed the reliability of the VA data we used and judged them to be sufficiently reliable for our purposes. We identified data limitations that did not significantly impact the results of our data analysis, or our findings. For example, 314 of the cases were missing from our data because VA is transitioning from BDN to a new data system. Additionally, we found 31 cases where the recipient’s award amounts were incorrect. According to VA officials, this was likely due to data entry errors. We excluded these 345 records—about 1/10 of 1 percent of the entire September 2008 beneficiary file—from our analysis. Our comparisons of DIC with survivor benefits for federal employees focused on three programs: the Civil Service Retirement System (CSRS), the Federal Employees’ Retirement System (FERS), and the federal workers’ compensation program established by the Federal Employees’ Compensation Act (FECA). We chose these programs because they cover the majority of federal employees and, like the DIC program, provide ongoing survivor benefits in the event of the employee’s death. Additionally, these programs provide disability benefits to federal employees who suffer an injury or illness, mirroring, to an extent, VA compensation for veterans with disabilities related to their military service. It is difficult to compare DIC benefits to survivor benefits under these programs because DIC generally provides flat payments to survivors regardless of their past incomes, while these federal programs base benefit amounts on prior income levels. Additionally for CSRS and FERS, the employee’s length of service and age affect benefits calculations. Therefore, to compare benefits, we constructed several scenarios to examine the DIC benefits available to various veterans and servicemembers, and those available to federal employees with pay and experience equivalent to those veterans and servicemembers. For CSRS and FERS, we developed examples in which the individuals started their careers in time periods in which the federal employees would have been covered by the respective programs. We obtained information on the military pay applicable to a veteran or servicemember in the last year he or she served and assumed that the federal employee would have a high-three average salary equal to this amount. We used these salary amounts to calculate the federal employees’ disability benefits to which they were entitled, and used the appropriate cost of living adjustments to determine what their disability benefits would have been in 2009 before dying, and their survivor’s benefit after their death in 2009. Similarly, we calculated survivor benefits for servicemembers who died on active duty and for federal employees with comparable years of service and pay at the time of death. To compare FECA benefits with DIC benefits, we constructed several scenarios in which a servicemember died in 2009 and compared these scenarios to a federal employee with an equivalent salary. We assumed that the federal employee died of a job-related injury that was covered by FECA. To provide context for our analysis of DIC benefits, we reviewed previous evaluations of DIC benefits. These included: Past GAO reviews of DIC and other survivor benefits; A program evaluation report prepared for VA in May 2001; and The CNA Corporation’s 2007 report prepared for the Veterans’ Disability Benefits Commission on VA disability compensation and DIC benefits. To gain an understanding of DIC, its benefit levels, and related issues, we interviewed VA officials, and officials of several veterans and military service organizations. The organizations included the American Legion, the Disabled American Veterans, the Iraq and Afghanistan Veterans of America, The Military Officers Association of America, the National Association for Uniformed Services, the National Military Family Association, the Paralyzed Veterans of America, the Retired Enlisted Association, the Society of Military Widows, the Gold Star Wives of America, Inc., The Military Coalition, and the Tragedy Assistance Program for Survivors. Finally, to provide background on the various disability and survivor benefits identified in this report, we reviewed literature from several agencies’ Web sites, including VA, the Department of Defense (DOD), the Social Security Administration (SSA), the Department of Labor, and the Office of Personnel Management. We also reviewed related GAO and Congressional Research Service reports, and relevant federal laws and regulations. Melissa H. Emrey-Arras (Assistant Director), Paul R. Schearf (Analyst-in- Charge), Daniel R. Concepcion, and Gregory D. Whitney made major contributions to this report. In addition, Kirsten B. Lauber and Walter K. Vance assisted in developing the study’s methodology; Beverly Ross analyzed VA data; Kyle C. Adams assisted with the calculation of survivor benefits; Susan L. Aschoff and Charles E. Willson provided writing assistance; James E. Bennett helped develop our graphics; and Craig H. Winslow provided legal support. Joseph Applebaum, Timothy J. Carr, Cynthia C. Heckmann, David E. Moser, and Patricia Owens provided additional support and guidance. | The Dependency and Indemnity Compensation (DIC) program provides monthly payments to the survivors of those who died as a result of a service-connected disability or while on active duty in the military. In fiscal year 2008, the Department of Veterans Affairs (VA) paid over $4.7 billion to about 354,000 survivors, replacing a portion of income lost with the death of the veteran or servicemember. The Veterans' Benefits Improvement Act of 2008 directed the Government Accountability Office (GAO) to study the DIC program and the levels of payments it provides. This report addresses (1) the extent to which DIC replaces VA disability compensation or active duty military pay lost due to the death of a veteran or servicemember, and (2) how DIC benefits compare to benefits for survivors of civilian federal employees. GAO obtained and analyzed data on DIC payments, VA disability compensation, and military pay rates. GAO also obtained information on survivor benefits under federal employee retirement and workers' compensation programs. GAO did not include in its analysis other sources of income survivors may receive, such as Social Security, private pensions, and life insurance. Lastly, GAO interviewed officials from VA and groups representing veterans, servicemembers, and their survivors. For more than half of survivors who recently began collecting DIC, the benefit replaced between 35 and 55 percent of the VA disability compensation or estimated military pay lost due to the death of a veteran or servicemember. Because DIC provides generally flat payments, the rate at which it replaced lost income varied according to the amount of prior income, such as VA disability compensation. The most common survivor was an older female spouse of a totally disabled veteran who, in 2009, received $1,154 per month--the base DIC payment--compared with $2,823 per month paid in VA disability compensation to the disabled veteran prior to death. In these cases, DIC replaced 41 percent of prior compensation. There were, however, DIC recipients at the far ends of the scale. For example, for surviving spouses of mid-ranked officers who died on active duty, the flat rate DIC payment represented 19 percent of prior military pay; for survivors of partially disabled veterans who had received relatively low VA disability compensation, the flat rate DIC payment sometimes represented more than 100 percent of prior compensation. When comparing survivor benefits for DIC with those for comparably paid civilian federal employees, DIC benefits are generally higher than survivor benefits paid by federal retirement programs, but lower than those paid by federal workers' compensation. The DIC program's flat payment structure differs from federal programs in which payment amounts are based on employee salaries and years of employment. We found that for most survivors, DIC provides higher benefits than the federal retirement programs because it gives more money to survivors of lower paid individuals, who comprise the majority of DIC recipients. In contrast, DIC payments are almost always less than workers' compensation payments for survivors of federal employees who die as a result of job-related injuries. For comparable employees, the salary levels of nearly all servicemembers in 2009 would result in higher survivor payments under workers' compensation than under the DIC program. |
Civilians comprise a significant portion of the Department of Defense’s (DOD) personnel strength; civilian employees alone account for one-third of DOD’s full-time work force. These civilians provide important support to military combat forces in peacetime and in war. Some deploy and provide needed support within theaters of operation. With the transition to an all-volunteer active-duty military force, DOD adopted the “Total Force” policy in 1973, which recognized that the reserves, retired military members, civilian government workers, and private contractor personnel could add to the active forces in ensuring the national defense. The objectives of DOD force management policies are to (1) maintain, during peacetime, as small an active-duty military force as possible and (2) use civilian employees and contractor personnel wherever possible, to free the military forces to perform military-specific functions. In 1990, DOD reported to the Congress that in implementing the Total Force policy, it had, among other things, improved use of the DOD civilian employee, contractor, and host nation support communities. In fiscal year 1994, DOD’s programmed civilian end strength was estimated at 923,000 personnel, with an estimated cost of about $42 billion in salaries and benefits. These civilians work for each of the military services; in Defense agencies, such as the Defense Logistics Agency or the Defense Finance and Accounting Service; and in other organizations, such as the Offices of the Secretary of Defense (OSD) or the Joint Chiefs of Staff (JCS). Civilian employees currently represent over one-third of DOD’s total full-time equivalent force. This ratio has remained relatively constant since 1987, as table 1.1 shows. (App. I shows the same information by service and the Defense agencies.) As table 1.1 also shows, both military and civilian personnel end strengths have declined since 1987, when DOD was at its peak strength. Based on its fiscal year 1995 budget, DOD estimates that, by 1999, it will achieve a 33-percent reduction in its military end strength and a 30-percent reduction in civilian end strength since 1987. While most civilians support the military forces both at home and abroad in peacetime and at home during times of war, some civilians historically have deployed with and supported the military forces within theaters of operations. As far back as the American Revolution, civilians served as wagoneers and drivers to tow artillery and move supplies. During the Persian Gulf War, DOD used over 14,000 civilian employees and contractor personnel to support its military forces. According to DOD’s April 1992, final report to the Congress on the Conduct of the Persian Gulf War, civilian expertise contributed directly to the success achieved. DOD and service officials also generally recognize that during peacetime civilians cost less than military members of comparable pay grades. Responding to various legislative provisions over the past 20 years requiring the use of the least costly form of personnel consistent with military requirements, DOD has gone through periods of concentrated efforts to replace military positions with civilian ones. For example, in the 1970s, the services replaced nearly 48,000 military personnel in support positions with 40,000 civilian employees. As shown in table 1.2, the services, in recent years, targeted nearly 20,000 military positions for conversion to civilian ones. The services, however, did not maintain adequate records to substantiate the achievement of the intended conversions or validate the savings. Significant differences exist in the way military and civilian positions are managed. These differences affect DOD’s costs and control over its forces. The military personnel system is often described as a centrally managed, “closed” system, meaning that persons recruited with no prior military service are generally brought in at entry-level positions and progress through the ranks, whether in the enlisted pay grades or the officer corps. Decisions pertaining to assignment, promotion, rotation, and retention are centrally controlled at service headquarters. The military personnel management system operates totally under policies and guidance established by DOD, which helps ensure that military leaders have control over their personnel. The civilian personnel system, on the other hand, is often described as a more “open,” or decentralized, system. Such a system allows new hires to enter an organization at various levels, depending on each person’s qualifications and experience. Although most civilians begin their government service at lower, entry-level pay grades, managers are not restricted to hiring them at lower-graded entry levels. Civilian employees are also subject to the federal civilian personnel regulatory framework that governs such issues as hiring procedures, working hours, overtime, and job retention rights. Unlike their military counterparts, who are employed “globally” and can be transferred anywhere, civilian employees are generally employed at the local installation level. Career opportunities are generally identified at the local level. While civilian personnel management is described as being decentralized, local managers view their control over civilian force management as limited because budget guidance and downsizing goals, established at higher organizational levels, can mandate reductions in end-strength levels and constrain their hiring authority. Unlike funding for military personnel, funding for civilian personnel is not aggregated into a single account that permits close monitoring. Rather, funding for civilian personnel is spread among several accounts within the DOD budget. For example, funding for most civilian personnel is included in the operation and maintenance appropriation in the DOD budget—an account that also includes spare parts, fuel for equipment, and military training. DOD’s policy is to establish its total personnel requirements at (1) the minimum level and least cost necessary to carry out assigned peacetime missions aimed at deterring aggression and (2) a level sufficient to retain capability to quickly respond to any combat needs that develop. The first priority is major combat forces such as fighter pilots, tank crews, sailors, and submariners. Combat forces are exclusively military, whether active-duty or reserve. After combat forces are determined, remaining forces are to be established to adequately support the combat forces. Support forces may include active-duty military, reserve military, civilian employees, contractor employees, and host nation personnel. Each service has implemented its own procedures for determining peacetime personnel requirements in support positions. These procedures—labeled by the different services as efficiency reviews, manpower surveys, or engineering studies—are intended to identify the most efficient personnel mix for performing assigned missions and tasks. Although some variations exist in service procedures, decisions on peacetime personnel resources generally should include two major considerations. First, service officials are to identify a task to be performed and establish the number of personnel needed, by specific skill, to perform the task. Second, they are to determine whether civilian employees, contractor personnel, or military members are the most appropriate source of the required skills, based upon DOD and services policies. These policies generally state that civilians are to be used in support positions that do not require military incumbency for reasons of law, training, security, discipline, rotation, or combat readiness, or that do not require military background for successful performance of the duties involved. When military incumbency is not essential, yet the work must be done by government personnel, civilian employees are to be used. If the workload is not military essential and not required to be done by government workers, contractor personnel may be used; however, decisions to use contractor personnel must be supported by cost comparisons. The execution of military operations may require the use of additional military and civilian personnel to bring the peacetime force structure to required wartime levels. The buildup of forces to sustain a contingency operation is called mobilization; contingency planning, or mobilization planning, is the broad umbrella under which the services determine their wartime personnel and materiel requirements. Military requirements are determined through analyses of numerous strategies and assumptions about how to fight a war and the need for a range of phased, incremental increases in force capability. Military forces needed immediately are programmed into the peacetime active-duty military. Other military forces needed for later deployment can be programmed into the reserves. Requirements for civilians in theaters of operations will depend on the nature of the contingency and the types of military units involved. To ensure that DOD civilian employees would perform critical support functions in-theater during a conflict, DOD established the emergency-essential civilian employee program in 1985. One objective of this program is to obtain written statements from combat-essential employees affirming that they understand the commitments of their positions and that they will continue to perform their functions while other civilians are being evacuated from combat areas. In 1990, after criticism from our office and the DOD Inspector General, DOD required the services to implement procedures to ensure that contractor personnel who perform combat-essential support functions will continue their services in-theater during conflicts. Concerned about the extent to which DOD is addressing civilian personnel requirements as it downsizes and restructures its total force, the Chairman of the House Committee on Armed Services, Subcommittee on Readiness asked us to review the decision-making processes the services use to determine whether a position should be military or civilian. In response to this request we examined (1) DOD and service efforts to replace military personnel in peacetime support positions with DOD civilian employees and (2) the adequacy of planning for the future use of DOD civilian employees and contractor personnel to support military forces in theaters of contingency operations. We were also asked to follow up on actions taken to correct problems identified by DOD and the services that were associated with the deployment of civilians to the Persian Gulf War. To identify trends and opportunities for replacing military personnel in support positions with civilian employees, we reviewed DOD and service criteria for determining when a position should be military or civilian. We obtained perspectives from personnel management officials on efforts to identify functions that civilians can perform. We also obtained available data on the number and types of military positions converted to civilian under a 1989 Defense Management Review Decision and interviewed DOD officials to identify reasons for not achieving the intended conversions. In addition, we obtained data from the Defense Manpower Data Center (DMDC) on the number of military personnel in support positions and identified potential opportunities to replace military personnel in such positions with civilians. We validated the potential for significant cost savings by reviewing (1) several studies comparing the cost of military and civilian personnel and (2) the differences in ranks or pay grades for previously made conversions, when data were available. We did not identify the full range of military positions that might be candidates for conversion to civilian, or the specific pay grades of the civilian replacements. Our analysis with respect to this issue was limited to comparisons between military personnel and DOD civilian employees. We did not evaluate potential cost savings that might result from replacing military members with contractor personnel. To determine the extent to which DOD and the services are identifying the need and properly planning for the use of civilian employees and contractor personnel in future operational contingencies, we reviewed DOD and service regulations. We interviewed officials in service headquarters’ requirements and operations directorates, comparable officials at various installations we visited, and officials of the Joint Staff. We obtained statistical information from DMDC on the number and occupational series of emergency-essential civilians in each of the services for the last 5 years. We compared these data across the services to identify patterns and followed up with officials at the locations we visited to validate the data. To determine the number of DOD civilian employees and contractor personnel who deployed to the Gulf War, the functions they performed, and problems associated with their deployment, we reviewed DOD’s April 1992 final report to the Congress, Conduct of the Persian Gulf War, with a particular focus on the “Civilian Support” appendix. We also reviewed “lessons learned” reports prepared by various service components and special studies performed by outside organizations under contract to the services. We conducted a group interview with representatives of several defense contractors who provided civilian support in the Persian Gulf. We also interviewed officials in the Office of the Assistant Secretary of Defense (Personnel and Readiness). We performed our work at the following service headquarters, major commands, and installations: Office of the Under Secretary of Defense, Personnel and Readiness, Office of the DOD Comptroller, Washington, D.C.; Joint Staff Directorates for Force Structure, Resources, and Assessments; Operational Plans and Interoperability; and Manpower and Personnel, Washington, D.C.; U.S. Pacific Command, Camp H. M. Smith, Hawaii; U.S. Transportation Command, Scott Air Force Base, Illinois; Army Deputy Chiefs of Staff for Personnel and Logistics, Washington, D.C.; Total Army Personnel Command, Alexandria, Virginia; Headquarters Army Materiel Command, Alexandria, Virginia; Army Training and Doctrine Command, Fort Monroe, Virginia; Army Combined Arms Support Command, Fort Lee, Virginia; Army Combined Arms Command, Fort Leavenworth, Kansas; Army Pacific Command, Fort Shafter, Hawaii; Headquarters, 4th Infantry Division (Mechanized), Fort Carson, Colorado; and Headquarters U.S. Forces Command, Fort McPherson, Georgia; Air Force Headquarters Directorates for Civilian Personnel, Programs and Evaluations, and Plans and Operations, Washington, D.C.; Air Combat Command, Langley Air Force Base, Virginia; Air Force Materiel Command, Wright-Patterson Air Force Base, Ohio; and Pacific Air Forces, Hickam Air Force Base, Hawaii; and Offices of the Assistant Chief of Naval Operations and Bureau of Personnel, Washington, D.C.; Navy Atlantic Fleet, Norfolk, Virginia; Navy Pacific Fleet, Pearl Harbor, Hawaii, and subordinate commands in San Diego, California. We conducted our review between January 1993 and June 1994 in accordance with generally accepted government auditing standards. We obtained DOD comments on a draft of this report. The comments have been summarized in chapters 2 and 3 and are presented in their entirety in appendix V. Although DOD policy is to use civilians wherever possible, large numbers of military personnel perform technical, management, administrative, and other functions that civilians typically do. The services vary in the degree to which they use military or civilian personnel to perform similar functions. Opportunities exist for DOD to replace thousands of military personnel with civilian employees and, in so doing, save personnel costs and achieve operational benefits. In some instances, valid reasons exist for not replacing military support personnel with civilians. In other instances, replacements that should be made are impeded by a variety of factors. Some factors, such as current practice or broad directives and regulations, permit the continued use of military personnel. Other factors, such as downsizing and funding, limit the number of civilian replacements. The 1994 DOD Manpower Requirements Report indicated that more than 245,000 military personnel throughout the services and defense agencies were serving in noncombat program areas such as service management headquarters, training and personnel, research and development, central logistics, and support activities. Appendix II defines each of the program areas and shows the percentage of civilians in each area for fiscal years 1987 and 1994. Many job categories, such as finance, administration, data processing, and personnel, within broad DOD programming areas, generally do not require knowledge or experience acquired through military service; skills to perform such functions are available in the civilian labor sector. Some DOD and service officials believe that a great majority of such positions should be civilian. Yet, DMDC data indicate that many of these job categories are filled more by military members than civilian employees. Table 2.1 shows, for example, that enlisted personnel and civilian employees of equivalent pay grades occupy 66 percent and 34 percent of the positions in data processing, respectively. DMDC also maintains data on officer personnel, but the data do not clearly reveal the extent to which officers perform civilian functions. Many officers assigned to headquarters organizations and staff offices are classified as operational, even though they might primarily perform administrative functions. For example, an aircraft pilot assigned to manage personnel requirements functions at a local command would still be classified as a pilot in the DMDC database. However, our analysis of other data in DOD’s 1994 Manpower Requirements Report indicates that nearly 48,000 active-duty military officers, about 20 percent of the services’ total officers, were allocated to organizations outside of the services to perform a wide range of noncombat functions. Service officials stated that many officer positions are needed in DOD-wide activities because of career progression requirements. For officers to be promoted to senior levels, they need experience in a “joint” activity. In many instances, however, these joint experiences may not occur within the officer’s military specialty and may have limited applicability to developing joint battle staff experience. Further, such assignments often last only 2 years, which may not provide enough time to develop the expertise to perform the duties proficiently. These frequent reassignments may also disrupt the continuity of key operations. At one joint command we visited, for example, about one-third of the management staff, including all of the directorate chiefs, rotated in 1 year alone. A command official said stability of the workforce and continuity of operations are important reasons for them to use more civilians. According to DMDC data, the services vary significantly in the degree to which they use military and civilian personnel to perform similar functions. For example, the services collectively employ more than 21,000 enlisted military and civilian equivalent personnel whose primary occupational specialty is computer operator. Only 17 percent of computer operators in the Air Force are civilian, whereas in the Navy more than 53 percent are civilian, and in the Army about 68 percent are civilian. Table 2.2 shows the occupational specialties with the greatest variations. Some service officials attribute much of the variations to the unique missions of each service that require them to use personnel differently. For example, some Air Force officials explained that they have broad responsibilities to safeguard U.S. nuclear weapons and believe military security guards are more appropriate for this mission. Other DOD and service officials in the civilian personnel and manpower requirements offices attribute the differences to the existing military culture, in which officials prefer to use military personnel instead of civilians. These officials state that there is no reason why the services cannot be more consistent. Some DOD and service manpower officials explained that some of the military positions, which otherwise could be civilian, are needed to provide adequate time in the continental United States (CONUS) for service members rotating from tours abroad. They said that, as the United States continues to reduce it forces overseas, the need to maintain large numbers of rotation positions will also decline. Requirements officials said the Army and the Air Force are reducing their number of positions held for rotation purposes. They said the Navy is also adjusting, to some extent, the number of positions held for rotation downward. We also observed differences within the services. For example, the Navy uses civilians in the Pacific Fleet to perform its shore personnel staffing analyses (called efficiency reviews), while the Atlantic Fleet uses many military personnel for the same function. According to service officials, the Atlantic Fleet is substantially behind the Pacific Fleet in reviewing all of its shore facilities. Atlantic Fleet officials attribute the delays to the frequent turnover of military personnel. Such turnover, the officials said, prevents military members from developing the level of expertise needed to efficiently perform the reviews. Atlantic Fleet officials explained that they currently do not have adequate funds to hire civilians to do their efficiency reviews and are forced to rely on available military personnel, who are always going through a learning curve. The Pacific Fleet, on the other hand, uses civilians who, because of longer tenures, have become more proficient in completing the studies. Significant differences exist between the compensation costs for comparable military and civilian pay grades; replacing the thousands of military personnel who perform civilian functions with civilian employees of comparable ranks can offer significant potential to save personnel costs. Using civilians in certain support positions also provides operational advantages for DOD because a greater proportion of military strength can be devoted more directly to combat-related functions. Some civilians already have technical expertise that would require additional training for military personnel to acquire, especially in areas such as high-technology communications. Civilians also provide continuity in their positions and provide institutional memory, since they are less subject to the frequent assignment rotations associated with military personnel. Increasing the percentage of civilians in specific occupations will free up military positions to be used for other purposes. If, for example, all the services adopted a 50-to-50 ratio between military members and civilians in personnel management—a function DOD officials describe as primarily civilian—about 5,200 military positions would be available for conversion to civilian ones. Similar patterns exist in the areas of data processing and disbursing. Using the 50-to-50 ratio, table 2.3 shows over 14,000 positions within four occupational specialties where large numbers of military personnel perform functions that civilians potentially could do. Some of our reports and other DOD-sponsored studies show that civilian employees generally cost the government less than military personnel. The differences vary by pay grade, but, as table 2.4 shows, the average difference is about $15,000 per person per year for peacetime support functions performed in CONUS. (App. III provides more detail on the components of military and civilian compensation by pay grade.) Savings to be achieved from military-to-civilian conversions will depend on whether DOD eliminates a position from its military end strength or retains the position and reassigns the military member to another unfilled military-specific position. The savings may be even greater than they first appear from table 2.4 because civilian replacements, in the past, have sometimes been made at lower grades than the comparability table suggests. For example, at one command we visited, two supply management officers at the O-3 level were replaced with GS-9 civilians, even though comparison studies show that the comparable civilian pay grade for an O-3 officer is GS-11. On average, the replacement of just two military O-3 personnel with two civilian GS-9 personnel would result in a potential cost savings to the government of more than $46,000 in 1 year alone, if the military positions were eliminated from the service’s end strength. (Even if the two military O-3 personnel were replaced with civilian GS-11 personnel, the government would still save more than $30,000.) DOD officials said civilian employees can be paid at grades lower than their military counterparts because civilians either enter government service with specific expertise or they develop more expertise at an earlier stage in their careers since they do not rotate as frequently. DOD officials also told us that, for similar reasons, there have been cases where one civilian replaced more than one military member, thus resulting in greater savings than a one-for-one replacement would suggest. DOD and service officials recognize that opportunities exist to replace military personnel with civilian employees. In fact, DOD requirements officials have recently initiated a study that will, in part, examine the potential for replacing military personnel with civilians within OSD, JCS, and all defense agencies and field activities. This study, to be completed in late 1994, was initiated after a DOD task force determined that the “military essentiality” of some positions was not always apparent. The Air Force has recently initiated an internal study that will examine, among other things, opportunities to replace officers with civilians. During our review, data were not available to suggest how many positions might be affected, and a time frame for completing the study was not provided. However, we believe that making these replacements will be difficult without special attention by DOD officials to overcome existing barriers, such as military culture, downsizing, and funding. Although DOD’s and the services’ general policies call for the use of civilian personnel where possible, they also allow service managers wide latitude in filling positions with military personnel. No single directive explains how DOD’s “Total Force” policy should be implemented or the specific criteria to use in determining the appropriate mix of personnel. Therefore, because of the broad nature of the guidance, tradition, and cultural preferences, DOD and the services often merely maintain the status quo on military incumbency. Guidance on the mix of personnel needed to perform DOD functions is contained in several DOD directives—some dating back to 1954—and in service regulations. For example, DOD Directive 1100.4, “Guidance for Manpower Programs,” August 20, 1954, states that civilian employees shall be used in positions that do not require military incumbency for reasons of law, training, security, discipline, rotation, or combat readiness, or that do not require military background for successful performance of the duties involved and that do not entail unusual hours not normally associated or compatible with civilian employment. DOD Directive 1400.5, “DOD Policy for Civilian Personnel,” March 21, 1983, provides little specificity on civilian functions or positions. Service implementing regulations expand the requirements for military incumbency outlined in the DOD directive. These regulations clearly define personnel requirements for combat functions, since only military personnel are expected to perform such roles. For example, the Manual of Navy Total Force Manpower Policies and Procedures, June 11, 1990, requires military members if the person must engage in or be prepared to engage in combat. In the case of support positions, which may be appropriate for civilians to fill, the service regulations still tend to give greater emphasis to military incumbency. Army Regulation 570-4, “Manpower Management,” September 25, 1989, for example, states that all support positions will be military if they have tasks that, if not performed, could cause direct impairment of combat capability. However, this does not reflect current Army operations, since civilians routinely perform equipment maintenance functions that are important to maintaining combat capability. Service regulations enable officials to use military members in certain administrative, security, and supply personnel positions simply because they have traditionally done so. In addition, a preference for using military personnel has often existed because the military personnel system provides a high degree of management control. Informally, DOD and service officials have often cited probable deployability to theaters of operations in wartime as a basis for maintaining military incumbency. However, this position does not reflect current practice, since thousands of civilians were deployed to the Persian Gulf War. DOD and service officials told us they are in the process of updating and consolidating some of these policies. They did not, however, have firm dates for completing the updates. Due to changes in the world security environment and budget constraints, DOD is reducing the size of its military and civilian workforces. By fiscal year 1999, active-duty military end strengths are to be reduced by 33 percent from the 1987 peak strength. Approximately 73,000 active-duty military personnel reductions are currently planned in the end strength between the beginning of fiscal year 1995 and the end of fiscal year 1999, based on DOD’s 1995 budget. In theory, DOD could achieve many of its military reductions by replacing military personnel with civilian employees. However, the simultaneous downsizing of civilian employees works against such replacements. Civilian end strengths, by fiscal year 1999, are to be reduced by 30 percent from the 1987 peak strength. Over 79,000 civilians are programmed for reduction from the DOD workforce between fiscal years 1995 and 1999, based on DOD’s 1995 budget. In addition, executive branch efforts to reduce the number of high-graded (GS-14 equivalent and above) civilian positions throughout the federal government impairs attempts to reduce or replace officers. Many officer positions, if converted, may likely be replaced with high-graded civilians. DOD officials explained that, especially during this period of downsizing, their civilian personnel end strengths have been driven more by available dollars than by requirements. Local officials said they have little, if any, incentive to identify military-to-civilian replacements during the drawdown. Officials see little opportunity to obtain the necessary funding to support new civilian positions, particularly in the wake of what they sometimes view as arbitrary cuts in end strengths and budgets. Likewise, they expressed concern that while funding might be provided at one point, this would not preclude subsequent reductions as part of broad guidance to meet other reduction targets. Many DOD and service personnel managers identified the inadequate integration between the process for determining civilian requirements and the budget process that funds these requirements as a barrier against replacing military personnel with civilians. Although local commanders determine their civilian requirements based on estimated workloads and request budgets to cover the costs of such requirements, budgets are allocated from higher levels and often do not support the identified requirements. According to some DOD and service officials, constant pressures to reduce the defense budget and personnel strengths compel them to allocate anticipated reductions across all defense programs on a proportional basis. According to local officials, the reductions are perceived as having been made arbitrarily, without fully considering civilian requirements. As a result, local officials have become reluctant to identify military positions for conversion to civilian ones because they fear they will ultimately lose both positions. From a commander’s perspective, the military position will be deleted from the installation’s military end strength because this process is centrally managed. Before civilians can be hired, the budget may be reduced by service headquarters and the installation will be unable to hire the civilians. For example, at one command we visited, 2,200 military members were identified in 1991 for replacement with civilian personnel. These replacements were to be achieved in stages between 1991 and 1995. A command official told us that they lost approximately 2,000 military members, but gained no more than 800 civilians even though the command had no change in workload. This result was attributed to the fact that higher command levels significantly reduced this installation’s budget before the civilian positions could be filled. This official said hiring civilians often takes 6 months because of the required lengthy processes of advertising vacancies and reviewing applications. Even when funds are allocated to replace military personnel in support positions with civilians, the services may not be required to use the funds for that purpose. Funds for civilian personnel are derived from several accounts that may be used for a variety of purposes. For example, the operation and maintenance appropriation funds the purchase of fuel, supplies, and repair parts for weapons and equipment, and training of military personnel, in addition to civilian personnel. Although DOD and the military services have general policies requiring them to use civilian personnel where possible, the services currently vary in the extent to which they use thousands of military personnel in support positions that, according to DOD and service officials, could be civilian. No single answer is apt to be found to precisely identify the appropriate mix of military and civilian personnel. However, achieving greater consistency among the services by increasing the proportion of civilians performing data processing, personnel management, and other similar functions could free up thousands of military personnel for reassignment. Eliminating military positions and replacing them with civilians can save significant personnel costs, since some cost analyses estimate that, during peacetime, each civilian costs about $15,000 per year less than a military person of comparable pay grade. The high degree of variation among the services in how they use military or civilian personnel to perform similar functions suggests a need for high-level oversight by OSD and/or the JCS to ensure balanced consideration of personnel requirements across the services. However, various interrelated factors discourage commanders from pursuing military-to-civilian conversions or replacements. These factors range from a traditional preference for military personnel where possible, to concerns over retaining civilian positions in the current downsizing environment. We recommend that the Secretary of Defense establish a joint review board and provide it with a mandate to work with the services to ensure a thorough and consistent review of military support positions that may have potential for conversion to civilian. We also recommend that the Secretary of Defense direct the services to identify military positions that should be replaced with civilians and eliminate, to the extent possible, existing impediments to using civilians when they would be less costly. In commenting on a draft of this report, DOD concurred with our findings and recommendations. DOD stated that it will review the military essentiality of positions in its support structure and report its results to the Congress by April 30, 1995, in accordance with requirements of the fiscal year 1995 National Defense Authorization Act. This review will entail recommendations by the military services for converting military positions to civilian. DOD is also aware that various cost analyses acknowledge a less costly civilian substitute for military personnel performing similar type work. However, DOD policies governing military versus civilian manpower mix are not predicated upon the comparative cost factor alone, nor modified based on a single conflict experience. Thousands of civilians deployed to the theater of operation in support of U.S. military forces during the Persian Gulf War. Civilian deployments for that operation revealed important administrative weaknesses related to the use of civilians in such circumstances; many of those weaknesses are now being addressed by DOD or one or more of the services. That deployment also demonstrated up-front operational planning problems with the deployment of civilians that have not been completely resolved. During the Gulf War, the United States deployed over 14,000 civilians, both government employees and contractor personnel, to the theater of operations. (About 500,000 military personnel deployed to the Persian Gulf War.) According to DOD’s April 1992 report to the Congress on the Persian Gulf War, civilians worked aboard Navy ships, at Air Force bases, and with virtually every Army unit. Only the Marine Corps did not employ significant numbers of civilians in-theater. Civilians served in a wide variety of support positions, including transportation, maintenance and repair, and other weapon system support roles. (App. IV provides a more detailed account of the types of civilian specialists deployed in support of the Gulf War.) DOD’s April 1992 report to the Congress on the Conduct of the Persian Gulf War acknowledges that civilian expertise was invaluable and contributed directly to the success achieved. The services acknowledge that they did not have good data systems to track civilians in-theater during the Gulf War, particularly for contractor personnel. Given these limitations, table 3.1 shows how the numbers break down among the services and between DOD civilian employees and contractor personnel. Historically, DOD civilians and contractor personnel have served in theaters of operations during wartime; however, the Persian Gulf War deployment was somewhat different from scenarios expected during the Cold War. U.S. defense planning for the threat of war in Europe during the Cold War era relied upon host nation support, augmented by U.S. reserve forces, to help meet support requirements. Defense planning also relied partly on the assumption that some civilians working for DOD in Europe would continue to perform their functions in time of conflict. These employees were designated as emergency essential; as such, they were expected to remain in the area when combat began. U.S. military leaders now expect that, with the collapse of the Soviet Union, future conflicts will more likely occur against regional powers, similar to the Persian Gulf War against Iraq. U.S. forces will be expected to operate in areas that have little or no military support infrastructure. Therefore, DOD officials expect that they will have to deploy more support capability from the United States, some of which will be provided by civilian employees and contractor personnel. DOD and service officials acknowledge that they were not adequately prepared to process, deploy, or support civilians in the Persian Gulf theater of operations, although a 1990 DOD directive required that emergency-essential civilians be identified and prepared for potential deployment. Specifically, this directive required emergency-essential employees to sign agreements stating that they accept certain conditions of employment, including relocating to foreign areas during crisis situations to perform their duties. The directive also required the services to provide emergency-essential civilians with protective equipment and work-related training. According to the services’ after-action reports on the Persian Gulf War, a number of problems arose in deploying civilians to the Gulf War and caring for them in the theater. Some problems, including those described below, could have had serious consequences. Many of these problems were attributed to poor planning. Most of the civilian employees had not been previously designated as emergency essential. Many civilians were not screened to ensure that they were medically fit to serve in desert conditions. Some arrived in the desert with medical and physical limitations, such as severe heart problems and kidney disorders, that precluded them from effectively performing their duties. Some deploying civilians did not initially receive protective gear, such as gas masks, because civilians were not included on military equipment and supply lists. Nor were adequate efforts made to ensure that civilians were trained in the use of such equipment. Dental records, which are an important source of identification, were not available for deploying civilians because dental screenings had not been done. Some civilians did not receive identification cards, provided under terms of the Geneva Convention, to identify them as noncombatants. Other problems, while not as grave, also indicated a lack of preparation for civilians in-theater. Clear procedures did not exist to ensure that civilians received medical care, housing, or transportation comparable to that received by military members. Procedures were not in place to provide for overtime or danger pay in this environment. Questions existed concerning whether civilian life insurance policies contained war exclusion clauses that would have precluded their survivors from receiving accidental death benefits had the civilians been killed while there. Unlike military personnel, civilians were not entitled to free mailing privileges. Our discussion with representatives of several contractors who deployed personnel to the Persian Gulf War indicated they were delayed in getting personnel and equipment to the theater of operations. They reported having to arrange for their own transportation. They also reported receiving little assistance from DOD in helping them prepare their employees for deployment. Each service has modified some of its regulations to respond to the problems identified during the Persian Gulf War. The definition of emergency-essential civilian employees has been clarified, and requirements for training, identification cards, and medical evaluations, among other things, have been defined. However, these changes have not yet been fully implemented. The Army, in particular, has responded very extensively. For example, the Army issued an extensive annex to the Army Mobilization and Operations Planning and Execution System and revised its civilian mobilization planning regulations. The Army Materiel Command has published a guide for deploying and processing its civilians. The guide addresses the key problems identified during the Gulf War. DOD officials indicate that they would like to use the Army’s deployment guide as a prototype for the other services. Some problems identified during the Gulf War are only partially solvable by DOD and will require coordinated action with other agencies. For example, DOD officials acknowledge that civilians should be entitled to danger pay when serving in hostile areas; however, specific designation of foreign areas subject to danger pay requires a formal determination by the Secretary of State. The Army’s Civilian Deployment Guide outlines how such pay is to be provided and its relationship to other pay and allowances. Similarly, rules governing overtime pay limits are controlled by the Office of Personnel Management. Waivers to the pay caps may be granted by the Office of Personnel Management when appropriate forms are completed by the civilian employees. According to DOD and service civilian mobilization officials, steps will be taken during future civilian deployment processing to ensure that DOD employees are aware of the forms and waiver request procedures. The above actions are oriented to DOD civilians, not civilian contractor personnel. Some officials said they believe contractor companies should be responsible for ensuring that their employees are ready for potential deployment, as well as caring for them while in-theater. These officials believe, however, that DOD should be responsible for ensuring the noncombatant status of civilian contractor personnel by issuing them Geneva Convention identity cards. DOD and the services have not fully integrated into their wartime planning systems requirements for essential wartime support that civilian employees and contractor personnel will perform in-theater during future conflicts. Such planning includes identifying civilian personnel requirements, designating emergency-essential employees, and ensuring the availability of contractor personnel for potential deployments. Officials in DOD, JCS, and service contingency planning offices acknowledge the importance of DOD civilian employees and civilian contractor support to war-fighting efforts. To some extent, each also acknowledged that adequate planning is not currently being done, and sometimes pointed to each other’s office to take the lead in this area. For example, DOD and some service personnel officials told us that requirements for wartime civilian support should be identified during the service-level operational planning for potential contingencies. During such planning, the services examine the requirements outlined by regional war-fighting commanders in chief in their various contingency plans, and develop time-phased force deployment plans for meeting the regional commanders’ needs. Service operational planners told us that civilians were not included in prior operational plans or force deployment plans, nor are they anticipated to be in the future, in part, because service policies for these functions deal only with military personnel. Moreover, these officials believe civilian deployment issues are the responsibility of civilian mobilization planners, not operational planners. On the other hand, some service civilian mobilization planners told us that civilian requirements should be included in the operational and deployment plans to ensure that civilians will have the proper equipment, such as gas masks. According to these officials, the major barrier to effective planning for civilian support in military operations is a hesitation by military leaders to fully accept (1) civilian wartime roles and (2) their responsibility for such civilians in the combat area. DOD mobilization officials expressed the view that civilian requirements should be integrated in joint staff and service contingency planning processes. They do not believe civilians should be included in the military-oriented deployment plans because these plans cover units, rather than individuals. These officials believe that civilians should be handled like some reservists who deploy as individuals rather than with units. They also believe current mobilization and contingency planning policies do not adequately address civilian deployment issues. These officials told us they plan to consolidate DOD mobilization policies into a single directive, rather than continuing with multiple directives that address only certain aspects of the issue. These officials would like to assign responsibility to the Chairman, JCS, to ensure that war-fighting commanders in chief recognize civilian wartime support functions in their planning processes, but provided no time frame to complete this action. Two military exercises, one before the Persian Gulf War and one more recently completed, have pointed out civilian deployment problems and the need for improved planning. The military exercise Proud Eagle 90 was the first major DOD-wide exercise to recognize civilian mobilization as a significant element. The exercise was designed to include all command levels in testing how well plans, policies, and procedures would work in responding to a world crisis. Many of the problems that subsequently surfaced in the Persian Gulf War were identified during this exercise, including vagueness in defining what constitutes an emergency-essential civilian, absence of an accurate civilian personnel data system, lack of clear understanding of civilian entitlements, and inadequate processing procedures. According to DOD officials, no DOD-wide exercise with a specific objective of evaluating mobilization issues has been held since Proud Eagle 90, due to the constraints of ongoing contingency operations. However, civilian deployment-related issues did surface in a recent U.S. military exercise in Egypt. An after-action report noted that emergency-essential civilian employees were not trained in accordance with DOD directives. Once requirements for potential civilian deployments to theaters of operations have been identified, action is then required to formally designate such personnel as emergency essential, to better facilitate deployment action, if and when it is required. The services have varied in the extent to which they have identified emergency-essential personnel and the extent to which such designations pertained either to the potential for overseas deployments or to peacetime contingencies in the United States. Data available from DMDC shows fluctuations over time in the numbers of civilian employees designated as emergency essential by the services. During fiscal year 1987, for example, over 1,100 civilians were designated as emergency essential. This number rose to about 2,700 emergency-essential civilians in 1990 and declined to nearly 1,900 in fiscal year 1993. The Army has consistently maintained the largest number of such designations and the Navy the least. The data do not show any emergency-essential designations for the Navy until 1991. Our review of the data showed that many administrative personnel were designated as emergency essential, despite policy guidance stipulating that such designations include only those civilians who perform critical combat-support functions. Many secretaries, clerks, and other administrative personnel were designated emergency essential because they were stationed in overseas areas and had a key role in base operations. Service officials told us they realize these types of personnel generally will not remain in an area during a conflict or deploy elsewhere to a combat area to support military forces. Other variations in emergency-essential designations also reveal some confusion over the definition. For example, the services designated as emergency essential many employees who were required to work in the United States during emergencies with no likelihood of deployment. In other cases, emergency-essential designations were given to employees who were required to report to work in the United States when other personnel were excused for such reasons as snowstorms. According to DOD and DMDC officials, the emergency-essential designations in their database are understated because many commands are still implementing the 1992 guidance for identifying and reporting emergency-essential information. Although these officials did not provide a time frame for updating the database, they said they are working with the services to ensure that personnel not expected to deploy to combat areas are removed from the lists. We believe such data are likely to remain understated until DOD and the services fully assess civilian deployment requirements as part of contingency planning efforts. Various DOD and service officials, and published studies, recognize a growing dependence on contractor personnel to support high-technology military systems. In November 1990, DOD issued a policy instruction intended to ensure the continuation of essential contractor services during hostilities. Yet, little has been done to develop data on persons who perform combat-essential functions under contracts or to ensure the continuity of such contracts. Disagreement exists among DOD, the services, and contractors as to who should be responsible for the readiness and safety of contractor personnel performing essential wartime support. The 1990 instruction directs the services to develop and implement plans and procedures that would reasonably assure the continuation of essential services during crisis situations. Requirements of the directive include, among other things, the following: The services must review all contracts annually to determine which functions will be essential during crisis situations. The services must maintain a current, generic description of the essential contractor service, the number of contractor employees, and equivalent staff years required to perform the essential services. The directive does not specify what assistance contractors can expect to receive from DOD, other than the issuance of Geneva Convention identity cards. Representatives of several contractors that deployed personnel to the Persian Gulf War said they received little assistance from DOD to help them prepare their employees for deployment, and said such assistance might have prevented deployment delays. One mechanism the services use to ensure continuation of services has been the inclusion of a “crisis clause” in contracts. At some locations we visited, boilerplate language had been included in some of the contracts related to essential functions. In general, this language states that the contractor shall be responsible for performing all requirements of the contract notwithstanding the existence of any state of war or emergency and states that failure to perform may subject the contractor to a termination of the contract for default. However, mobilization and operational planners at local commands could not tell us whether all of the command’s contracts had been reviewed for their wartime essentiality. Neither local commands, service headquarters, nor DOD officials could provide summary data on contractor employees performing essential combat-support functions as required by DOD, or verify whether all contracts had been reviewed. Some officials said they did not need to know the number of personnel because contractor companies are responsible for deploying and protecting their employees. The DOD Inspector General reported in 1988 and 1991 that no major command could provide data concerning all contracts vital to combat or crisis operations. According to the reports, a contributing factor was the absence of a central DOD activity with oversight over contractors with wartime essential functions. During our review, officials in the Office of the Under Secretary of Defense for Personnel and Readiness, who must monitor the implementation of the DOD directive, said that oversight is still decentralized, and, while several organizations have some responsibility, no single headquarters organization wants to assume full control. For example, contracting for logistics support of major weapon systems is delegated to the managers of individual weapon programs in the systems acquisition chain, while war planning associated with using these systems rests with operational support personnel. According to the Personnel and Readiness officials, such decentralization slows efforts to address contractor deployability. Although DOD officials have informally cited potential deployment to theaters of operations as reasons for retaining military incumbents in selected support positions, civilians have historically deployed to combat areas to support the military forces. The recent Persian Gulf War showed that, to the extent civilians are to be used in combat areas, improved up-front contingency planning is needed. The services are making progress in developing and implementing policies to prevent problems that arose during the deployment of civilian employees and contractor personnel to the Persian Gulf War. However, they still have not adequately addressed civilian support requirements in their existing war-planning processes. They have not fully identified civilian employees or contractor personnel who perform combat essential functions and who might be called to deploy. Some confusion exists among organizations involved with contractor support for military operations on what assistance DOD should provide and who should be responsible for the readiness and safety of these personnel. Proper identification of civilian employees and contractors would help ensure that deploying individuals are properly trained and prepared to enter combat areas. Many personnel officials believe recognition of wartime requirements for civilians must come from the JCS before service planners will include civilians in their operational plans. We recommend that the Secretary of Defense and the Chairman, JCS clarify organizational responsibility for ensuring that civilian support to military operations is considered during contingency planning processes. These officials should direct operational planners to integrate civilian requirements for DOD civilian employees and contractor personnel into appropriate plans for deploying forces to combat areas. We also recommend that the service secretaries direct commanders of major support organizations to establish time frames for reassessing their needs for emergency-essential civilian employees. The commanders should expeditiously purge existing lists of administrative persons to prevent unnecessary spending on training for persons who will not deploy to theaters of operation. The commanders should ensure that emergency-essential civilians (1) receive appropriate training, including basic survival skills; (2) participate in job-related DOD-wide training exercises; and (3) are otherwise prepared to deploy to combat areas when needed. We further recommend that the Secretary of Defense clarify the type of assistance, such as deployment processing, training, transportation, housing, or care in-theater, that DOD will provide to contractors who perform essential, combat-support functions. The Secretary should also direct the service secretaries to establish time frames for identifying contractors and the personnel who provide essential combat-support services, and initiate actions to ensure that such personnel will be prepared to deploy to combat areas, if needed. DOD concurred with our recommendations and agreed to pursue, in fiscal year 1995, initiatives to ensure that military operational planning includes necessary civilian support. DOD also agreed to request all subordinate organizations to validate their requirements for emergency-essential civilian employees and contractor personnel and provide for required training. DOD noted, however, that deployment-related issues affecting contractors are complex and will probably not be resolved over the next fiscal year. | Pursuant to a congressional request, GAO reviewed the Department of Defense's (DOD) guidance and decisionmaking processes for determining when and whether to use civilian or military personnel in support positions, focusing on: (1) DOD and the military services' efforts to replace military personnel in support positions; (2) whether the services have adequately planned for the future use of civilian employees and contractor personnel to support military operations in combat areas; and (3) the actions taken to correct problems concerning civilian deployments to the Persian Gulf War. GAO found that: (1) although DOD and the services have attempted to convert military positions to civilian positions, the extent of these changes appears limited, since the ratio of military personnel to civilian personnel has not changed significantly; (2) replacing military personnel with civilian employees could reduce military personnel costs and release military members for use in combat-specific duties; (3) some DOD-sponsored studies have determined that civilian employees in peacetime support functions cost the government about $15,000 less per year than military employees in comparable pay grades; (4) service officials are reluctant to replace military personnel with civilian employees because the military is downsizing, they believe they can exert greater control over military personnel, they often do not receive sufficient funds or information to support civilian replacements, and budget allocation and civilian personnel requirement decisions are often made separately; and (5) the services have made efforts to correct some of the problems identified during the Persian Gulf deployment, but they have not identified their future potential wartime requirements for DOD civilian employees or contractor personnel or taken adequate steps to ensure that these personnel remain in the services for future crises. |
Families of OSP scholarship award recipients, as consumers, need complete and timely information about participating schools to make informed decisions about what school is best for the student. Further, federal internal control standards state that organizations must have relevant, reliable, and timely communications, and adequate means of communicating with external parties who may have an impact on the organization achieving its goals. During our 2013 review, we found that OSP provided information to prospective and current OSP families through a variety of outreach activities. However, families lacked key information necessary to make informed decisions about school choice because the directory of participating schools—a key communication tool—was not published in a timely fashion and did not contain key information about tuition, fees, and accreditation. Additionally, scholarships to students were awarded several months after many schools had completed their admissions and enrollment processes, limiting the amount of time and choice in selecting schools. To address these issues, we recommended that Education take steps to ensure that the OSP administrator improve the timing of key aspects of program administration and program information for prospective and participating families. In late October 2015, Education described to us actions that had been taken to address these issues. For example, Education stated that the OSP administrator published its school directory in a timely manner in 2013 and 2014. The SOAR Reauthorization Act, which recently passed in the House and has been introduced in the Senate, includes provisions to address accreditation of participating schools. Effective policies and procedures: During our 2013 review, we found that OSP’s policies and procedures lacked detail in several areas related to school compliance and financial accounting, which may weaken overall accountability for program funds. Policies and procedures are a central part of control activities and help ensure necessary actions are taken to address risks to achievement of an organization’s objectives. The absence of detailed policies and procedures reflect weak internal control in the areas of risk assessment, control activities, information and communication, and control environment. For example, we found that OSP relied on schools’ self-reported information to ensure school compliance and did not have a process for independently verifying information, such as a school’s student academic performance, safety, and maintenance of a valid certificate of occupancy. Without a mechanism or procedures to verify the accuracy of the information provided, OSP cannot provide reasonable assurance that participating schools meet the criteria established for participation in the program. As a result, there is a risk that federal dollars will be provided for students to attend schools that do not meet the education and health and safety standards required by the District. Further, at the time of our review, OSP’s policies and procedures lacked sufficient detail to ensure each participating school in OSP has the financial systems, controls, policies, and procedures in place to ensure federal funds were used according to federal law. OSP’s policies and procedures for the financial stability review of participating schools did not identify the specific risk factors that should be considered when assessing schools’ financial sustainability information. As a result, the OSP administrator was unable to confirm that all schools participating in the program were financially sustainable. In addition, OSP lacked detailed policies and procedures for dealing with schools not in compliance with program rules. Furthermore, policies and procedures for fiscal years 2010 through 2012 did not specify how to track administrative expenses, including what should be included, and OSP had little documentation to support administrative expenses incurred during these years. Therefore, while federal law limits the administrative expenses to 3 percent of the annual grant amount, the true cost of administering the OSP program during these years is not known and could be higher or lower than the 3 percent allotted. Without sufficiently detailed policies and procedures for all aspects of a school choice program, the program administrator cannot effectively monitor program operation and may not be able to account for all federal or public dollars spent. To address these issues, we recommended Education require the OSP program administrator to add additional detail to their policies and procedures to more efficiently manage day-to-day program operations. OSP amended its policies and procedures in August 2013 which addressed some of these issues, but OSP did not address all of the weaknesses described and the policies and procedures had not been fully implemented at the time of our review. In addition, in late October 2015, Education described to us actions that they had taken to address these issues. For example, Education stated that its Office of Risk Management Services provided feedback on the OSP administrator’s internal policies and procedures. The SOAR Reauthorization Act recently passed by the House and introduced in the Senate includes a provision to address how the program administrator will ensure that it uses internal fiscal and quality controls for OSP. Accurate, Up-to-Date Student Information: According to the internal controls framework, information should be communicated to management and within an organization in a form and time frame that enables officials to carry out their responsibilities and determine whether they are meeting their stated objectives. For example, in OSP—and other eligibility-based choice programs—it is important to have accurate, up-to-date student application information in order to meet program objectives, such as determining eligibility and awarding program scholarships in an efficient and timely manner. However, at the time of our 2013 review OSP’s database containing past and current student and school information had several weaknesses, including a lack of documentation and automated checks, and a deficient structure, which left the database open to errors. For example, there were many records with missing fields and data that were partially entered, and the database did not have automated data checks, which would reduce the risk that significant errors could occur and remain undetected and uncorrected. We found these deficiencies also negatively affected day-to-day program management, and impeded efforts to communicate information about the program to families and Education. In addition, the database’s current structure hampers OSP’s ability to look at historical trends and use them as an effective management tool. We also found incomplete records from past years which will continue to be a problem for future program administrators who need them for effective program implementation and oversight. In addition, because a key variable in the OSP database used in the student selection process was unreliably populated, OSP’s ability to accurately select students based on established priorities for the program may have been compromised. To address issues with the database, we recommended Education have the program administrator improve the program database to provide reasonable assurance that there is sufficiently reliable data regarding the operation of OSP. In late October 2015, Education stated that OSP did not have the capacity or financial resources to update the database and Education could not require them to make the suggested updates. As noted above, the SOAR Reauthorization Act recently passed by the House and introduced in the Senate includes a provision intended to ensure the entity uses internal fiscal and quality controls for OSP. Timely Financial Reporting: Reliable published financial statements, such as those required by the Single Audit Act, are needed to meet program requirements and to ensure federal funds are being used appropriately. The Single Audit Act requires that recipients submit their Single Audit reports to the federal government no later than 9 months after the end of the period being audited. However, the required audit documents for the year ended Sept. 30, 2010 were issued by the program administrator on Jan. 31, 2013—more than 2 years after the end of its 2010 fiscal year. As a result, until these reports were issued Education did not have the financial reports required to properly account for the federal funds expended for OSP. To address these issues we recommended Education explore ways to improve monitoring and oversight of the program administrator. In 2014, Education stated that OSP was current with all required financial audits and provided documentation that, OSP’s 2014 Grant Award Notification imposed a special condition due to OSP’s history of untimely financial reporting. Specifically, the award notification stated that Education could impose sanctions, such as withholding a percentage of or entirely suspending federal awards, if OSP fails to submit a timely financial audit or written explanation. Internal control activities help ensure that actions are taken to address risks, and include a wide range of activities such as approvals, authorizations, and verifications. According to the MOU between Education and the District, the District is responsible for conducting regulatory inspections of participating schools and providing the administrator with the results of those inspections. However, we found that requirements under the MOU were not being met. For example, inspections of participating private schools were often not conducted. For our 2013 report, OSP told us they did not receive any information from the District as a result of any inspections, nor did the administrator follow up with District agencies to inquire about them. Given that the program administrator is responsible for ensuring that participating schools continue to be eligible to receive federal dollars through OSP, notifying the District agencies about inspections is important in ensuring appropriate oversight of participating schools. The MOU includes a responsibility for the program administrator to notify District agencies to conduct these inspections, but because the program administrator is not a signatory to the MOU, OSP officials were not fully aware of this responsibility, they said. As a result, activities crucial to the successful implementation of the program—such as building, zoning, health, and safety inspections—may not be occurring for all participating schools. To address these issues, we recommended Education work with the Mayor of the District of Columbia to revise the MOU that governs OSP implementation to include processes that ensure the results of OSP school inspections are communicated to the program administrator. In late October 2015, Education described to us actions that they had taken to address these issues. For example, Education stated that it ensured that the OSP administrator informed the appropriate District agency of the names of the participating schools for the purpose of conducting required inspections. The SOAR Reauthorization Act recently passed by the House and introduced in the Senate includes provisions that require Education and the District to revise their MOU to, among other things, address some of these issues. In conclusion, OSP has provided low-income families in the District additional choices for educating their children and has likely made private school accessible to some of these children who would not otherwise have had access. However, to help ensure that OSP efficiently and effectively uses federal funds for their intended purpose—that is, to provide increased opportunities to low-income parents to send their children, particularly those attending low-performing schools, to private schools—any entity responsible for operating a school choice program such as OSP needs a strong accountability infrastructure that incorporates the elements of internal control discussed above. Well- designed and executed operational and financial management policies and procedures and the underlying systems help provide reasonable assurance that federal funds are being used for the purposes intended and that funds are safeguarded against loss from error, abuse, and fraud. Education stated that they had addressed some of the issues that we identified, but we were unable to assess the extent to which they had implemented our recommendations in time for this statement. We continue to believe that by fully addressing our nine remaining recommendations for the OSP program, Education would promote more efficient and effective program implementation and accountability over federal funds, regardless of which entity is administering the program. Mr. Chairman Johnson, Ranking Member Carper, and Members of the Committee, this concludes my statement for the record. If you or your staff have any questions about this statement, please contact Jacqueline M. Nowicki at (617) 788-0580. You may also reach me by email at [email protected]. Contact points for our Offices of Congressional Relations and Public Affairs may be found on the last page of this statement. Key contributors to this statement include Nagla’a El-Hodiri (Assistant Director), Jamila Jones Kennedy, and Michelle Loutoo Wilson. In addition, key support was provided by Susan Aschoff, William Colvin, Julianne Cutts, Alexander Galuten, Gretta L. Goodwin, Sheila McCoy, Kimberly McGatlin, Jean McSween, John Mingus, Linda Siegel, Deborah Signer, and Jill Yost. Other contributors to the report on which the statement is based are Hiwotte Amare, Carl Barden, Maria C. Belaval, Edward Bodine, Melinda Cordero, David Chrisinger, Carla Craddock, Kristy Kennedy, John Lopez, Mimi Nguyen, James Rebbe, Ramon Rodriguez, George A. Scott, Aron Szapiro, and Helina Wong. This is a work of the U.S. government and is not subject to copyright protection in the United States. The published product may be reproduced and distributed in its entirety without further permission from GAO. However, because this work may contain copyrighted images or other material, permission from the copyright holder may be necessary if you wish to reproduce this material separately. | School vouchers are one of many school choice programs. Vouchers provide students with public funds to attend private schools and are often featured in discussions on education reform. The District of Columbia’s (District) Opportunity Scholarship Program (OSP) has garnered national attention as the first federally-funded private school voucher program in the United States. Since the program’s inception, Congress has provided more than $180 million for OSP, which has, in turn, provided expanded school choice to low-income students by awarding more than 6,100 scholarships to low-income students in the District. GAO’s 2013 report was in response to a request from the Chairman of the Subcommittee on Financial Services and General Government, Committee on Appropriations, U.S. Senate that GAO review the extent to which OSP was meeting its stated goals and properly managing federal funds. This statement is based on GAO’s 2013 report, and discusses the importance of ensuring effective implementation of OSP and any future similar federal school choice programs and providing sufficient accountability for public funds. Students in the District of Columbia (District) have many choices for K-12 schooling including charter, magnet, and traditional public schools, as well as private schools through the federally funded Opportunity Scholarship Program (OSP). Strong fiscal monitoring and oversight of the various schools that participate in choice programs is critical to ensuring that these programs have effective internal controls that help them meet the goal of providing a quality education to students. Internal control is broadly defined as a process designed to provide reasonable assurance that an organization can achieve its objectives. Five internal control standards—control environment, risk assessment, control activities, information and communication, and monitoring—should be an integral part of a system that managers use to regulate and guide an agency’s operations. During GAO’s 2013 review of OSP, most families GAO spoke with were generally happy with their children’s participation in the program, citing increased safety and security at their children’s OSP schools and improved quality of education. However, GAO found weaknesses in three areas—access to timely and complete program and award information, effective controls to safeguard federal funds, and clearly defined and properly executed roles and responsibilities—that are the result of internal control deficiencies that may limit the effectiveness of OSP and its ability to meet its goal of providing a quality education experience for students in the District. Strong internal controls in these areas would strengthen the OSP and are critical to the success of any similar federally funded school voucher program. In 2013, GAO made 10 recommendations to Education to improve OSP. To date, one recommendation has been closed as implemented. In October 2015, Education told GAO that it had addressed some of the issues that GAO identified in the 2013 report, but GAO was unable to assess the extent to which they had implemented our recommendations in time for this statement. GAO continues to believe that the 2013 recommendations would address weaknesses previously identified in OSP, and would improve the implementation and effectiveness of OSP—and any future federally funded choice programs. |
The State Department advances U.S. national interests through diplomatic relations with 163 countries at 263 posts worldwide. About 5,900 Foreign Service generalists stationed overseas and at State headquarters perform much of this work. To become a Foreign Service officer, an individual must be an American citizen between 20 and 59 years old on the date of the written examination; pass a written and oral examination; be able to obtain security and medical clearances; and be available for worldwide assignment, including in Washington, D.C. State recruits and hires candidates by administering a written and oral exam to individuals interested in becoming Foreign Service officers. The general skills identified by the department and the exams, which test for those skills, were validated during a 1997 to 1998 job analysis conducted by State employees and outside contractors. According to State officials and consultants, the results of the analysis should be valid for 10 years. In addition, State has updated the exam to reflect changing needs. For example, it added a section on management skills to the Foreign Service written exam to identify more candidates with knowledge useful in this career track. Moreover, the Board of Examiners reviews the exam annually, as required by the Foreign Service Act. The written exam tests for knowledge of 36 topics such as world historical events, geography, basic economic principles and statistics, and basic management principles. Applicants registering for the written exam can self-declare foreign languages spoken and must select a career track or cone. There are five from which to choose: management, consular, economic, political, and public diplomacy. The oral exam assesses a candidate for 13 general skills or competencies: written communication, oral communication, information integration and analysis, planning and organizing, judgment, resourcefulness, initiative and leadership, working with others, experience and motivation, composure, objectivity and integrity, cultural adaptability, and quantitative analysis. State does not test for language proficiency as a requirement for employment. Table 1 shows the number of applicants taking and passing the written and oral exams in fiscal years 2001 through 2003. After a candidate passes both the written and oral exams, he or she is placed on a register of eligible hires and will remain there for up to 18 months or until being placed in an initial training, or A-100, class, according to State officials. There are five separate registers, one for each career track or cone, which rank candidates according to their scores on the oral assessment. To increase the chances that candidates on the register who have language skills are hired, a passing score on an optional telephonic assessment of a candidate’s foreign language skills will add points to the individual’s final score. Each register has a minimum cutoff point, which dictates an immediate conditional offer of employment to those candidates who receive that score on their oral exam. The cutoff points for receiving an immediate conditional offer vary according to each register. Registers with more candidates interested in serving in that career track have higher cutoff points. Each A-100 class consists of between 45 and 90 junior Foreign Service officers who will be assigned as entry-level Foreign Service personnel in overseas or domestic posts. During training, junior officers are required to bid on a list of available jobs from which State’s Entry Level Division will assign them to an overseas post. The officers receive language and job- specific training after they receive their assignments. State used critical elements of workforce planning to identify Foreign Service officer staffing and skill gaps within the next 5 to 10 years. The department determined that it needed to hire 623 new Foreign Service generalists above attrition hiring; to accomplish this, in 2001 it developed a 3-year hiring plan. The department has met its hiring targets for fiscal years 2002 and 2003 and is ready to implement 2004 hiring pending congressional funding. However, officials we interviewed projected that it would take up to 10 years to hire and promote enough junior officers to eliminate the shortfalls at the mid level. Almost all officials we interviewed said State has hired and was in the process of filling overseas positions with very talented and capable junior officers with the general skills and competencies required to do their jobs well. State used critical elements of workforce planning, which include (1) setting strategic direction, (2) analyzing the workforce to determine if staffing and skill gaps exist, (3) developing workforce strategies to fill the gaps, and (4) evaluating the strategies and making needed revisions to ensure that strategies work as intended. Involving various staff (from top to bottom) is important across all the critical elements. (See fig. 1.) direction and program goals. State has done this by implementing a strategic plan, which contains 12 strategic goals and 44 performance goals. Overseas posts participate in the planning process by developing mission program plans that link their resource (including staffing) requests to the strategic goals. The overseas posts submit their plans to the regional bureaus in Washington, D.C. After review and prioritization, the regional bureaus incorporate elements from the mission plans into bureau performance plans, based on policy priorities and initiatives that are relevant to the strategic and performance goals. State has developed an overseas staffing model, which it uses to determine staffing requirements and allocate personnel resources worldwide. The model is linked to State’s strategic goals through the mission program planning process. In 2001, State analyzed its workforce to identify staffing and skill gaps in the Foreign Service. State’s overseas staffing model served as the basis for the analysis, which is a key component of workforce planning. The staffing model, which State updates biennially, measures Foreign Service staffing needs overseas by the five career tracks or “cones.” The model places posts into categories by size and the post’s primary function and determines how many positions the post needs for each career track based on certain workload factors. For example, the model determines the number of administrative positions a post requires based on the number of Americans at the post and such factors as the level of service provided to each U.S. government agency at the post, the number of housing units, and the number of visitors. To identify its Foreign Service staffing needs, State compared the number of officers it had in each career track with the total number of positions to be filled, including new overseas positions required according to post workload categories projected by the staffing model. State used these analyses in determining total staffing needs. State’s analysis considered the level of experience needed for the officers by grade level. In 2001, State determined that it needed 623 new Foreign Service generalists to eliminate its mid-level Foreign Service staffing and skills shortfall. This number includes the 386 overseas positions identified by the overseas staffing model, as well as additional staff needed to manage crises; permit employees to step out of assignment rotation to receive training, including language training; allow employees to seamlessly rotate in and out of positions abroad; allow State to meet domestic responsibilities and fully staff the required details to other U.S. government agencies and offices; and provide employees with training in languages, leadership and management, and tradecraft, such as consular duties. This deficit affected all grade levels, with the majority at the mid level, according to State officials. As of March 2003, State had a combined mid-level deficit of 353 officers in all career tracks. The deficits also included domestic positions, such as desk officers, that Foreign Service officers occupy when they are assigned to headquarters. The largest deficit for these positions is in the public diplomacy career track, due mainly to deficits inherited from the U.S. Information Agency, which was folded into the State Department in 1999. Table 2 shows the staffing deficits and surpluses for Foreign Service generalists by career track. In 2001, the Secretary of State launched the Diplomatic Readiness Initiative (DRI), a $197.5 million plan to address the staffing and skills deficits to ensure diplomatic readiness. This initiative calls for hiring an additional 1,158 employees over attrition, including 623 Foreign Service generalists, between fiscal years 2002 and 2004. This hiring is in addition to the 852 staff needed to fill gaps created by attrition. State’s plans call for the agency to continue hiring at least 200 officers above attrition through fiscal year 2005. To accomplish the increased hiring under the DRI, State is implementing an aggressive recruitment program that incorporates its traditional recruitment at campuses and job fairs with new methods, such as an interactive Web site. State’s recruitment program is focused on addressing shortages in specific career tracks. For example, State is targeting business schools and other appropriate professional associations to recruit applicants with management skills. State officials described a few ways in which they evaluate and revise the agency’s planning process. For example, Human Resources personnel said they frequently adjust the staffing model to ensure that its different components, such as the promotion, retirement, and attrition sections, accurately reflect the trends occurring in the Foreign Service. State also monitors its intake plans. A recruitment committee meets biweekly to review and adjust State’s recruitment and training plans. As a result of these reviews, the committee may move hiring from one career track to another or increase training resources to accommodate the workload. The officials said State also conducts quarterly reviews of bureau staffing to take into account changing priorities. Involving employees at all levels and stakeholders in the workforce planning process is important to encourage support for and understanding of its outcomes. State’s workforce planning process involves managers at all levels. For example, all 37 bureaus as well as all overseas posts provide input. Managers at all levels help determine staffing needs in parts of the organization for mission program plans and bureau performance plans that are then factored into the overall plans. Managers at all levels assist in data gathering as well as assessing and validating the overseas staffing model. Senior management, including the Deputy Secretary and the Undersecretary for Management, reviews all bureau performance plans at formal annual hearings. Budget and human resources analysts also review the bureau performance plans. Further, employees at varying levels serve on committees, such as the recruitment committee, involved in workforce planning. Other nonmanagement employees participate in State’s workforce planning efforts, according to Bureau of Human Resources officials. For example, they said officers at all levels participated in the analysis done to validate Foreign Service skill needs, and junior and mid- level officers at the overseas posts provide data that are used to develop the mission program plans. State has met its hiring targets for fiscal years 2002 and 2003. (See table 3.) State has eliminated staffing deficits at the entry level in all five of its career tracks, according to officials in State’s Office of Recruitment Examination and Employment. They said there is a sufficient number of candidates on the list of eligible hires to fill all junior officer positions coming vacant for fiscal year 2004. Since 2002 State has hired at over twice the level of attrition. It plans to hire an additional 209 new Foreign Service generalists in fiscal year 2004 to provide a training “float” and to ensure that additional officers are available for crisis management. According to State, it must sustain the personnel “float” to ensure that training can continue at the appropriate levels. Most of these positions are new junior officers, who are hired at the entry level for their career tracks. State’s plan is to eventually promote the junior officers to the mid level in sufficient numbers to eliminate the current deficit of 353 mid-level officers. State anticipates that the mid-level gap will be eliminated within the next 9 to 10 years, based on its attrition and hiring and provided it receives all DRI allocations through fiscal year 2004. Several officers said elimination of the mid-level gap depended on State’s ability to promote the junior officers. For example, they said that if State continues to hire large numbers of junior officers, eventually there would be a surplus of officers eligible for promotion. If all of these officers were not promoted quickly, they might leave the Foreign Service. In addition, a few officials stated that elimination of the mid-level gap depended on State’s ability to continue hiring junior officers at the current rate. They feared a “feast or famine” situation in which increased hiring would be followed by years of no hiring. State officials believe that, due to the current deficit at the mid level, it will be able to provide adequate promotion opportunities to satisfy the career expectations of recently hired junior officers as it eliminates the mid-level deficit. They also believe that to avoid the feast or famine situation it will be necessary to protect the personnel float so that additional officers continue to be available in a crisis. Almost all officials we interviewed said State identified and hired very talented and capable junior officers with the general skills and competencies, such as written and oral communication, required to do their jobs well, noting that the examination process was identifying junior officers with the needed skills. Junior officers said the oral exam effectively measured the necessary general skills that they use on their jobs. Many said the group exercise administered during the oral assessment was a potent tool for assessing a candidate’s ability to lead and work with others. The current version of the oral assessment allows test- takers to present relevant information about previous work experience and skills that examiners would consider important. Junior officers we interviewed who had taken the oral exam twice—first when it did not allow candidates to present information about their background and skills and a second time when it did—said the latter version of the exam was an improvement in the oral assessment. Opinions about the effectiveness of the written exam to measure the same aptitude were mixed. Junior officers said the section of the written exam that focused on biographical, or personal, data did not identify skills needed to perform effectively. However, some junior officers said the written exam worked effectively as a knowledge screen for candidates to ensure that those hired had the broad intellectual skills needed for the job. State is filling overseas positions with new officers who have the general skills that State requires, according to headquarters and overseas officials with whom we spoke. Officials said that overall, the assignment process was accomplishing its goals and that State was assigning junior officers with the appropriate skills and eliminating junior officer vacancies. Several overseas U.S. officials in Mexico City and Moscow cited interpersonal skills as particularly important and stated that the junior officers assigned to their posts had those skills. For example, one official said the number of junior officers entering the Foreign Service with excellent interpersonal skills had increased dramatically in the past 3 or 4 years. An official at a small hardship post in Africa stated that flexibility and the ability to handle a variety of tasks were critical skills and that State carefully selected the junior officers assigned to his post. Several officers in Mexico City and Moscow commented on State’s success at filling positions in general and noted that there were no vacant positions in their sections. Junior officers generally spoke favorably about how State assigned them to their posts. They said they were pleased with the process because it allowed them to choose their top 25 jobs from an available list, and several junior officers told us they were assigned to one of their top locations. Some junior officers stated that although State did not necessarily take their previous work experience into account when assigning them to a post, they sometimes had opportunities to use their experience once they arrived overseas. For example, several junior officers said their legal backgrounds helped them perform their consular duties. Another junior officer commented that his past Army leadership and experience with the press directly related to his public diplomacy position. The career development officers who assign junior officers to overseas posts stated that they are familiar with junior officers’ background and work experience and may consider them when they make assignments. However, they explained that the ultimate purpose of the assignment process to meet the needs of the Foreign Service and to prepare junior officers for tenure. To be tenured, the officers have to reach required levels of proficiency in foreign languages and demonstrate core competencies that indicate their ability to have a successful career in the Foreign Service. Thus, these criteria guide junior officers’ assignments. State still faces challenges in recruiting, hiring, assigning, and training officers who are proficient in hard-to-learn languages. State officials at headquarters and overseas have stated that the department does not have enough Foreign Service officers with hard language skills. Three recent GAO reports also cited language skill gaps that adversely affected department operations. State has acknowledged that it needs more staff with skills in certain hard languages and, in addition to its efforts to ensure adequate training in foreign languages, has begun an effort to recruit officers with hard language skills. However, State does not have data that link its outreach efforts to the number of people hired with skills in hard languages. In addition to the language issue, State officials and some junior officers expressed other concerns, including the junior officers’ public diplomacy skills, supervision, and on-the-job training requirements, as well as issues related to rotational positions. Overseas post officials and several new officers told us that some junior officers who are assigned to hard language posts lack sufficient training in these languages. For example, in 2002, junior officers in Moscow sent a cable to State stating that they had not received sufficient language training to do their jobs effectively, which was weakening the post’s diplomatic readiness. The junior officers, as well as most senior officials at this post, said that many of the junior officers have difficulty participating in high- level political meetings—which significantly impedes the political section’s work—and interviewing visa applicants because they lack language proficiency. The latter is of particular concern as the department moves toward heavier reliance on interviewing applicants as a basis for determining whether they will receive a visa. While State classified the junior officer positions as requiring level-2 proficiency in speaking, post management and junior officers said they need a level-3 proficiency to perform their jobs effectively. Our past work has also shown gaps in the numbers of officers with proficiency in certain hard languages. In September 2003, we reported that about 21 percent of the public diplomacy officers posted overseas in language designated positions have not attained the level of language speaking proficiency required for their positions, hampering their ability to engage with foreign publics. In January 2002 we reported that State had not filled all of its positions requiring foreign language skills, and we noted that lack of staff with foreign language skills had weakened the fight against international terrorism and resulted in less effective representation of U.S. interest overseas. We cited similar shortages during our review of staffing at certain hard-to-fill posts. We reported that some new junior officers did not meet the minimum language proficiency requirements of the positions to which they were assigned in several countries of strategic importance to the United States, including China, Saudi Arabia, and Ukraine. State has acknowledged that it has gaps in the number of officers proficient in certain hard languages, but its workforce planning does not identify the number of officers to hire with those skills. The department has further acknowledged that languages are integral to its work and important to its mission. However, because its officers are required to do much more than use a foreign language, State’s philosophy is to hire officers with a wide range of skills it believes are predictors of success in the Foreign Service. It does not hire for skills that it can train for, such as languages. For example, State officials have told us that it is easier to train a person with good diplomatic skills to speak a language than it is to teach a linguist to be a good diplomat. Therefore, State officials do not believe the solution to the language skill gap is recruiting aimed only at filling this gap. According to State, increased staffing under the DRI will solve the problem. Nevertheless, the department has implemented efforts to identify candidates for the Foreign Service with hard language skills. State has begun an effort to recruit more speakers of difficult languages. Since the DRI in 2001, the department has extended its outreach efforts by targeting professional associations, such as the American Council on the Teaching of Foreign Languages and the Modern Language Association, and specific universities and colleges that produce graduates with ability in hard languages. While State does track the language skills of its new hires, it has not established numerical targets for the number of individuals with hard language ability it aims to hire. Nor could it provide current or historical data showing the number of individuals it hired as a direct result of targeted outreach efforts at these professional associations and schools. While State has not set targets, our analysis of data from State’s Foreign Service Institute (FSI) on the number of junior officers who took a language proficiency test after they were hired indicates that the number of Foreign Service officers with ability in hard languages has increased since 2001, with State hiring 51 Foreign Service generalists with these skills in fiscal year 2001, 74 in 2002, and 115 in 2003. While these figures include new hires with a broad range of hard language skills, a subset of these hires speaks hard languages at a more advanced skill level. New hires in this subgroup have speaking skills ranging from a minimum level of 2, or what State refers to as “limited working proficiency,” to a level of 5—equivalent to skills a native speaker would possess. The number of these officers has also increased from fiscal year 2001 to 2003. State hired 31, 43, and 78 Foreign Service generalists who spoke languages at a level of working proficiency or higher from 2001 through 2003, respectively. (See fig. 2.) State could not provide data to demonstrate how many junior officers with hard language skills were hired as a result of targeted recruitment. Thus it is unclear whether the increase is the result of expanded outreach or a steep increase in hiring of junior officers. According to our analysis, the number of new Foreign Service generalists with hard language ability as a percentage of the total population of new hires has fluctuated since 2001 when it was 22 percent, compared with 16 percent and 25 percent in 2002 and 2003, respectively. (See fig. 3.) In addition to outreach efforts, State uses a telephonic assessment—the Board of Examiners (BEX) test—to provide candidates with foreign language skills a competitive advantage in the hiring process, according to State officials. Candidates who have passed the written and oral exams can take the telephone test in their language of choice. If they pass, they are assigned additional points to their oral assessment score. The purpose of this tool is to raise the candidates’ oral assessment scores sufficiently for them to receive an immediate offer of employment. However, our analysis of 102 individuals who passed the telephonic assessment in Arabic, Chinese, Japanese, Korean, or Russian in fiscal year 2003 shows that, as of October 2003, only 32 received and accepted offers from the Foreign Service and were placed in A-100 training. Twenty-seven individuals are awaiting security or medical clearances; 6 are no longer junior officer candidates because they failed their security or medical clearances, withdrew their applications, or their candidate eligibility expired; and 37 remain on the Foreign Service register. The 37 individuals in the latter category scored well enough to pass the oral assessment; however, the additional points they received from passing the BEX assessment were not sufficient for them to receive a job offer. Moreover, the State Department does not provide any additional points for BEX testees with hard languages versus other languages. However, State officials said the department is revising this system. Although State is trying to increase the number of officers with hard language skills, it does not necessarily assign new hires to posts where they can use those skills during their first two tours. We analyzed the assignment of 31 new officers with hard language ability to determine if during their first two tours they were assigned to a post where they could use their language skills. According to our analysis, 45 percent of new hires with hard language ability were deployed to a post where they could use their language skills during their first two tours. For the 55 percent of junior officers who did not use their hard language skills during their first two tours, 20 percent were assigned to a post where they could use other foreign language skills they had acquired and 35 percent were assigned to posts that required foreign language training. (See fig. 4.) It is even less likely that officers will be assigned to hard language posts during their first tour. Our analysis of first tour officers with hard language ability shows that 24 percent of these officers were immediately deployed in fiscal year 2001 to posts where they could use those skills and 32 percent in fiscal year 2002 and 28 percent in fiscal year 2003. The vast majority of the new hires were immediately deployed to posts where other foreign languages were spoken or to English-speaking posts. The ability to speak a difficult language is one of many factors influencing a junior officer’s assignment to an overseas post. As a practical matter, there may not be openings at particular hard-language posts at the same time junior officers are being assigned to their first and second tours. The requirements for tenure, which include a variety of regions and jobs for junior officers to prepare them for careers as Foreign Service generalists, are also a major consideration. The emphasis on career development and achieving tenure sometimes limits the department’s ability to train and deploy a sufficient number of officers with the needed training in hard languages to do their jobs, according to several headquarters officials. For example, officials in one of State’s geographic bureaus stated that some hard languages require a level-2 speaking proficiency, for which officers may get from 24 to 26 weeks of language training. However, if junior officers spend a longer period of time in training, they could be at a disadvantage for tenure at the first year of eligibility because they would have a narrower range of on-the-job experiences on which tenure decisions are based. Security requirements are also a consideration when assigning junior officers overseas. According to State officials, junior officers with hard language skills are sometimes precluded from serving at a post where they can use their hard language skills for diplomatic security reasons, such as having an immediate family member or close ties with individuals in a country. In fiscal year 2003, 8 percent, or 38 of the 468 new Foreign Service generalists State hired, were precluded from serving at hard language posts for security reasons. However, because of Privacy Act restrictions and some unavailable data, State could only provide partial information about the foreign language skills of these new hires. As a result, we are unable to determine how many of these preclusions were also hard-language speakers. Our analysis was limited to an officer’s first two tours. State officials noted that when a new hire possesses strong language skills already, the employee and department may consciously use the first two tours to develop additional skills rather than existing ones. Skills brought into the Foreign Service are likely to be used later in a career if not immediately, according to the State officials. State has been exploring options to provide additional training in hard languages for officers. State officials said their efforts to provide more language training while officers are in Washington at the FSI are affected by a tax regulation that limits the time officers can spend in temporary duty status to one year before they have to pay federal taxes on their per diem. To alleviate this situation, State is developing pilot programs to provide some officers with additional training in hard languages by sending them to training overseas. In one such pilot, an officer would spend a year studying Arabic at the FSI field school in Tunis prior to being sent to an Arabic- speaking post, according to an official of the Bureau of Near Eastern Affairs. Under another pilot, junior officers assigned to Moscow are taking an immersion course in Russia following their initial language training in Washington. In addition to the hard-language issues, some overseas officials expressed concern about the lack of on-the-job training opportunities for junior public diplomacy officers, citing overseas training as the single most important factor in building these officers’ skills and positioning them to succeed in public diplomacy. The FSI’s training did not include grant writing, program management, and basic supervisory skills, they said, and was not a viable substitute for overseas training. Moreover, about 58 percent of the officers responding to a GAO survey reported that the amount of time available for public diplomacy training was inadequate. Furthermore, State’s Inspector General reported that public affairs officers in Africa were often first-tour or entry-level officers with no prior public diplomacy experience and as such, their mistakes in dealing with the media have embarrassed the post. First-tour officers have also displayed poor judgment by not seeking advice from experienced local staff, the IG said. FSI has revised its public diplomacy training to address some of these issues. As of September 2003, public diplomacy officers are receiving from 9 to 19 weeks of training (depending upon the duties of their assignment) before they are sent to a post. Previously they received 3 weeks of training. State officials said the success of this effort depends on State’s ability to hire sufficient staff for a training float that would allow officers time to take the training. Several post officials said State’s practice of filling positions traditionally held by mid-level officers with junior officers and assigning inexperienced junior officers to small posts where they would have increased responsibilities worked well. However, others expressed concern because junior officers in these positions require increased supervision and on-the- job training. State has assigned a number of junior officers—new DRI hires—to positions formerly held by mid-level officers to fill unmet needs at that level. For fiscal years 2002 to 2003, 96 mid-level positions were downgraded to junior-level positions after consultations with posts, regional bureaus, and the Bureau of Human Resources. Career development officers explained that such positions have been restructured so that with more supervision and revised portfolios, junior officers should be able to do the work. Smaller posts often have very few American staff, and junior officers are frequently responsible for work in more than one career track. For example, a junior officer with whom we spoke at a small post in Africa was responsible for the political and economic sections and served as backup for the consular section. According to some officials, junior officers assigned to some smaller posts have been very qualified and have helped alleviate the burden of staffing at hardship posts. Several officials with whom we spoke at three embassies reported positive experiences with junior officers in positions that required more responsibility. Moreover, junior officers serving at smaller hardship posts can gain a multitude of Foreign Service experiences not available to other officers. Some post officials, however, noted that such assignments require more supervision and on-the-job training. Supervision is a particular issue at smaller posts where there may be few or no mid-level officers. According to several overseas officials, this situation creates a burden for the senior- level officers who have to mentor and provide on-the-job training as well as serve as backup for other jobs at the mission and manage the mission. For example, an official at one small African post said a mid-level supervisor would normally be responsible for training a junior officer to write cables. Because there are no mid-level officers to provide the training, more senior officials must provide it, leaving them less time to manage the embassy. One overseas embassy official told us a junior officer was having difficulty serving in a mid-level position at a small constituent post where the officer had very little training and supervision. Officials explained that while the position had been designated as a junior officer position, it still required an individual with significant related experience. Unfortunately, the junior officer assigned to this position did not have the requisite work experience or knowledge. Another official said that placing junior officers in positions formerly held by mid-level officers was not achieving the same results as hiring people with directly related management experience. Furthermore, State’s Inspector General reported that assigning inexperienced junior officers to mid-level consular positions in African posts with high levels of visa fraud was a serious problem. A Bureau of Human Resources official stated that this problem should ease as positions are filled under the DRI. In the meantime, according to State officials, the bureau tries to fill vacancies in mid-level consular positions with at least a second-tour officer. State established “rotational” positions that allow some junior officers to serve one year in one career track and another year in a different career track—for example, consular and public diplomacy. Several officials in Mexico City and Moscow said that the rotations were working well at their embassy and the length of the rotations was adequate for the junior officers to learn their jobs. Some officials said rotational assignments could benefit junior officers and the Foreign Service by increasing officers’ knowledge of how an overseas post operates. One official noted that working in different sections of the embassy becomes harder as an officer is promoted, so it is extremely important to have this experience at the junior level. Other officials, however, said that rotational assignments were not serving the posts’ needs. For example, one official stated that a year is not enough time for a person to learn the tasks of the job in the consular section and, as a result, local national employees carry much of the responsibility in the section. An overseas official stated that a 1-year consular rotation might not allow the junior officer to get the same breadth of experience as junior officers who spend 2 years in the consular section. In addition, State’s Inspector General reported that many consular supervisors said junior officers are not assigned to consular work long enough to acquire the skills to adjudicate visas under new performance requirements to improve U.S. border security. Rotational positions also increase managers’ training responsibilities. As one post official described it, managers have to “start from scratch” each time the position turns over. Some officials said the rotational program was hindering productivity in the Foreign Service because junior officers rotate soon after they master their current position. These issues led the Inspector General to recommend discontinuing the practice of assigning junior officers to 1-year rotational positions in consular sections. The Bureau of Consular Affairs and the Bureau of Human Resources have decided to continue the rotational program, according to a Bureau of Human Resources official. The official stated that the bureau continues to believe the program is beneficial and said that there are safeguards in place to address the Inspector General’s concerns. For example, the official stated that the two bureaus have reviewed all of the consular positions and have identified those that should not be filled as part of a rotation by first- tour junior officers. Critical gaps in the number and skills of Foreign Service staff endangered State’s ability to carry out U.S. foreign policy. The department has addressed the numeric shortfall through its Diplomatic Readiness Initiative, which has been successful in expanding the candidate pool for Foreign Service positions. State has been able to hire junior officers with the general skills it requires and to fill overseas positions. However, State continues to face gaps in personnel who are proficient in speaking languages considered hard to learn. To address these gaps, State has undertaken outreach efforts to attract speakers with proficiency in certain hard languages, extended the time junior officers spend in training, established pilot programs to develop a cadre of speakers of hard languages, and assigned many junior officers with skills in hard languages to countries where they can use those skills. However, it is not clear to what extent these efforts will help eliminate the gaps, and State has little data to demonstrate their success. Furthermore, State’s process of assigning junior officers, with its emphasis on achieving tenure, may hinder the department’s ability to take advantage of the hard language skills that some of its officers have. This report recommends that the Secretary of State collect and maintain data on the effectiveness of State’s efforts to address language gaps. State should use these data to, among other things, report on filling such gaps through its outreach efforts to recruit more junior officers with hard language skills and its pilot programs to increase training in hard-to-learn languages for junior officers. State should also explore additional opportunities to maximize assignment of junior officers who have skills in these languages to overseas posts where they can use these languages. The State Department provided written comments on a draft of this report. These comments and our response are reprinted in appendix II. State also provided technical comments, which we have incorporated into the report as appropriate. The State Department generally agreed with the report’s findings and observations, but did not completely address our recommendations. State commented that it is already addressing our recommendation that it maintain data on its efforts to recruit speakers of hard-to-learn languages. State said that the department collects and maintains extensive data to monitor its recruitment efforts. However, State has not used the data to determine whether its outreach efforts for increasing the number of hard- language speakers are effective or have helped decrease the gap in certain languages. State further said that it is confident that its overall hiring plan will address the language gaps over the next several years, but the plan does not provide specific milestones for achieving this goal. We believe State needs to more specifically link its efforts to its hard language needs. We have modified our recommendation to make this clearer. State did not completely address the second part of our recommendation, but stated that our approach, which focused on six specific languages, was too narrow. We disagree with State’s assessment. We focused on the six languages because of their strategic importance and findings from previous GAO reports that lack of staff with skills in some of these languages has hindered diplomatic readiness. In its comments, State also overstated a number of our findings, observations, and conclusions. We are sending copies of this report to appropriate congressional committees. We are also sending copies of this report to the Secretary of State. Copies will be made available to others upon request. In addition, this report will be made available at no charge on the GAO Web site at http://www.gao.gov. If you or your staff have any questions about this report, please contact me on (202) 512-4128. Other GAO contacts and staff acknowledgments are listed in appendix III. To report on State’s processes for determining the number and skills of junior officers it needs during the next 5 to 10 years, we examined workforce planning documents and data, including the overseas staffing model. We also interviewed officials from State’s Resource Planning and Compensation Division and Office of Resource Management and Organizational Analysis, Bureau of Human Resources. We reviewed and analyzed data from the Office of Resource Management and Organizational Analysis on projected promotions and hiring for fiscal years 2002 through 2007 and the current deficit and surplus of Foreign Service generalists according to the five career tracks and grade levels. We also interviewed officials from all six of State’s regional bureaus, the Bureau of Consular Affairs, the Foreign Service Institute (FSI), and the U.S. embassies in Mexico City and Moscow. We selected these embassies because they contained the largest number of junior officers. During our fieldwork, we conducted interviews with senior level, mid-level, and junior officers. To determine whether State is hiring and assigning officers with the general skills to meet the needs of overseas posts, we reviewed information related to State’s recruiting program, including Diplomatic Readiness recruitment goals and hiring data from 2001 through 2003 and projected hiring through 2007. We interviewed officials from the Office of Recruitment, Examination, and Employment; the Office of Career Development; the Diplomatic Readiness Task Force; all six of State’s regional bureaus; and the Bureau of Consular Affairs. In addition, we interviewed one of the consultants who helped perform State’s 1997 job analysis—-a comprehensive revalidation of the skills tested by the Foreign Service written and oral exams. We also reviewed the raw data in the form of survey responses by Foreign Service generalists about the skills that are most critical to their work, but we did not evaluate the validity of State’s analysis. We interviewed officials, including junior officers, at the U.S. embassies in Mexico City and Moscow and supplemented our fieldwork with telephone interviews of Foreign Service officers at U.S. embassies in Angola, Djibouti, Burkina Faso, Sierra Leone, and South Africa. We selected the first four countries to obtain the perspective of officers at small or hard-to-fill posts. We selected South Africa at the recommendation of a Bureau of Human Resources official. We also conducted in-person interviews with junior officers at headquarters. To examine the challenges State still needs to address, especially regarding officers with hard-to-learn language skills, we solicited data from three different State Department databases. We interviewed State officials who were authorities on each of the three databases and determined that the data obtained were reliable in accordance with generally accepted government auditing standards. To determine the number of officers with hard language ability hired in 2001, 2002, and 2003, we developed the “New Hires Database.” To create this database we used information drawn from FSI’s Student Training Management System (STMS) database and the Bureau of Human Resources’ Global Employment Management System (GEMS) database. The New Hires Database contains information on the number of junior officers with hard language ability hired in 2001, 2002, and 2003. It includes their levels of proficiency—as rated by the FSI’s School of Language Studies—in those hard languages, additional foreign languages spoken and their corresponding FSI rating of proficiency, A- 100 class information, and first—and in some cases second—tour assignment information. In our analysis of new hires with hard language ability, we included those officers who, at a minimum, possessed at least rudimentary skills in speaking or reading difficult languages, indicated by a score of 1 from FSI on these two dimensions (the FSI scale ranges from a score of 0 to a score of 5, with 5 indicating proficiency at the level of a native speaker). To determine the number of new hires with working proficiency, we considered only those officers with a level 2 or higher proficiency in both speaking and reading and writing. To determine the percentage of new hires with hard language ability in the population of new hires in fiscal years 2001 through 2003, we took the number of officers with hard language ability from the New Hires Database in fiscal years 2001 through 2003 and divided that number by the total number of Foreign Service generalists hired during those years. To report the status of candidacy for individuals who had taken and passed the Board of Examiners Telephonic Assessment (BEX) test in fiscal year 2003, we developed the BEX Database. Categories in the table include: number assigned to A-100, pending clearance; name on foreign service register; no longer a junior officer candidate; and total number of BEX Passers. To create this database we used information from the Foreign Service Institute (FSI) School of Language Study’s Student Training Management System (STMS) database and the Bureau of Human Resources’ Global Employment Management System (GEMS) and Automated Foreign Service Examination and Registry System (AFSERS) database. The BEX Database contains individuals who passed the Foreign Service’s telephonic assessment in hard-to-learn languages and, where applicable, their A-100 assignment information, and proficiency scores according to FSI in hard languages as well as additional languages they bring to the service. Names of individuals in the BEX Database for whom there was no A-100 information were resubmitted to the State Department to obtain their alternate outcomes. These individuals and their alternate outcomes were subsequently recorded on a separate spreadsheet. The alternate outcomes of these individuals were primarily derived from the AFSERS database and the following categories: expiration of eligibility dates, withdrawals, terminations, status on the Foreign Service Register, status of medical and security clearances, and employment start dates. To examine assignment location for new hires with hard language ability in fiscal year 2001, we used the New Hires Database to create three distinct categories of junior officers for whom we had information on two tours: (1) posted where hard language skills could be used, (2) posted where other foreign language skills were used, and (3) posted where other foreign language skills had to be acquired. To calculate the percentage of junior officers in each of the three categories, we divided the category total by the number of new hires with hard language ability for whom information was available about two tours. The total number for each category was defined as the number of those officers being sent to hard language posts who had at least basic speaking and writing skills in that language for the first category. For the second category, we used the number of officers with hard language skills assigned to a post where they could use other foreign language skills they brought to the service, and for the third category we used the number of officers assigned to posts during both their first and second tours where they did not have the relevant foreign language skills. We also used the New Hires Database to determine the number of junior officers with hard language ability assigned to hard language posts during their first tour for fiscal years 2001 through 2003. For each fiscal year, we divided the number of officers hired in that fiscal year and assigned to hard language posts during their first tour by the total number of officers hired in that fiscal year. In addition, we met with officials from all six of State’s regional bureaus and the Bureau of Consular Affairs; officials and junior officers at the U.S. embassies in Moscow and Mexico City, as well as junior officers at headquarters; and officials from the Office of Recruitment, Examination, and Employment, the Office of Career Development, and the Diplomatic Readiness Task Force. We reviewed State Department recruitment data from the Diplomatic Readiness Task Force on efforts to recruit Foreign Service officers with hard language skills from the following targeted language schools: Brigham Young University, Columbia University-– Columbia College, Cornell University, Harvard University, Indiana University--Bloomington, Middlebury College, Ohio State University, University of California Los Angeles, University of Chicago, University of Michigan-–Ann Arbor, University of Washington, University of Wisconsin-– Madison, and Yale University. These data showed the number of individuals from each of these universities who had passed the Foreign Service written exam, but did not indicate whether these individuals possessed any hard language skills or if they were in fact even hired by the State Department. We conducted our work from December 2002 through August 2003 in accordance with generally accepted government auditing standards. The following are GAO’s comments on the Department of State’s letter dated November 11, 2003. 1. State overstated our conclusions. The department wrote that “GAO found that process is conducted using a skills assessment that is valid, a robust workforce planning process that determines hiring needs, a dynamic recruiting program that targets needed skills, an examination process that accurately evaluates competency in those skills...” While we described State’s workforce planning and staffing processes, we did not validate its staffing model or its skills assessment. Furthermore, we did not describe the workforce planning process as “robust” and the recruiting program as “dynamic.” We reported that State used elements of workforce planning to determine its Foreign Service staffing needs, junior officers stated that the exam tested for the skills they used on the job, and State officials believed the department was hiring and assigning junior officers overseas with the skills they needed to do the job. 2. While we reported on State’s processes for recruiting, hiring, and assigning new staff, we did not conclude that these processes are the best way to meet mission requirements. There may be other ways to accomplish State’s mission, but an evaluation of alternatives was beyond the scope of this report. 3. We did not conclude that the department is successfully meeting its staffing needs through the Diplomatic Readiness Initiative. We concluded that State had met its hiring targets for Foreign Service generalists in fiscal years 2002 and 2003. Also, State officials told us that it would take 9 to 10 years to eliminate its mid-level staffing gap. We did not assess whether this gap could be closed more quickly. 4. State mischaracterized what we wrote and thus did not address the second part of our recommendation. State further commented that our approach, which focused on six specific languages, was too narrow and implied that we believe increasing the number of speakers of selected languages will address diplomatic readiness needs. We focused on the six languages because of their strategic importance and findings from previous GAO reports that lack of staff proficient in these languages hinders diplomatic readiness. Moreover, senior officials at the U.S. embassy in Russia told us that some junior officers lacked sufficient Russian skills to effectively do their jobs. 5. We are not suggesting that State supplant training as its main avenue for achieving its language goals as State’s comments infer. However, we believe that State should explore as many avenues as possible to eliminate its gaps in officers with proficiency in hard-to-learn languages. 6. The intent of our analysis of the assignment of junior officers with preexisting hard language skills was to show the extent to which those officers were assigned to posts where they could use those skills. We had no basis to conclude that the results were positive as State commented. State also commented that we did not review officers’ assignments beyond their first two tours. We did not go beyond the first two tours because the scope of our review was the recruitment and assignment of junior officers. However, we have incorporated the department’s statements that many skills officers bring to the Foreign Service will be used throughout their careers, not just in the first two tours. 7. State wrote that the department is making considerable progress in recruiting for language skills, along with all required skills. However, as we have previously noted, State has not set numerical targets for the number of individuals with hard language ability it aims to hire. Moreover, the department does not maintain data to demonstrate how many junior officers with hard language skills were hired as a direct result of its outreach efforts. 8. State commented that we understated the contribution that rotational assignments make toward accomplishing mission goals. We disagree. The report provides several examples of the benefits of the rotations. However, a number of officials raised the issue of increased supervisory requirements as a concern. 9. State commented that it is already addressing the first part of our recommendation that it maintain data on its efforts to recruit speakers of hard-to-learn languages. As we noted in the report, State has not used the data to determine whether its outreach efforts for increasing the number of hard-language speakers are effective or have helped decrease the gap in certain languages. In addition to the persons named above, Kaya Taylor, Julia Roberts, Martin de Alteriis, Monica Wolford, and Janey Cohen made key contributions to this report. The General Accounting Office, the audit, evaluation and investigative arm of Congress, exists to support Congress in meeting its constitutional responsibilities and to help improve the performance and accountability of the federal government for the American people. GAO examines the use of public funds; evaluates federal programs and policies; and provides analyses, recommendations, and other assistance to help Congress make informed oversight, policy, and funding decisions. GAO’s commitment to good government is reflected in its core values of accountability, integrity, and reliability. The fastest and easiest way to obtain copies of GAO documents at no cost is through the Internet. GAO’s Web site (www.gao.gov) contains abstracts and full- text files of current reports and testimony and an expanding archive of older products. The Web site features a search engine to help you locate documents using key words and phrases. You can print these documents in their entirety, including charts and other graphics. Each day, GAO issues a list of newly released reports, testimony, and correspondence. GAO posts this list, known as “Today’s Reports,” on its Web site daily. The list contains links to the full-text document files. To have GAO e-mail this list to you every afternoon, go to www.gao.gov and select “Subscribe to e-mail alerts” under the “Order GAO Products” heading. | During the 1990s, the State Department lost more people than it hired. The resultant shortfalls in the number and skills of Foreign Service officers have endangered U.S. diplomatic readiness. Furthermore, recent studies, including several by GAO, have questioned whether State's recruitment system identifies people with the appropriate skills and whether State is assigning officers with specialized skills, such as the ability to speak a difficult language, to positions where they can be utilized. GAO was asked to review State's processes for determining the number and skills of junior officers the department needs and to determine whether it is hiring and assigning officers with the general skills to carry out foreign policy overseas. GAO was also asked to examine the challenges State still needs to address, especially regarding officers' foreign language skills. State used critical elements of workforce planning to identify the number of junior officers it needs to hire within the next 5 to 10 years. State implemented key elements of workforce planning, including setting strategic direction and goals, identifying gaps in its workforce, and developing strategies to address these gaps. State's analysis showed that it had a deficit of 386 positions, mainly at the mid level, and in 2001, State launched a $197 million plan to address the gaps. State has met its 2002 to 2003 hiring targets for junior officers and is filling overseas positions with junior officers with the general skills and competencies required to do their job well. However, State officials said it will take up to 10 years to hire and promote junior officers in sufficient numbers to significantly decrease the shortage of midlevel officers. While State is able to fill overseas positions with junior officers who have the necessary general skills, the department continues to face challenges filling the gaps in staff with proficiency in certain hard-to-learn languages, such as Arabic and Chinese. State has implemented a plan to target applicants who speak these difficult languages. However, this plan does not include numeric goals, and State has collected limited data to assess the effectiveness of its efforts. Other challenges include new officers' public diplomacy skills and training in this area, increased supervisory and on-the job requirements when State assigns junior officers to positions above their experience level, and the impact of rotational assignments on junior officers' performance and managers' time. |
The Air Force is developing the F/A-22 aircraft to replace its fleet of F-15 air superiority aircraft. The F/A-22 is designed to be superior to the F-15 by being capable of flying at higher speeds for longer distances, less detectable, and able to provide the pilot with substantially improved awareness of the surrounding situation. The National Defense Authorization Act for Fiscal Year 1998 requires us to annually assess the F/A-22 development program and determine whether the program is meeting key performance, schedule, and cost goals. We have issued six of these annual reports to Congress. We have also reported on F/A-22 production program costs over the last 3 years. Most recently, we reported on F/A-22 production and development in February and March 2003, respectively. Following a history of increasing cost estimates to complete the development phase of the F/A-22 program, the National Defense Authorization Act for Fiscal Year 1998 established a cost limitation for both the development and production programs. Subsequently, the National Defense Authorization Act for Fiscal Year 2002 eliminated the cost limitation for the development program but left the cost limit for production in place. The production program is now limited to $36.8 billion. The current cost estimate of the development program is $21.9 billion. In the past several years, we have reported on a range of performance issues that have arisen during the development of the F/A-22. F/A-22 estimated performance in the areas of supercruise, acceleration, maneuverability, radar observability, combat radius, and radar range in searching targets have so far been met or exceeded. However, problems have surfaced related to some overheating concerns during high-speed flight-testing, reliability, avionics that perform radar, communication, navigation, identification and electronic warfare functions as well as excess movement of the vertical tails. Modifications are being made to some test aircraft to address some of these problems. For now, however, testing in some areas is restricted. In 2001, we reported on continuing increases in aircraft weight and that more frequent maintenance than planned on the aircraft was being required. We also reported on structural inadequacies in the aft (rear) fuselage and on problems with the separation of some materials within the horizontal tail section and cracking of the clear section of the canopy. In 2002, we again reported that the F/A-22’s performance could be affected by increased aircraft weight and maintenance needs as well as a potential problem with “buffeting”, or excessive movement, of the aircraft’s vertical tails. We also continued to report on problems with the separation of materials within the horizontal tail section and cracking of the clear section of the canopy. We reported last month that the F/A-22 developmental program did not meet key performance goals established for fiscal year 2002 and continues to confront numerous technical challenges, specifically: Avionics instability: Software instability has hampered efforts to integrate advanced avionics capabilities into the F/A-22 system. Avionics control and integrated airborne electronics and sensors are designed to provide an increased awareness of the situation around the pilot. The Air Force told us avionics have failed or shut down during numerous tests of F/A-22 aircraft due to software problems. The shutdowns have occurred when the pilot attempts to use the radar, communication, navigation, identification, and electronic warfare systems concurrently. Although the plane can still be flown after the avionics have failed, the pilot is unable to successfully demonstrate the performance of the avionics. Therefore, the Air Force has had to extend the test program schedule. The Air Force has recognized that the avionics problems pose a high technical risk to the F/A-22 program, and in June 2002 the Air Force convened a special team to address the problem. According to the team, the unpredictable nature of the shutdowns was not surprising considering the complexity of the avionics system. The team recommended that the software be stabilized in the laboratory before releasing it to flight-testing. The team further recommended conducting a stress test on the software system architecture to reduce problems and ensure it is operating properly. The Air Force implemented these recommendations. Further, the Air Force extended the avionics schedule to accommodate avionics stability testing and it now plans to complete avionics testing in the first quarter of 2005. However, Air Force officials stated they do not yet understand the problems associated with the instability of the avionics software well enough to predict when they will be able to resolve this problem. Vertical fin buffeting: Under some circumstances, the F/A-22 experiences violent movement, or buffeting, of the vertical fins in the tail section of the aircraft. Buffeting occurs as air, moving first over the body and the wings of the aircraft, places unequal pressures on the vertical fins and rudders. The buffeting problem has restricted the testing of aerial maneuvers of the aircraft. In addition, unless the violent movement is resolved or the fins strengthened, the fins will break over time because the pressures experienced exceed the strength limits of the fins. This could have an impact on the expected structural life of the aircraft. Lockheed Martin has developed several modifications to strengthen the vertical fins. Overheating concerns: Overheating in the rear portions of the aircraft has significantly restricted the duration of high-speed flight-testing. As the F/A- 22 flies, heat builds up inside several areas in the rear of the aircraft. Continued exposure to high temperatures would weaken these areas. For example, a portion of the airframe that sits between the engines’ exhausts experiences the highest temperatures. This intense heat could weaken or damage the airframe. To prevent this heat buildup during flight-testing, the aircraft is restricted to flying just over 500 miles per hour, about the same speed as a modern jet liner, and significantly below the supercruise requirement. Currently, the F/A-22 flies with temperature sensors in those areas of the aircraft and slows down whenever the temperature approaches a certain level. The Air Force may incorporate a modification that adds copper sheets to the rear of the aircraft to alleviate the problem. The Air Force began these modifications in January 2003 and plans to complete them by July 2003. Horizontal tail material separations: F/A-22 aircraft have experienced separations of materials in the horizontal tail and the shaft, which allow the tail to pivot. Because the separations reduce tail strength, the Air Force restricted flight-testing of some aircraft until it had determined that this problem would not affect flight safety during testing. The Air Force and the contractor initially believed that improvements to the aircraft’s manufacturing process would solve this problem. However, the Air Force has determined that it could only solve this problem by redesigning the aircraft’s tail. The Air Force plans to conduct flight-testing of the redesigned tail between February 2004 and April 2004. Airlift support requirements: The Air Force estimates it will not meet the F/A-22 airlift support requirement—a key performance parameter. The airlift support requirement is that 8 C-141 aircraft or their equivalents would be sufficient to deploy a squadron of 24 F/A-22s for 30 days without resupply. Today, the Air Force estimates that 8.8 C-141 equivalents will be necessary. Impact of maintenance needs on performance: The F/A-22’s performance may also be affected by maintenance needs that exceed established objectives. The Air Force estimates that the F/A-22 should, at this point in its development, be able to complete 1.67 flying hours between maintenance actions and 1.95 flying hours by the end of development. However, aircraft are requiring five times the maintenance actions expected at this point in development. As of November 2002, the development test aircraft have been completing only .29 flying hours between maintenance actions. Therefore, the development test aircraft are spending more time than planned on the ground undergoing maintenance. Testing is instrumental to gauging the progress being made when an idea or a concept is translated into an actual product that people use. DOD divides testing into two categories: developmental and operational. The goal of developmental tests is to determine whether the weapon system meets the technical specifications of the contract. The goal of operational testing is to evaluate the effectiveness and suitability of the weapon system in realistic combat conditions. Operational testing is managed by different military test organizations that represent the customers, such as the combat units that will use the weapons. The results of operational tests are provided to Congress as well as the Secretary of Defense and senior service officials. Our reviews over the years have underscored the importance of not delaying tests too late in development—when it is more difficult, costly, and time consuming to fix any problems discovered. Yet, we have been reporting on delays of flight tests for the F/A-22 and that these delays have contributed to scheduling and cost problems affecting the program. F/A-22 flight-testing began in late 1997. Each year since 1998, we have reported that assembly of the test aircraft was requiring more time than planned and that this was causing the test aircraft to be delivered late to the test center for flight-testing. We have also reported annually since 2000 that the flight-test program efficiency—the amount of flight-testing accomplished—has been less than planned. In March 2003, we reported that F/A-22 flight-testing was slower than expected in 2002 in all test areas according to Office of the Secretary of Defense (OSD) testing officials. Consequently, the Air Force extended flight test schedules and reduced the number of flight tests. Many tasks originally planned for 2002 were rescheduled for 2003. Further, the Air Force now plans to conduct more developmental flight-testing concurrently with operational testing. Continuing technical problems were the primary reasons for the most recent delay in flight-testing. In addition, late delivery of development aircraft to the flight-test center continued to be a contributing problem. Late deliveries were due not only to technical problems but also to ongoing problems associated with the manufacture and assembly of development aircraft by the prime contractor. With the new schedule, the Air Force delayed the beginning of operational testing for 4 months, until the portion of developmental testing required to begin operational testing could be completed. Operational testing is now planned to begin in August 2003. Table 1 shows the changes in key F/A-22 schedule events. Further, according to OSD officials involved in operational testing, there is a high risk of not completing an adequate amount of development flight- testing before operational testing is scheduled to begin. Indeed, we believe that it is unlikely that the Air Force will be able to complete all necessary avionics flight-testing prior to the planned start of operational testing. Based on F/A-22 flight test accomplishment data and current flight test plans, we project that the start of operational testing might be delayed until January 2004. As a result, operational testing could be delayed by several months beyond the current planned date of August 2003. Cost increases have plagued the F/A-22 program since it began in 1991. They have spurred Congress to impose spending limits and have forced the Air Force to scale back production. Nevertheless, the Air Force is still contending with cost increases in three principal areas: development, production, and modernization. Since 1997, the Air Force’s estimated cost to develop the F/A-22 has increased by $3.2 billion. Figure 1 highlights development cost limitation and estimate increases during the past 6 years. Increases prior to 1998 have prompted limitations on spending from Congress. While the Air Force held the position that these limitations could be met until recently, our reviews showed that there was a potential for additional increases because of delays. Table 2 presents a time line of congressional limitations, our findings and DOD’s positions. The initial congressional limitation of $18.688 billion established in 1997 followed an Air Force team’s review of estimated development and production costs. That team concluded in 1997 that additional time would be required to complete the development program and estimated that costs would increase from $17.4 billion to $18.688 billion. The team recommended several changes to the development program’s schedule, including slower manufacturing than planned for a more efficient transition from development to low-rate initial production and an additional 12 months to complete avionics development. The National Defense Authorization Act for Fiscal Year 1998 then established this $18.688 billion amount as a cost limitation for the development program. Congressional direction in fiscal year 2000 legislation shifted six production representative test aircraft to the development program and caused the cost limitation to be adjusted upward to $20.4 billion. In September 2001, DOD acknowledged that the cost to complete the development program would exceed the cost limitation by $557 million. This increase brought the development cost estimate to $21 billion. Subsequently, in December 2001, the National Defense Authorization Act for fiscal year 2002 eliminated the development cost limitation. In March 2003, we reported that the Air Force estimated that development costs had increased by $876 million, bringing total development cost to $21.9 billion. This increase was due to the technical problems and schedule delays related to avionics and vertical fin buffeting discussed earlier. Over the last 6 years, DOD has identified about $18 billion in estimated production cost growth during the course of two DOD program reviews. As a result, the estimated cost of the production program currently exceeds the congressional cost limit. The Air Force has implemented cost reduction plans designed to offset a significant amount of this estimated cost growth. But the effectiveness of these cost reduction plans has varied. During a 1997 review, the Air Force estimated cost growth of $13.1 billion. The major contributing factors to this cost growth were inflation, increased estimates of labor costs and materials associated with the airframe and engine, and engineering changes to the airframe and engine. These factors made up about 75 percent of the cost growth identified in 1997. In August 2001, DOD estimated an additional $5.4 billion in cost growth for the production of the F/A-22, bringing total estimated production cost to $43 billion. The major contributing factors to this cost growth were again due to increased labor costs and airframe and engine costs. These factors totaled almost 70 percent of the cost growth. According to program officials, major contractors’ and suppliers’ inability to achieve the expected reductions in labor costs throughout the building of the development and early production aircraft has been the primary reason for estimating this additional cost growth. The Air Force was able to implement cost reduction plans and offset cost growth by nearly $2 billion in the first four production contracts awarded. As shown in table 2, the total offsets for these contracts slightly exceeded earlier projections by about $.5 million. Cost reduction plans exist but have not yet been implemented for subsequent production lots planned for fiscal years 2003 through 2010 because contracts for these production lots have not yet been awarded. If implemented successfully, the Air Force expects these cost reduction plans to achieve billions of dollars in offsets to estimated cost growth and to allow the production program to be completed within the current production cost estimate of $43 billion. However, this amount exceeds the production cost limit of $36.8 billion. In addition, while the Air Force has been attempting to offset costs through production improvement programs (PIP), recent funding cutbacks for PIPs may reduce their effectiveness. PIPs focus specifically on improving production processes to realize savings by using an initial government investment. The earlier the Air Force implements PIPs, the greater the impact on the cost of production. Examples of PIPs previously implemented by the Air Force include manufacturing process improvements for avionics, improvements in fabrication and assembly processes for the airframe, and redesign of several components to enable lower production costs. As shown in figure 2, the Air Force reduced the funding available for investment in PIPs by $61 million for lot 1 and $26 million for lot 2 to cover cost growth in production lots 1 and 2. As a result, it is unlikely that PIPs covering these two lots will be able to offset cost growth as planned. Figure 3 shows the remaining planned investment in PIPs through fiscal year 2006 and the $3.7 billion in estimated cost growth that can potentially be offset through fiscal year 2010 if the Air Force invests as planned in these PIPs. In the past, Congress has been concerned about the Air Force’s practice of requesting fiscal year funding for these PIPs but then using part of that funding for F/A-22 airframe cost increases. Recently, Congress directed the Air Force to submit a request if it plans to use PIP funds for an alternate purpose. Modernization costs have increased dramatically in recent years. In fiscal year 2001, the Air Force plan was to spend a total of $166 million for upgrades to enhance the operational capabilities of the F/A-22. Currently, Air Force plans in 2004 call for spending almost $3 billion through fiscal year 2009 for modernization projects. (See fig. 4). Most of the recent increase in modernization funding is necessary to provide increased ground attack capability. Other modernization projects include upgrading avionics software, adding an improved short-range missile capability, upgrading instrumentation for testing, and incorporating a classified project. The cost increases experienced by the F/A-22 program have, in part, forced the Air Force to reduce its planned procurement over time by more than half (see fig. 5). Such a decrease, in turn, has jeopardized the Air Force’s ability to modernize its fleet of tactical aircraft. In late 2001, in the face of a significant cost overrun in the estimated cost to produce the F/A-22, the total aircraft to be produced was reduced. At the same time, DOD requested that Congress remove the production cost limit. While the congressional limit on production costs remains in effect, DOD transferred production funding to help offset $876 million in development cost growth. The net effect was another decrease in total aircraft to be produced—now estimated at 276. This reduction may have a negative effect on Air Force plans to modernize its tactical aircraft fleet. The F/A-22 is designed to be a replacement for the F-15 aircraft, but the F/A-22 quantity reductions that have occurred since 1991 tend to exacerbate the increasing trend in the average age of current Air Force fighter aircraft. In 2001, we reported that the average age of Air Force tactical fighters would continue to increase until the fleet reached an average age of 21 years in 2011. This is almost twice the average age goal of the Air Force. Aging equipment contributes significantly to increased operating and support costs. Despite continuing development problems and challenges, the Air Force plans to continue acquiring production aircraft at increasing annual rates. For example, the Air Force plans to acquire 20 aircraft during 2003, rather than the maximum of 16 Congress allowed without DOD’s submittal of a risk assessment and certification. Since 2001, we have reported that this is a very risky strategy because the Air Force runs the chance of higher production costs by acquiring significant quantities of aircraft before adequate testing is complete. Late testing could identify problems requiring costly modifications to achieve satisfactory performance. As shown in figure 6, the Air Force is committed to acquiring 73 production aircraft (26 percent) before operational and development testing is complete. We believe that this is an overly optimistic strategy given the remaining F/A-22 technical problems and the current status of testing. As we have noted, acquiring aircraft before completing adequate testing to resolve significant technical problems increases the risk of costly modifications later. If F/A-22 testing schedules slip further—as we believe is likely—even more aircraft will be acquired before development and operational testing is complete, and the risk of costly modifications will increase still more. The F/A-22 has the potential for being the most advanced air superiority aircraft ever to join the Air Force’s inventory—using several advanced technologies and capabilities. But performance problems, schedule delays, and cost overruns threaten the program’s success as well as DOD’s ability to modernize its tactical aircraft fleet. Moreover, uncertainties about some of the performance capabilities have increased the risk that the Air Force will have to modify a larger quantity of aircraft after they are built. For these reasons, our recommendations have stressed the need for the Air Force to (1) avail itself of all opportunities for gaining manufacturing efficiencies during production, (2) find ways to fund cost reduction plans that require initial government investment instead of using funding to cover cost growth in earlier aircraft lots, and (3) reconsider its decision to increase the annual production rate beyond 16 until greater knowledge on any need for modifications is established through operational testing. Moreover, we have also recommended, in light of the high risk nature of the program, that Congress be informed about the amount of cost reduction plans identified to offset cost growth, the potential cost of production if cost reduction plans are not as effective as planned, or the quantity of aircraft that can be produced within the cost limit. Congress would be able to use this information to help exercise proper program oversight. | The Air Force is developing the F/A-22 aircraft to replace its fleet of F-15 air superiority aircraft. The F/A-22 is designed to be superior to the F-15 by being capable of flying at higher speeds for longer distances, less detectable, and able to provide the pilot with substantially improved awareness of the surrounding situation. The National Defense Authorization Act for Fiscal Year 1998 requires us to annually assess the F/A-22 development program and determine whether the program is meeting key performance, schedule, and cost goals. We have issued six of these annual reports to Congress. We have also reported on F/A-22 production program costs over the last 3 years. Most recently, we reported on F/A-22 production and development in February and March 2003 respectively. This testimony summarizes our work on the F/A-22 program, covering performance, cost, and scheduling issues. In the past several years, we have reported on a range of problems affecting the development of F/A-22. Specifically, F/A-22 estimated performance in the areas of supercruise, acceleration, maneuverability, radar observability, combat radius, and range in searching targets have so far been met or exceeded. However, problems have surfaced related to overheating during high-speed flight-testing, reliability, avionics that perform radar, communication, navigation, identification and electronic warfare functions as well as excess movement of the vertical tails. Modifications are being made to some test aircraft to address some of these problems. For now, however, testing in some areas is restricted. Each year since 1998, we have reported that assembly of the test aircraft was requiring more time than planned and that this was causing the test aircraft to be delivered late to the test center for flight-testing. We have also reported annually since 2000 that flight-test program efficiency--the amount of flight-testing accomplished--has been less than planned. Cost increases have plagued the F/A-22 program since development began in 1991. Since 1997, the Air Force's estimated cost to develop the F/A-22 has increased by $3.2 billion bringing the total estimate to $21.9 billion. In addition, over the last 6 years, DOD has identified about $18 billion in estimated production cost growth bringing the total estimate to $42.2 billion--which exceeds the congressionally mandated production cost limit of $36.8 billion. Further, modernization costs have increased dramatically in recent years. Actions to offset estimated cost growth have had mixed success. These problems have dramatically affected the F/A-22 program. Cost increases, in part, have forced the Air Force to substantially decrease the number of aircraft to be purchased--from 648 to 276. Delays in testing also have significant consequences. Continuing to acquire aircraft before adequate testing is a high-risk strategy that could serve to further increase production costs. Moreover, F/A-22 problems have limited DOD's ability to upgrade its aging tactical aircraft fleet. If the F/A-22 program had met its original goals, the Air Force could have been replacing older aircraft with F/A-22 aircraft over 7 years ago. Now, however, it will not begin replacing aircraft until late 2005 at the earliest. The rate of replenishment will be substantially lower, due to the decrease in the number of new aircraft to be purchased. As a result, DOD will have to continue to use tactical aircraft that contribute to increased operating and support costs and it will have to wait longer than anticipated to have access to the advanced capabilities to be offered by the F/A-22. |
As you know, Mr. Chairman, the decennial census is a constitutionally mandated enterprise critical to our nation. Census data are used to apportion seats and redraw congressional districts, and to help allocate hundreds of billions of dollars in federal aid to state and local governments each year. In developing the 2010 Census, a long-standing challenge for the Bureau has been the reliability of its IT systems. For example, in March 2009, we reported that the Bureau needed to develop a master list of interfaces between systems; set priorities for the testing of interfaces based on criticality; and develop testing plans and schedules. In the months that followed, while the Bureau strengthened its management and oversight of its IT systems, additional work was needed under very tight time frames. More generally, now that the census has moved to the operational phase, it will be important for the Bureau to stay on schedule. The enumeration has several immutable deadlines, and an elaborate chain of interrelated pre- and post-Census Day activities are predicated upon those dates. Specifically, the Department of Commerce—the Bureau’s parent agency— is legally required to (1) conduct the census on April 1 of the decennial year, (2) report the state population counts to the President for purposes of congressional apportionment by December 31 of the decennial year, and (3) send population tabulations to the states for purposes of redistricting no later than 1 year after the April 1 census date. To meet these reporting requirements, census activities need to take place at specific times and in the proper sequence. A time line of key census operations is shown in figure 1. Because of these tight deadlines, as the enumeration progresses, the tolerance for any operational delays or changes becomes increasingly small. Consequently, as the enumeration progresses, it will be important for the Bureau to closely monitor key performance metrics to ensure that the various operations are on track and quickly address any glitches. Indeed, the interrelated nature of census activities raises the risk that a shortcoming in one operation could trigger other activities to spiral downward. For example, a lower than expected mail response rate would drive up the follow-up workload, which in turn would increase staffing needs and costs. Of course the reverse is also true, where a success in one operation could have a number of positive downstream impacts. Although the Bureau has made progress in testing and deploying IT systems for the 2010 Census, significant performance issues have been identified with both the workflow management system—PBOCS—as well as with the Decennial Applicant Personnel and Payroll System (DAPPS), the automated system the Bureau is using to handle the payroll of the more than 1 million temporary employees that are to work on the census. In March 2009, we reported that the Bureau had a number of problems related to testing of key IT systems, including weaknesses in test plans and schedules, and a lack of executive-level oversight and guidance. In that report, we recommended that the Bureau complete key system testing activities and improve testing oversight and guidance. The Bureau agreed with our recommendations. Since that time, we have been monitoring and tracking the Bureau’s progress and, last October, we testified that the Bureau had taken steps to improve its management and testing of key IT system for the 2010 Census, such as naming a Decennial Census Testing Officer whose primary responsibilities include monitoring testing for decennial census activities. The Bureau had also completed limited end- to-end testing of PBOCS. The Bureau developed this workflow management system—which is designed to manage the work assignments and related maps for hundreds of thousands of enumerators—late in the decade when it moved from handheld computers, which it found unreliable, to a paper-based approach for some field operations. These operations include NRFU, when enumerators collect data through personal interviews from the tens of millions of households that fail to mail back a census questionnaire. However, critical performance issues still need to be addressed and additional testing remains to be completed. For example, in December 2009, the Bureau completed two iterations of a key performance test, known as the Decennial Application Load Test. For the test, more than 8,000 field staff at about 400 local census offices performed a combination of manual and automated tests to assess the performance of key IT systems, including DAPPS and the first release of PBOCS. In the first test, DAPPS failed, and other key systems, including PBOCS, performed slowly. There were system communication errors as well. Bureau officials stated that many of these issues were resolved during the second iteration of testing; however, others remain to be resolved and new issues were identified. For example, DAPPS performed slowly during the second iteration of testing. This issue must be resolved and retested. To the Bureau’s credit, the performance test helped to identify significant issues before systems are needed for key field operations. DAPPS program officials stated that the current version of the program has been deployed since October 2008 and has been processing payroll for a smaller number of temporary census employees (about 140,000). However, three major issues, involving system hardware, software, and the operating system, were identified as the likely causes of DAPPS system failure during the first load test. At least one of these issues was known to exist before the load test, but has not yet been resolved. The officials stated that they are taking several steps to resolve these issues, including upgrading and reconfiguring the system, and deploying additional hardware to support the system. An additional load test is also planned for DAPPS. The officials stated that they plan to have all issues resolved by the end of February, and acknowledge that it is critical that DAPPS be fully functional under a heavy load by mid-March, when the Bureau will begin hiring a large number of temporary employees (about 600,000) for NRFU who will need to be paid using the system. In addition to issues mentioned with DAPPS, the December load test was not intended to be a comprehensive test of PBOCS, which has multiple releases at varying stages of development and testing. The first release of this system was deployed for early census field operations in January 2010, but it has known defects, such as limited functionality, slow performance, and problems generating certain progress and performance reports. In addition, the development and testing of two other releases is needed before the system is ready for other key field operations, such as the enumeration of residents in group quarters, scheduled to begin in March 2010. In recognition of the serious implications that a failed PBOCS would have for conducting of the 2010 Census, the Bureau has taken additional steps to mitigate the outstanding risks. For example, in June 2009, the Bureau chartered an independent assessment team, chaired by the Bureau’s Chief Information Officer, to monitor and report on, among other things, the system’s development and testing progress. These efforts are encouraging. However, the aggressive development and testing schedule presents various challenges. For example, two of the three releases of PBOCS were not included in the recent performance test because development of these releases had not yet been completed. This increases the risk that performance issues, such as those described above, may reoccur in future releases of the system and the Bureau’s ability to resolve and retest these issues before the system is needed for key field operations will be limited. In addition to DAPPS and PBOCS, the Bureau will rely on six other key automated systems to conduct the census. Progress has been made with respect to system testing. However, much system testing remains to be completed in the next few months, as shown in the following table. Given the importance of IT systems to the decennial census, it is critical that the Bureau ensure that DAPPS, PBOCS, and other key systems are thoroughly tested. The limited amount of time to resolve what are, in certain cases, significant performance issues creates a substantial challenge for the Bureau. In 2008, we reported that the Bureau had not carried out the necessary analyses to demonstrate that the then life-cycle cost estimate of about $11.5 billion for the 2010 Census was credible, and we recommended that the Bureau better document and update the estimate, to which it generally agreed. Since then, two early census field operations have experienced major differences between their estimated and actual costs. For address canvassing, where census workers verify address lists and maps, actual costs exceeded the Bureau’s initial estimate of $356 million by $89 million, or 25 percent. In contrast, for group quarters validation, where census workers verify addresses of group housing, actual costs were below the Bureau’s estimate of $71 million by about $29 million, or 41 percent. Because of cost overruns during address canvassing, as well as concerns over the increased number of vacant units due to foreclosures, the Bureau has implemented our recommendation and reexamined the assumptions and other data used to support the cost estimate for NRFU, the most costly and labor-intensive of all census field operations. Earlier this month, the Bureau provided us with the results from that reexamination. Although we have not fully assessed the Bureau’s analysis, our preliminary review shows that the Bureau now estimates that NRFU will cost about $2.3 billion, a decrease of around $400 million (15 percent) from its previous estimate of about $2.7 billion. In updating the estimate, the Bureau considered a number of cost drivers. For example, the Bureau reviewed 1) field work assumptions—such as miles driven per case, pay rates, hours worked per week, and attrition—which the Bureau updated based on actual Census 2000 data, national and field tests, and address canvassing results; 2) factors affecting response rate and hence NRFU workload—such as the national trend in survey response, use of a bilingual questionnaire and replacement mailing for 2010, and the vacancy rate; and 3) enumerator productivity rates, based on regional managers’ concerns over enumerating vacant units and non-English-speaking households. Further, in its analysis, the Bureau cited holding pay rates for NRFU temporary staff at 2009 levels, rather than the proposed 2010 pay rate, as one of the reasons for the reduction in NRFU costs. According to the Bureau, two cost drivers—workload, based on the mail response rate, and productivity—are uncertain and could have a significant effect on the ultimate cost of NRFU. For example, the Bureau states that if the response rate decreases by 2 percentage points due to extreme circumstances, such as an immigration backlash, costs could increase by $170 million. Likewise, if PBOCS continues to experience performance problems causing 2 weeks of lost productivity, the Bureau says it would need to hire and train more staff to complete NRFU in order to deliver the apportionment counts to the President by December 31, 2010, which, according to the Bureau, could increase costs by about $138 million. As we previously recommended, revising cost estimates with updated data is an important best practice for cost estimation. However, the Bureau’s analyses of cost are not complete. While the Bureau has finalized its reexamination of NRFU cost, it continues to update the costs for other NRFU-related operations. These operations include the NRFU Reinterview, a quality assurance procedure designed to ensure that field procedures were followed and to identify census workers who intentionally or unintentionally produced data errors. It also includes the Vacancy/Delete Check operation, which is a follow-up to NRFU and is designed to verify the status of addresses classified as vacant, or addresses determined to be nonexistent (deletes) during NRFU, as well as cases added since the NRFU workload was initially identified. According to the Bureau, emerging information about the Vacancy/Delete Check operation suggest that the workload may be much higher than originally expected and could increase costs from $345 million to $482 million—almost $137 million, or 40 percent. The Bureau said it will update the cost estimates of both these operations once additional information becomes available. A reliable cost estimate is critical to the success of any program because it provides the basis for informed investment decision making, realistic budget formulation, meaningful progress measurement, proactive course correction when warranted, and accountability for results. In contrast to the IT systems, the rollout of other activities is going more smoothly. Indeed, the Bureau has taken steps to address certain previously identified problems, and its plans to improve the count of hard-to- enumerate groups are generally more robust compared to similar activities during the 2000 Census. Those activities include procedures for fingerprinting temporary employees; the Bureau’s efforts to count people residing in nursing homes, dormitories, and other group living arrangements known as “group quarters”; the rollout of key marketing efforts aimed at improving the participation of hard-to-count populations; the Bureau’s plans for a mailing a second, follow-up questionnaire and the removal of late mail returns; and the Bureau’s plans to secure a complete count in the hurricane-affected areas along the Gulf Coast. The Bureau plans to fingerprint its temporary workforce for the first time in the 2010 Census to better conduct background security checks on its workforce of hundreds of thousands of temporary census workers. However, the Bureau found that during address canvassing, an operation that the Bureau conducted in the summer of 2009 to verify every address in the country, 22 percent of the workers (approximately 35,700 people) hired for the operation had unclassifiable prints. The Federal Bureau of Investigation (FBI) determined that the issue was generally the result of errors that occurred when the prints were first taken at the local census offices. To fingerprint workers during address canvassing, Bureau employees captured two sets of fingerprints on ink fingerprint cards from each temporary worker by the end of the workers’ first day of training. The cards were then sent to the Bureau’s National Processing Center in Jeffersonville, Indiana, to be scanned and electronically submitted to the FBI. If the first set of prints were unclassifiable, then the National Processing Center sent the FBI the second set of prints. If the results showed a criminal record that made an employee unsuitable for employment, the Bureau either terminated the person immediately or placed the individual in a nonworking status until the matter was resolved. To help ensure the success of fingerprinting operations for NRFU—which will peak at approximately 484,000 fingerprint submissions over a 3-day period from April 28-30, 2010—the Bureau will follow similar procedures, but has taken additional steps to improve fingerprint image quality. They include refining training manuals used to instruct local census office staff on how to take fingerprints, scheduling fingerprint training closer to when the prints are captured, and increasing the length of training. Further, the Bureau plans on using an oil-free lotion during fingerprinting that is believed to raise the ridges on fingertips to improve the legibility of the prints. The Bureau has also revised its procedures for refingerprinting employees when both fingerprint cards cannot be read. During address canvassing, if both sets of fingerprints were unclassifiable, workers were allowed to continue working if their name background check was acceptable, and would be refingerprinted only if they were rehired for future operations. Under the revised policy, the Bureau plans to digitally capture a third and fourth set of fingerprints if the FBI cannot classify the first two sets. The Bureau plans to purchase approximately 1,017 digital fingerprint scanners. Each local census office will receive a minimum of one machine, with the remaining scanners to be distributed at the discretion of the Regional Director. The Bureau estimates that this additional step could reduce the percentage of workers with unclassifiable prints from 22 percent down to approximately 10 to 12 percent, or an estimated 60,000 to 72,000 temporary workers for NRFU. We did not receive a response from the Bureau whether it will allow those workers with unclassifiable prints to continue to work on NRFU operations. During the decennial census, the Bureau conducts separate operations to count people residing in group quarters facilities. The Bureau defines group quarters as “places where people live or stay in a group living arrangement that are owned or managed by an entity or organization providing housing and/or services for the residents,” such as boarding schools, correctional facilities, health care facilities, military quarters, and college and university housing. According to Bureau estimates, more than 8.1 million people, or approximately 3 percent of the population, live in group quarter facilities. During the 2000 Census, the Bureau did not always accurately enumerate group quarters because, among other reasons, group quarters were sometimes hard to distinguish from conventional housing units (see fig. 2), or the address of an administrative building was in a separate geographic location than where the people actually lived, as was sometimes the case with prison complexes. For example, in prior work, we found that the population count of Cameron, Missouri, was off by nearly 1,500 people because the population of the state’s Crossroads Correctional Center was inadvertently omitted from the town’s headcount. Similarly, North Carolina’s population count was reduced by 2,828 people, largely because the Bureau had to delete duplicate data on almost 2,700 students in 26 dormitories (see fig. 3) at the University of North Carolina at Chapel Hill (UNC). Precision is critical because, in some cases, small differences in population totals could potentially impact apportionment and/or redistricting decisions. The Bureau developed and tested new procedures to address the difficulties it had in identifying and counting this population during the 2000 Census. For example, the Bureau moved from manual to GPS- generated mapspots, which should reduce the chance of human error and group quarters populations being counted in the wrong jurisdiction; moved from a telephone interview to a field verification approach, which should increase accuracy; and moved to a single address list, which should reduce the chance of double counting. In addition, following the 2004 Census Test, we recommended that the Bureau revisit group quarter procedures to ensure that this population was properly located and counted. The Bureau implemented our recommendation and revised its group quarters procedures to clearly instruct census workers to properly correct and delete addresses. Further, to better ensure a more accurate group quarters count, the Bureau employed a three-prong effort consisting of those operations shown in table 2. For the 2010 group quarters operations, the Bureau drew from a number of sources to build its list of group quarters addresses including data from the 2000 Census, address submissions provided by state and local governments, Internet-based research, and group quarters located during door-to-door address canvassing. During the first of the three group quarters operations (group quarters validation), approximately 25,000 temporary workers identified over 240,000 group quarters facilities from a workload of over 2 million potential group quarters in both the United States and Puerto Rico. The remaining approximately 1.76 million addresses were identified during group quarters validation as conventional housing units, transitory locations, nonresidential, nonexistent, or duplicates. All addresses that were verified as housing units or transitory locations were added to the appropriate address extracts for subsequent enumeration operations. In addition, over 7,000 addresses from the group quarters validation workload could not be properly processed in the Bureau’s database because they were returned with insufficient information. However, a contingency plan was implemented to ensure these locations were included in the census. The changes made to group quarters operations appear promising, and the Bureau plans to evaluate coverage of the group quarters population. However, the Bureau will not evaluate each of the three group quarters operation’s effectiveness, cost, or value added. Such evaluations could be useful in improving the operations, identifying possibly duplicative operations, and identifying potential cost savings for 2020. For example, given the large number of non-group quarters included in the workload for group quarters validation (about 88 percent), the Bureau may want to consider ways to begin the operation with a more concise initial workload. Additionally, in both group quarters validation and group quarters advance visit operations, census workers personally visit group quarters, verify the facility contact information, provide confidentiality information, and collect occupancy numbers. Because these activities appear to be duplicative, the Bureau may want to reexamine the need to conduct both operations. A complete and accurate census is becoming an increasingly daunting task, in part because the nation’s population is growing larger, more diverse, and more reluctant to participate. To overcome these challenges, the Bureau has developed the Integrated Communications Campaign aimed at, among other things, improving the mail response rate and reducing the differential undercount. An undercount occurs when the census misses a person who should have been included; an overcount occurs when an individual is counted in error. What makes these errors particularly problematic is their differential impact on various subgroups. Minorities, renters, and children, for example, are more likely to be undercounted by the census while more affluent groups, such as people with vacation homes, are more likely to be enumerated more than once. As shown in table 3, the 2010 communications campaign consists of four components: the partnership program, paid advertising, public relations, and an educational program called Census in Schools. The 2010 communications campaign’s initial budget of $410 million was increased by $220 million in additional funds appropriated by the American Recovery and Reinvestment Act of 2009 (Recovery Act). As a result, the Bureau was able to greatly expand its communications campaign activities. For example, the Bureau hired about 3,000 partnership staff, over 2,000 more than originally planned, and increased its paid advertising purchases targeted to specific ethnic or language audiences by more than $33 million (85 percent) over its initial plan of about $39 million. The increased funding should enhance the Bureau’s capacity to reach out to hard-to-count communities. In all, the Bureau plans to spend about $72 million on paid advertising targeted to specific ethnic or language audiences, which is about $11 million more than the almost $61 million the Bureau plans to spend targeting the general population. However, even with the additional Recovery Act funds, the Bureau plans to spend less for some components of the 2010 paid media buys than it did for 2000, when compared in constant 2010 dollars. For example, although the total budget for the 2010 paid advertising is $253 million, which is about $12 million (5 percent) more than 2000, the Bureau plans to spend about $133 million of it on the total advertising buy (excluding production, labor, and other management costs), which is about $27 million (17 percent) less compared to the about $160 million spent in 2000. Table 4 shows the Bureau’s 2010 budget for paid media buys by target audience compared to what was spent in 2000. Decreased spending on paid advertising may seem like a step in the wrong direction for promoting census participation. However, by better targeting paid advertising buys the Bureau expects to reach those who have historically been the hardest to count. For example, the Bureau based its decisions on how to allocate spending across different ethnic and language audiences based on a variety of factors, such as historical response data for an area, prevalence of hard-to-count households in a market, population size, and availability of in-market media. The Bureau also received input from staff in census regional offices, as well as from an independent 2010 Census advisory group called the Race and Ethnic Advisory Committee. Further, the Bureau targeted the paid advertising messages based on market and attitudinal research. For example, the Bureau’s attitudinal research identified five mindsets people have about the census, ranging from what Bureau research identified as “leading edge”—those who are highly likely to respond—to the “cynical fifth” who are less likely to participate because they doubt that the census provides tangible benefits. The Bureau used this information to develop messages to motivate each cohort to participate in the census. To target the cynical fifth, for example, the Bureau developed advertising that focus on the message that the census is important to their community. In addition, as shown in table 5, the Bureau has made other noteworthy changes to 2010 paid advertising and partnership program activities, which are aimed at expanding outreach to hard-to-count groups and better monitoring campaign effectiveness. In summary, our analysis suggests that the paid advertising and partnership activities, along with the other components of the Bureau’s communications campaign, are generally more robust than the Bureau’s promotional efforts during the 2000 Census in that the entire effort is more comprehensive, and activities appear to be more data-driven and targeted. Moving forward, the key challenge facing the campaign is that it must not only raise awareness of the census, it must also influence behavior, a far more difficult task. The Bureau’s strategy to mail a second, or replacement, census questionnaire will be implemented for the first time in 2010 and is an important step towards improving response and decreasing costs. According to Bureau studies, mailing a replacement questionnaire increases overall response from households that do not respond to the initial questionnaire, which could generate significant cost savings by eliminating the need for census workers to obtain those responses via personal visits. The Bureau plans to mail approximately 30 million replacement questionnaires to all households in census tracts that had the lowest response rates in Census 2000 (known as blanket replacement). Also, the Bureau plans to mail approximately 12 million replacement questionnaires to nonresponding households in other census tracts that had low-to- moderate response rates in 2000 (known as targeted replacement). In order to enhance the effectiveness of the replacement mailing, the Bureau will include a cover letter to distinguish the initial and replacement questionnaires and thus avoid receiving duplicate responses. However, replacement questionnaires will be provided in English-only, regardless of whether the household will receive a bilingual English/Spanish questionnaire in the initial mailing. According to a Bureau official, mailing a bilingual replacement questionnaire was logistically impractical for 2010, given the limitations of the printing process and the five-day time frame for the targeted replacement mailing. Thus, in looking forward to the 2020 Census, it will be important for the Bureau to evaluate potential changes to the mailing strategy that would include, at a minimum, sending bilingual replacement questionnaires to those households that initially received a bilingual questionnaire. The Bureau plans to mail replacement questionnaires between April 1 and April 10 and develop an initial list of nonresponding households on April 7 (see table 6 for key dates in this process). Because the Bureau will likely receive replacement questionnaires after April 7, it must be able to effectively remove these late mail returns from the list of nonresponding households, or NRFU workload. Removing late mail returns is important because it prevents enumerators from visiting households that already returned their census forms, thus reducing NRFU workload and cost, as well as respondent burden. As shown in table 6, the Bureau plans to remove late mail returns from the NRFU workload four times using one automated and three manual processes. The Bureau has some experience with the manual process because some local census offices did some testing of late mail removals during the 2000 Census. In addition, they have developed quality assurance procedures for the manual removal process. Moving forward, it will be important for the Bureau to ensure that local census offices follow these procedures so that households are not unnecessarily visited by an enumerator or inadvertently removed from the follow-up workload and missed in the census count. The scale of the destruction in areas affected by hurricanes Katrina, Rita, and Ike has made getting a complete and accurate population count in parts of Mississippi, Louisiana, and Texas especially challenging (see fig. 4). Hurricane Katrina alone destroyed or made uninhabitable an estimated 300,000 homes. As we have previously testified, the Bureau, partly in response to recommendations made in our June 2007 report, developed supplemental training materials for natural disaster areas to help census address listers, when developing the census address list, identify addresses where people are, or may be, living when census questionnaires are distributed. For example, the materials noted the various situations that address listers might encounter, such as people living in trailers, homes marked for demolition, converted buses and recreational vehicles, and nonresidential space such as storage areas above restaurants. The training material also described the clues that could alert address listers to the presence of nontraditional places where people are living and provided a script they should follow when interviewing residents on the possible presence of hidden housing units. To ensure a quality count in the hurricane-affected areas, the Bureau will hand-deliver an estimated 1.2 million census questionnaires in these areas through the Update Leave operation, where census workers update addresses and provide a mail-back census questionnaire to each living quarter in their assigned areas. The Bureau estimates that it will be delivering questionnaires starting March 1, 2010, to housing units that appear inhabitable in much of southeast Louisiana, south Mississippi, and Texas, even if they do not appear on the Bureau’s address list. Occupants will be asked to complete and return the questionnaire by mail. Census workers will also identify modifications for the Bureau’s address list, including additions, deletions, corrections, and spotting duplicate information. By hand delivering questionnaires, the Bureau hopes to ensure that housing units that may have been missed will receive and return questionnaires, ultimately improving the accuracy of the count. Finally, the Bureau stated that it must count people where they are living on Census Day and emphasized that if a housing unit gets rebuilt and people move back before Census Day, then that is where those people will be counted. However, if they are living someplace else, then they should be counted where they are living on Census Day. Mr. Chairman, with less than two months to go until Census Day, the Bureau’s readiness for the headcount is mixed. On the one hand, with data collection already underway, the ability of key IT systems to function under full operational loads has not yet been demonstrated. The issues facing these systems need to be resolved, and additional testing must take place, with little time remaining. Likewise, questions remain regarding the ultimate cost of the 2010 Census, as the Bureau continues to analyze the cost of NRFU-related operations. On the other hand, certain operations, such as the communications campaign and efforts to enumerate group quarters, generally appear to be on track and more robust compared to similar efforts for the 2000 Census, better positioning the Bureau for a complete and accurate headcount. In the coming weeks and months ahead, we will continue to monitor the Bureau’s progress in addressing these issues, as well as the implementation of the census as a whole, on behalf of the Subcommittee. Mr. Chairman and members of this Subcommittee, this concludes my statement. I would be happy to respond to any questions that you might have at this time. If you have any questions on matters discussed in this statement, please contact Robert N. Goldenkoff at (202) 512-2757 or by e-mail at [email protected]. Other key contributors to this testimony include Peter Beck, Steven Berke, Clayton Brisson, Virginia Chanley, Benjamin Crawford, Dewi Djunaidy, Vijay D’Souza, Jennifer Echard, Elizabeth Fan, Ronald Fecso, Robert Gebhart, Ellen Grady, Richard Hung, Kirsten Lauber, Jason Lee, Andrea Levine, Signora May, Catherine Myrick, Lisa Pearson, David Powner, Jonathan Ticehurst, Cheri Truett, Timothy Wexler, and Katherine Wulff. 2010 Census: Census Bureau Has Made Progress on Schedule and Operational Control Tools, but Needs to Prioritize Remaining System Requirements. GAO-10-59. Washington, D.C.: November 13, 2009. 2010 Census: Efforts to Build an Accurate Address List Are Making Progress, but Face Software and Other Challenges. GAO-10-140T. Washington, D.C.: October 21, 2009. 2010 Census: Census Bureau Continues to Make Progress in Mitigating Risks to a Successful Enumeration, but Still Faces Various Challenges. GAO-10-132T. Washington, D.C.: October 7, 2009. 2010 Census: Communications Campaign Has Potential to Boost Participation. GAO-09-525T. Washington, D.C.: March 23, 2009. 2010 Census: Fundamental Building Blocks of a Successful Enumeration Face Challenges. GAO-09-430T. Washington, D.C.: March 5, 2009. Information Technology: Census Bureau Testing of 2010 Decennial Systems Can Be Strengthened. GAO-09-262. Washington, D.C.: March 5, 2009. 2010 Census: The Bureau’s Plans for Reducing the Undercount Show Promise, but Key Uncertainties Remain. GAO-08-1167T. Washington, D.C.: September 23, 2008. 2010 Census: Census Bureau’s Decision to Continue with Handheld Computers for Address Canvassing Makes Planning and Testing Critical. GAO-08-936. Washington, D.C.: July 31, 2008. 2010 Census: Census Bureau Should Take Action to Improve the Credibility and Accuracy of Its Cost Estimate for the Decennial Census. GAO-08-554. Washington, D.C.: June 16, 2008. Census 2010: Census at Critical Juncture for Implementing Risk Reduction Strategies. GAO-08-659T. Washington, D.C.: April 9, 2008. Information Technology: Census Bureau Needs to Improve Its Risk Management of Decennial Systems. GAO-08-79. Washington, D.C.: October 5, 2007. 2010 Census: Basic Design Has Potential, but Remaining Challenges Need Prompt Resolution. GAO-05-9. Washington, D.C.: January 12, 2005. This is a work of the U.S. government and is not subject to copyright protection in the United States. The published product may be reproduced and distributed in its entirety without further permission from GAO. However, because this work may contain copyrighted images or other material, permission from the copyright holder may be necessary if you wish to reproduce this material separately. | In March 2008, GAO designated the 2010 Census a high-risk area in part because of information technology (IT) shortcomings and uncertainty over the ultimate cost of the census, now estimated at around $15 billion. The U.S. Census Bureau (Bureau) has since made improvements to various IT systems and taken other steps to mitigate the risks of a successful census. However, last year, GAO noted that a number of challenges and uncertainties remained, and much work remained to be completed under very tight time frames. As requested, this testimony provides an update on the Bureau's readiness for an effective headcount, covering (1) the status of key IT systems; (2) steps the Bureau has taken to revise its cost estimates; and (3) the extent to which critical enumeration activities, particularly those aimed at hard-to-count populations, are on track. The testimony is based on previously issued and ongoing GAO work. Overall, the Bureau's readiness for a successful headcount is mixed. On the one hand, ongoing performance issues are affecting key IT systems, especially a workflow management system essential for the Bureau's field operations and a payroll processing system that will be used to pay more than 1 million temporary workers. Indeed, an important performance test the Bureau held in December 2009 revealed significant performance issues with each system. Bureau officials stated that many of these issues were resolved in further testing; however, others remain unresolved, and new defects were identified. The Bureau is going to great lengths to address these issues. However, little time remains before the systems need to become fully operational. In addition, the Bureau revised its cost estimate from $2.7 billion to $2.3 billion for nonresponse follow-up, the largest and most costly field operation where census workers follow up in person with nonresponding households. However, the Bureau's analyses of cost are not complete. According to the Bureau, it continues to reexamine the cost of two other nonresponse follow-up related operations. On the other hand, the rollout of key enumeration activities is generally on track, and the Bureau has taken action to address some previously identified problems. For example, the Bureau has taken several steps to reduce the number of unreadable fingerprint cards of temporary workers, a problem that plagued an earlier field operation. Among other actions, the Bureau plans to digitally capture a third and fourth set of fingerprints if the first two sets cannot be read for background security checks. The Bureau has also developed new procedures for counting those living in group quarters, such as dormitories and prisons. For example, the Bureau is using a single address list containing both group quarters and housing units, rather than separate lists as in the 2000 Census, to reduce the chance of double counting. The Bureau's 2010 Census communications campaign is also more robust than the one used in the 2000 Census. Key differences from the 2000 campaign include increased partnership staffing, targeted paid advertising based on market and attitudinal research, and a contingency fund to address unexpected events. To increase participation rates, the Bureau plans to mail a second, replacement questionnaire to census tracts that had low or moderate response rates in the 2000 Census. To help ensure a complete count of areas along the Gulf Coast, the Bureau plans to hand deliver an estimated 1.2 million census forms in areas devastated by hurricanes Katrina, Rita, and Ike. This effort will help ensure that households--even those that were not on the Bureau's address list but appear inhabitable--will be included in the census. Moving forward, it will be important for the Bureau to quickly identify the problems affecting key IT systems and test solutions. Further, given the complexity of the census and the likelihood that other glitches might arise, it will be important for the Bureau to stay on schedule, monitor operations, and have plans and personnel in place to quickly address operational issues. |
Carbon dioxide is by far the most prevalent of the greenhouse gases— gases that trap heat in the atmosphere—emitted in the United States, accounting for about 85 percent of emissions. The other principal greenhouse gases are methane, nitrous oxide, and three types of synthetic gases—hydrofluorocarbons, perfluorocarbons, and sulfur hexafluoride. Like carbon dioxide, methane and nitrous oxide are released during the combustion of fossil fuels by stationary and mobile sources. Hydrofluorocarbons are emitted from refrigerants that leak from chillers and air-handling units. Perfluorocarbons and sulfur hexafluoride are generally not emitted by legislative branch operations. Each greenhouse gas has a global warming potential—a measure of its heat-trapping ability relative to that of carbon dioxide. For example, methane is 21 times more potent than carbon dioxide, so its global warming potential is 21. Global warming potentials are used to convert emissions of non-carbon-dioxide gases into their carbon dioxide equivalents to allow comparisons of the total cumulative warming effects of different greenhouse gases. Carbon dioxide equivalents are calculated by multiplying the emissions of the non-carbon-dioxide gas by its corresponding global warming potential (see app. I for a list of the global warming potentials of the principal greenhouse gases). The common unit of measure for reporting greenhouse gas emissions is metric tons of carbon dioxide equivalents. Legislative branch operations generate greenhouse gas emissions from the combustion of fossil fuels in the Capitol Power Plant; business travel in government-owned and -leased vehicles; the use of heavy machinery; the release of VOCs in furniture and print shops; fugitive emissions, such as leaks in refrigeration equipment and fuel tanks; the combustion of fossil fuels in emergency generators; and the consumption of purchased electricity, natural gas, steam, and chilled water. AOC, GAO, and GPO have jurisdiction over the majority of these sources through their management of legislative branch property. While AOC operates the facilities within the Capitol complex, LOC, CBO, the Senate, and the House of Representatives are responsible for their own energy consumption. These entities also procure their own office equipment, and own and lease vehicles independent of AOC. In addition, the Senate and House of Representatives run the operations of their own furniture shops that perform wood refinishing, painting, and upholstery, and the Senate operates its own print shops. LOC also leases facilities independent of those managed by AOC. Table 1 shows the number of facilities, vehicles, and other property managed by each entity. The Capitol Power Plant produces steam and chilled water for the majority of the Capitol complex, as well as steam for GPO. Steam is used for heating buildings and hot water, as well as for cooking and humidification. Chilled water is used for cooling buildings and equipment, as well as for dehumidification. Two of the Capitol Power Plant’s seven boilers are coal-fired units with auxiliary gas burners, and the other five run on natural gas or oil. AOC uses a mix of fossil fuels—coal, oil, and natural gas—in the Capitol Power Plant to help ensure continuity of operations in case of a supply shortage or an increase in the price of one of the fuels. Ten chillers in the Capitol Power Plant’s refrigeration plants run on electricity to generate chilled water. In addition to the steam and chilled water produced by the Capitol Power Plant, AOC purchases steam and chilled water from GSA for one building under its jurisdiction (the Ford House Office Building), and GAO also purchases its steam from GSA. GAO has six electric-powered chillers and GPO has three electric-powered chillers that produce chilled water for these agencies. The legislative branch agencies purchase their electricity primarily from Pepco Energy Services and natural gas from Washington Gas. Options to reduce emissions include projects that can be divided into five categories—energy efficiency, renewable energy, adjustment of power plant fuel mix to include less carbon-intensive fuel, energy curtailment, and offsets. Energy efficiency means using less energy to produce a given level of service or an increase in output for the same amount of energy. Energy-efficiency projects include enhancing the energy efficiency of equipment, installing a cogeneration (combined heat and power) system, and upgrading vehicles to more fuel-efficient models. Renewable energy is derived from resources that are generally not depleted by human use, such as the sun, wind, and water movement. In most cases, renewable energy releases less carbon dioxide than fossil fuels. Renewable-energy projects include purchasing renewable energy, generating renewable energy on site, procuring alternative-fuel vehicles, and adjusting power plant fuel mix to include renewable fuels. In addition to adjusting the fuel mix to include renewable fuels, adjustments could be made to the fuel mix to use less carbon-intensive fuel, such as natural gas. Energy curtailment means a decrease in activity to reduce energy consumption, such as turning off lights when not in use. Finally, offsets refer to projects that would reduce or remove emissions outside an entity’s sphere of operations and are generally used to supplement other projects that directly reduce emissions. Legislative branch operations generated about 316,000 metric tons of greenhouse gas emissions (expressed in carbon dioxide equivalents) in fiscal year 2006. Electricity use was the largest source of emissions, accounting for 198,989 metric tons, or approximately two-thirds (63 percent) of total emissions (see fig. 1). Electricity purchased by legislative branch agencies is generated primarily from the combustion of fossil fuels, such as coal, oil, and natural gas. The second-largest source of emissions was the combustion of fossil fuels—primarily coal and natural gas—in the Capitol Power Plant to produce steam for the majority of the legislative branch buildings. The Capitol Power Plant produced 102,659 metric tons of greenhouse gas emissions in fiscal year 2006, or approximately one-third (32 percent) of total emissions. In addition, the consumption of purchased natural gas, steam, and chilled water each accounted for approximately 1 percent of the greenhouse gas emissions from legislative branch operations. The natural gas was used to heat buildings within the Capitol complex that do not receive steam from the Capitol Power Plant, to operate appliances in GAO’s cafeteria, and as part of the printing process at GPO. Finally, business travel in government- owned and -leased vehicles and the use of heavy machinery, the release of VOCs in furniture and print shops, the combustion of fossil fuels in emergency generators, and leaks in refrigeration equipment at the Capitol Power Plant each accounted for less than 1 percent of emissions. Our analysis of emissions by type of greenhouse gas showed that carbon dioxide represented 99 percent of total emissions from legislative branch operations in fiscal year 2006. Hydrofluorocarbons, nitrous oxide, and methane made up the remaining 1 percent of emissions. Although nitrous oxide and methane emissions were generated from multiple sources and hydrofluorocarbons were generated from a sole source—R-134a refrigerant that escaped from two chillers at the Capitol Power Plant through a gasket leak between June and August 2006— hydrofluorocarbons represented the majority of the non-carbon-dioxide emissions, in part because of R-134a’s high global warming potential. Overall, greenhouse gas emissions generated by legislative branch operations in fiscal year 2006 increased 4 percent from the annual average quantity emitted in fiscal years 1998 through 2001 (see fig. 2). Factors that could have influenced emissions trends—and may continue to influence trends in the future—include emissions reduction projects and changes in square footage of buildings, weather, numbers of employees, operating hours, security measures, sources of production, energy prices, and numbers of vehicles. Despite the overall increase in emissions, there was one notable decrease in emissions during this time period—a 6 percent decrease from fiscal year 2003 to fiscal year 2004. The 6 percent decrease can likely be attributed to AOC’s purchase of renewable energy from Pepco Energy Services during an 8-month period beginning in September 2003. The most recent decrease in emissions (1 percent), from fiscal year 2005 to fiscal year 2006, was likely influenced by two factors: a change in the fuel mix at the Capitol Power Plant that was due to a malfunction in the coal-fired boilers, which required AOC to replace some coal with more expensive—but less emissions-intensive—natural gas; and lower fuel consumption that was due to more moderate temperatures. Emissions trends varied by agency (see app. IV for emissions trends by agency). For example, GPO emissions decreased 28 percent primarily due to a reduction in staff levels. A strategy for reducing emissions includes conducting energy audits to identify and evaluate energy-efficiency and renewable-energy projects, as well as evaluating other emissions reduction projects that may fall outside the scope of energy audits. The strategy would also involve developing an implementation plan that considers cost-effectiveness, the extent to which the projects reduce emissions, and funding options. Conducting energy audits would assist the legislative branch in addressing the largest sources of emissions—the consumption of purchased electricity and fossil fuel combustion in the Capitol Power Plant—because these audits identify cost-effective systemwide energy-efficiency and renewable-energy projects. Energy audits typically include information on projects that could address these emissions sources, as well as projects that could reduce emissions from other sources, such as the consumption of purchased natural gas and leaks in refrigeration equipment. Energy audits also include information on the cost-effectiveness of projects and on the extent to which the projects could reduce emissions, which assist agencies in evaluating and selecting projects. In general, projects identified by energy audits as generating savings sufficient to pay for the capital costs of the projects are deemed cost-effective. Other projects identified through the energy audits may partially pay for themselves and could be considered cost-effective relative to other projects. Energy- efficiency projects are generally more cost-effective than renewable- energy projects because many renewable-energy projects are not cost competitive when compared with more traditional sources of power. There are three main types of energy audits—preliminary, targeted, and comprehensive. Each type is distinguished by the level of detail and analysis required to complete the audit. Less detailed audits include less accurate estimates of project costs and energy savings. Preliminary energy audits are the least detailed and provide quick evaluations to determine a project’s potential. These energy audits do not provide sufficiently detailed information to justify investing in the identified projects. Instead, preliminary audits are primarily used to decide if a more detailed evaluation is necessary. Targeted audits are detailed analyses of specific systems, such as lighting or boiler replacement. Comprehensive audits are detailed evaluations of all major energy-using systems. Targeted and comprehensive audits provide sufficiently detailed information to justify investing in projects. AOC, GAO, and GPO commissioned six preliminary, four targeted, and one comprehensive energy audit of some of their facilities from fiscal years 1998 through 2006. AOC commissioned preliminary audits of the Capitol in June 2000, the Rayburn House Office Building in April 2003 and December 2003, the Hart Senate Office Building in December 2003, and the LOC Madison Building in May 2005. These audits identified cost-effective projects, meeting the definition of cost-effectiveness found at 10 CFR §§ 436.18-436.22. For example, the energy audit of the LOC Madison Building identified 12 cost- effective projects with savings-to-investment ratios ranging from 1.02 to 3.87. It was estimated that these projects would reduce emissions from electricity by approximately 4,760 metric tons per year. However, according to agency officials, AOC has not followed up with energy audits that provide sufficiently detailed information to justify investing in projects at these facilities because of fiscal constraints. There are also approximately 27 buildings under AOC’s jurisdiction that have not had any type of energy audit. In the fiscal year 2008 budget, AOC requested $1.1 million to fund the first two years of a five-year plan to perform energy surveys of all its facilities. In addition to the energy audits, AOC has conducted Facility Condition Assessments and other studies of facilities in need of upgrades and repairs, which identified projects that would yield potential energy efficiency improvements. However, most of these projects have not been implemented. Since 2004, AOC has evaluated the viability of changing the Capitol Power Plant to cogeneration, which could provide steam, supplementary electricity, and backup power to the Capitol complex and reduce emissions by more efficiently capturing the energy output. AOC also began a project in 2001 to evaluate the clean coal technology alternatives to supplement or replace the existing Capitol Power Plant steam generating facilities to reduce emissions from burning coal. In addition, AOC took initial steps in response to legislation that required the agency to develop and implement a cost-effective energy conservation strategy. For example, AOC purchased a building automation system that will be used to operate mechanical and electrical systems more efficiently throughout the Capitol complex, purchased energy-efficient chillers to supplement production of chilled water at the Capitol Power Plant, and is evaluating proposals from contractors for installing energy conservation measures, including on-site renewable energy, on the rooftop of the Dirksen Senate Office Building. In 1999, GPO had a preliminary energy audit and chose to implement two of the projects identified as cost-effective—the replacement of its chillers and 15,000 light fixtures–after a targeted energy audit of the chillers in 2000. According to officials, GPO pursued only those projects with the shortest payback periods because of its limited budget and plans to relocate. GPO does not have a regular schedule for conducting energy audits. GAO had a comprehensive energy audit in 2002 and plans to have another comprehensive energy audit by fiscal year 2009. GAO also conducts a targeted energy audit of its facility every 2 years as part of its building assessment report. GAO has implemented the majority of the projects identified through its audits, such as installing optimization controls for the air-handling system and installing specialized software to decrease electricity use during periods of peak demand. In addition, GAO routinely considers other opportunities taking into account technology, price, and available funding. Legislative branch agencies have three methods for financing energy audits and implementing projects: energy savings performance contracts (ESPC), utility energy savings contracts (UESC), or direct appropriations. Congress authorized agencies to use ESPCs to privately finance energy- efficiency and renewable-energy projects in 1986. Under an ESPC, agencies enter into a long-term contract (up to 25 years) with a private energy services company under which the company conducts a comprehensive energy audit of the agency, then finances and implements projects approved by the agency. The agency then repays the company with the resulting energy savings. The energy audits of the Rayburn and Hart buildings were done through an initial proposal for an ESPC. UESCs are similar to ESPCs, but are offered by electric and gas utilities and can cover smaller projects. The third financing mechanism is direct appropriations. While GPO’s preliminary audit was conducted by Pepco Energy Services under an initial proposal for an UESC, GPO opted to fund the projects with direct appropriations. According to GPO officials, the projects cost $6 million and reduced the agency’s energy bills by $1 million a year. GAO funds its energy audits through direct appropriations and seeks funding for implementing projects in its annual budget requests. In 1995, DOE’s FEMP initiated the SAVEnergy Program, which provided funding for energy audits of federal facilities but not for project implementation. FEMP funding for SAVEnergy audits was eliminated in fiscal year 2006. Three energy audits—for the Capitol and the Rayburn and Madison buildings—were conducted under the SAVEnergy Program. In addition to projects identified through energy audits, a strategy would include evaluating other projects to reduce emissions that may fall outside the scope of energy audits, such as (1) projects to reduce electricity emissions by curtailing energy use, purchasing high-efficiency appliances, using renewable electricity, and considering the energy efficiency of facilities when constructing new facilities and before entering into leases; (2) projects to reduce emissions from the combustion of fossil fuels in the Capitol Power Plant by adjusting the fuel mix; (3) projects to reduce vehicle emissions by acquiring fuel-efficient vehicles and vehicles that run on renewable fuel; and (4) projects to reduce overall emissions by purchasing offsets. The cost-effectiveness, emissions reductions, and funding options for each of these projects would have to be evaluated on a case-by-case basis. Compared with projects identified through energy audits, several of these projects cost more to implement but could reduce emissions faster. Curtailing energy use: These projects would include enhancing outreach and education efforts to encourage building occupants to curtail their energy use. Examples of energy curtailment outreach efforts include a June 2006 memo from GAO management requesting all employees to help conserve electricity, AOC’s “how-to guides” distributed to Members of Congress and their staff detailing cost-effective methods to save energy in the workplace, and GPO’s goal-sharing program, which is an incentive award program that encourages employees to reduce energy consumption and splits the cost savings realized from these efforts equally between the agency and its employees. According to GPO, fiscal year 2006 energy savings totaled $558,604, for an estimated award of $126.27 per employee. Energy curtailment activities generally involve a trade-off between convenience and productivity, and energy use. Purchasing energy-efficient computer equipment and appliances: Energy-efficient products have been identified through two federal programs—the Energy Star Program and FEMP. Energy Star-qualified and FEMP-designated products meet energy-efficiency guidelines set by EPA and DOE and, in general, represent the top 30 percent most energy efficient-products in their class of products. These products cover a wide range of categories, including appliances and office equipment. According to the Energy Star program, office products that have earned the Energy Star rating use about half as much electricity as standard equipment and generally cost the same as equipment that is not Energy Star-qualified. Under section 104 of the Energy Policy Act of 2005, agencies are required to purchase Energy Star-qualified and FEMP-designated products. Some of the agencies have reported adopting such practices to further reduce emissions. For example, officials from AOC and GAO reported that they currently have all Energy Star-qualified information technology equipment. Purchasing renewable electricity: Renewable-energy certificates (REC) represent the environmental, social, and other positive attributes of electricity generated by renewable resources. RECs can be purchased independent of the associated electricity from a wholesale supplier or bundled with the electricity from a utility company. It is usually less expensive to buy RECs from a wholesale supplier because a supplier generally has access to a wider array of resources than a utility company. In both cases, purchasing RECs helps the electricity generator invest more money in renewable energy, increasing the amount of renewable electricity and decreasing the amount of fossil fuel electricity entering the country’s power supply. For 8 months beginning in September 2003, AOC purchased RECs from its utility, Pepco Energy Services—equal to 51,296,000 kilowatt hours, or approximately 15 percent of its annual electricity use. In November 2006, AOC, GPO, and GAO participated in a GSA areawide electricity contract with Pepco Energy Services to purchase RECs equal to 3 percent of their energy consumption in order to meet the Energy Policy Act of 2005 federal purchase requirement. Other federal agencies, such as the Environmental Protection Agency, have chosen to purchase RECs equal to 100 percent of their energy use. Leasing and constructing energy-efficient facilities: Another way to reduce emissions is to consider the efficiency of potential building space when renewing or entering into a new lease as well as applying energy- efficiency measures in the design and construction of new federal facilities. Under the Energy Policy Act of 1992, executive branch agencies are required to fully consider energy efficiency when leasing and constructing facilities. AOC was also required to apply federal building energy standards adopted under the act to new buildings within its jurisdiction. AOC adopted a standard equivalent to a Silver rating of the Leadership in Energy and Environmental Design (LEED) Green Building Rating System in 2006 as a minimum standard for all new construction. The LEED Rating System, created and maintained by the U.S. Green Building Council, provides a benchmark for the design, construction, and operation of high-performance green buildings. Adjusting the fuel mix: The fuel mixture at the Capitol Power Plant could be adjusted to include renewable fuels, such as biomass. However, using renewable fuels would require extensive boiler retrofits and changes to emissions control technology. The agency could also adjust the fuel mixture to increase the use of natural gas since natural gas produces less carbon dioxide than any other fossil fuel. As discussed earlier, when AOC substituted natural gas for some coal in 2006 because of problems with its coal boilers, emissions from the power plant decreased. However, in 2006, the price of natural gas was more than five times higher than coal. Acquiring fuel-efficient vehicles: Approximately 296—92 percent—of legislative branch vehicles in fiscal year 2006 were trucks (approximately 73 percent of which are light duty trucks). Heavy duty trucks have an actual average fuel economy of 8.8 miles per gallon, light duty trucks have an actual average fuel economy of 16.2 miles per gallon, and cars have an actual average fuel economy of 22.4 miles per gallon. Hybrid-electric vehicles have even higher fuel economies because they combine an electric motor and battery pack with an internal combustion engine to improve efficiency. For example, the hybrid Toyota Camry is rated at 39 miles per gallon, while the rating for the gasoline-fueled standard model is 27 miles per gallon. There are currently no hybrid-electric vehicles in the legislative branch vehicle fleets. Hybrid electric vehicles are, on average, about $8,200 more expensive than the lowest-priced gasoline vehicle in fiscal year 2007. Acquiring alternative-fuel vehicles: Alternative-fuel vehicles include dedicated, flexible-fuel, or dual-fuel vehicles designed to operate on at least one alternative fuel, such as ethanol or biodiesel. The legislative branch vehicle fleets include 35 alternative-fuel vehicles and, in September 2006, AOC adopted a policy specifying that all newly acquired vehicles, with a few exceptions, are to be alternative-fuel vehicles. Although legislative branch entities are purchasing these vehicles, they generally fuel them with gasoline because the infrastructure for supplying alternative fuel in the Washington, D.C., metropolitan area is not conveniently located for legislative branch employees. LOC was the only entity that reported using ethanol to fuel its alternative-fuel vehicles to date, using 18 gallons in fiscal year 2006. LOC also reported using 8 cubic feet of compressed natural gas in fiscal years 2005 through 2006 to fuel its two gasoline/compressed natural gas light-duty vehicles. Alternative-fuel vehicles that run on ethanol or gasoline are, on average, $1,500 more expensive than the lowest-priced gasoline vehicle in fiscal year 2007 and get 20 percent to 30 percent fewer miles per gallon, but Congress is encouraging the use of these vehicles because burning ethanol in vehicles instead of gasoline reduces emissions by 18 percent to 29 percent per gallon. In response, AOC’s alternative fuel-vehicle policy states that the initial cost shall not be considered as a factor unless it exceeds the initial cost of a comparable conventionally fueled vehicle by at least 5 percent. However, despite the emissions reductions associated with burning ethanol in vehicles instead of gasoline, the net energy benefit of using ethanol is less clear cut when full life-cycle emissions are taken into account. If the emissions from the production of ethanol are included, ethanol can have higher emissions per gallon. It can also have higher emissions of VOCs per mile traveled, compared with gasoline. Purchasing offsets: Offsets are credits for emissions reductions outside an entity’s sphere of operations and can be purchased in the retail marketplace. Offset projects range from buying credits for carbon sequestration resulting from planting trees to funding energy-efficiency upgrades at a power plant in another city. The price of offsets ranges from $5 to $25 per ton, averaging about $10 per ton. While not specifically considered offsets, RECs also reduce emissions outside an entity’s sphere of operations. The renewable electricity associated with nationally- sourced RECs—those generated by sources in another part of the country—do not enter the customer’s electricity supply. In general, these RECs are less expensive than RECs generated from local sources. However, RECs generated from local sources support local projects, and the renewable energy enters the local electricity supply which increases the amount of renewable electricity received by the customer. The legislative branch agencies’ RECs contract did not exclude national RECs, but Pepco Energy Services won the contract with a proposal that included only RECs generated from local sources. Although the legislative branch is not required to inventory greenhouse gas emissions or develop an overall strategy to reduce emissions, individual legislative branch agencies have been taking some steps to minimize or reduce emissions. However, the legislative branch as a whole has not focused on reducing emissions. The base year, inventory, and trends presented in this report could serve as a starting point for a legislative branch initiative to follow the efforts of other U.S. government and private-sector entities to reduce emissions. Energy audits are a key step in identifying projects to reduce the largest sources of emissions from legislative branch operations. While all legislative branch agencies recognize the benefits of energy audits to reduce emissions, the agencies have varied in the extent to which they have used such audits. Consequently, each agency would benefit from a schedule to conduct audits regularly and a plan for implementing and financing the most cost-effective projects identified through the audits. The legislative branch could also evaluate other projects to reduce emissions, including curtailing energy use, acquiring fuel-efficient and alternative-fuel vehicles, and purchasing offsets, and combine these evaluations with information acquired from energy audits to develop an implementation plan for reducing emissions. Agencies that manage the operations of the legislative branch should establish a schedule for routinely conducting energy audits that provide sufficiently detailed information-—such as targeted or comprehensive audits-—to justify investing in projects. Furthermore, the agencies should implement selected projects as part of an overall plan to reduce emissions that considers cost-effectiveness, the extent to which the projects reduce emissions, and funding options. We provided a draft of this report to the Architect of the Capitol, the Government Printing Office, and GAO for review and comment. We received comments orally and via e-mail from officials designated to speak for their agencies. All of the agencies agreed with the report’s overall findings and recommendations and offered technical suggestions that we have incorporated, as appropriate. The Architect of the Capitol noted that, while AOC operates the facilities within the Capitol complex and would be responsible for energy audits of the building systems and implementing the projects that result from the energy audits, the agency has little influence over the energy use activities of the occupants of the facilities. We are sending copies of this report to the appropriate congressional committees, the Acting Architect of the Capitol, and the Acting Public Printer. We will also make copies available to others upon request. In addition, this report will be available at no cost on GAO’s Web site at http://www.gao.gov. If you or your staffs have any questions about this report, please contact me at (202) 512-6923 or [email protected]. Contact points for our Offices of Congressional Relations and Public Affairs may be found on the last page of this report. Major contributors to this report are listed in appendix V. To conduct an inventory of the greenhouse gas emissions generated by legislative branch operations, we followed the Greenhouse Gas Protocol and additional guidance from the Environmental Protection Agency’s (EPA) Climate Leaders program. In accordance with the Greenhouse Gas Protocol, the scope of our work included direct emissions, such as the combustion of fossil fuels at the Capitol Power Plant, and indirect emissions from the consumption of purchased electricity, natural gas, steam, and chilled water. We excluded other indirect emissions that are optional under the Greenhouse Gas Protocol, such as those generated from business travel in private vehicles or commercial airplanes, employee commuting, or paper use. Our work covered the legislative branch’s leased and owned facilities and vehicles within the Washington, D.C., metropolitan area. We excluded indirect emissions from the U.S. Capitol Police for security reasons, as well as non-legislative branch facilities under AOC’s jurisdiction, such as the U.S. Supreme Court. We also excluded emissions from the Medicare Payment Advisory Commission and the Stennis Center for Public Service because of their small size and location within buildings outside of the legislative branch. To calculate emissions for the inventory of greenhouse gas emissions and identify emissions trends, we selected a base year, which is a reference year against which changes in emissions are measured over time. We selected the average annual emissions in fiscal years 1998 through 2001 as the base year because this is the time period set by the Chicago Climate Exchange, a voluntary greenhouse gas reduction program. We collected activity data from the Architect of the Capitol (AOC), GAO, Government Printing Office (GPO), Library of Congress, Congressional Budget Office, Senate Sergeant at Arms, House of Representatives Chief Administrative Officer, and General Services Administration (GSA) for each source of emissions, such as kilowatt hours of electricity, from fiscal years 1998 through 2006. In general, we multiplied the data by a corresponding emissions factor to determine emissions for each year. An emissions factor is a representative value that relates the quantity of a pollutant released to the atmosphere with an activity associated with the release of that pollutant. See table 2 for a list of emissions factors. We converted all greenhouse gas emissions to carbon dioxide equivalents by multiplying emissions for each greenhouse gas by its corresponding global warming potential. See table 3 for a list of the global warming potential of each greenhouse gas. The House of Representatives Chief Administrative Officer was unable to provide fuel use data from the House of Representatives’ 23 vehicles or volatile organic compounds (VOC) emissions data from its furniture shop that performs wood refinishing, painting, and upholstery. In addition, AOC was unable to provide data on leaks from their oil, diesel and propane tanks. Therefore, greenhouse gas emissions from these sources were not included in our calculations. In analyzing emissions trends from the base year to fiscal year 2006, we used data from the National Oceanic and Atmospheric Administration to compare changes in the local weather to changes in emissions to help explain emission trends. Some legislative branch entities verified the accuracy of their activity data and made corrections as they deemed appropriate. Some entities also made assumptions about their data. For example, AOC’s data were incomplete because there were periods of time for which AOC was not billed for energy use. AOC officials made the assumption that these facilities were under the control of a contractor/vendor during this period and bills were being paid for by these outside entities. We did not independently verify the accuracy of the data. In calculating the greenhouse gas emissions, we also had to make several assumptions in the absence of data. (See app. II for additional details on the calculations and assumptions.) Unless otherwise noted, we determined the data were sufficiently reliable for the purposes of this report. To identify a strategy for reducing emissions, we reviewed documents from the World Resources Institute, and Congressional Research Service; and we interviewed officials and reviewed documents from AOC, GPO, and GAO to learn about energy audits and emissions reduction projects that the legislative branch has already implemented. We also interviewed officials from the National Renewable Energy Laboratory and DOE’s Federal Energy Management Program about energy audits, and types of emissions reduction projects and their cost-effectiveness; and officials from GSA about emissions reduction projects related to vehicles. In addition, we also interviewed Pepco Energy Services about its renewable energy contracts with the legislative branch agencies. We conducted our work from August 2006 through April 2007. To develop a greenhouse gas inventory in accordance with the Greenhouse Gas Protocol, we set an organizational boundary, operational boundary, and base year. This boundary defines the legislative branch and the criteria for reporting emissions. For the purpose of this report, the legislative branch includes the Architect of the Capitol (AOC), GAO, Government Printing Office (GPO), Library of Congress (LOC), Congressional Budget Office (CBO), and U.S. Botanic Garden. AOC has jurisdiction over the day-to-day operations of the Senate Office Buildings, House Office Buildings, U.S. Capitol and Grounds, LOC Buildings and Grounds, Capitol Power Plant, and U.S. Botanic Garden. We applied the Greenhouse Gas Protocol’s control approach based on the operational control criterion. Under this criteria, the legislative branch accounts for 100 percent of emissions from operations over which it has operational control—the full authority to introduce and implement operating policies. While the Greenhouse Gas Protocol states that geographic location is not relevant to establishing an organizational boundary, the scope of this study was limited to the Washington, D.C., metropolitan area because the majority of the legislative branch activity is located in this geographic area and data for activities outside this area were not readily available. This boundary identifies and categorizes the sources of emissions from legislative branch operations. The inventory includes emissions from the combustion of fossil fuels in the Capitol Power Plant and emergency generators, business travel in government-owned and leased vehicles, and heavy machinery; leaks in refrigeration equipment; the release of volatile organic compounds (VOC) in furniture and print shops; leaks from oil, diesel and propane tanks; and the consumption of purchased electricity, natural gas, steam, and chilled water. These emissions are placed in categories, or “scopes,” defined by the Scope 1 (direct emissions from sources that are controlled by the legislative branch): combustion of fossil fuel at the Capitol Power Plant; combustion of fossil fuels in emergency generators; business travel in government-owned and leased vehicles, as well as heavy machinery; leaks in refrigeration equipment; leaks from oil, diesel and propane tanks; and release of VOCs in furniture and print shops. Total Scope 1 emissions in fiscal year 2006: 106,045 metric tons of carbon dioxide equivalents. Scope 2 (indirect emissions from the consumption of purchased electricity, natural gas, steam, and chilled water by the legislative branch): use of electricity, use of natural gas, use of steam, and use of chilled water. Total Scope 2 emissions in fiscal year 2006: 209,946 metric tons of carbon dioxide equivalents. Scope 3—optional (all other indirect emissions such as paper use, contracted work, shipping/courier services, Member or employee travel and commuting, resource extraction, production and waste disposal, and transmission and distribution losses associated with the consumption of purchased electricity): none of these optional sources were included in the inventory. A base year is a reference year against which changes in emissions are measured over time. We selected the average annual amount emitted in fiscal years 1998 through 2001 for the base year because this is the time period set by the Chicago Climate Exchange, a voluntary greenhouse gas reduction program. The following section explains calculations and assumptions needed to prepare the data for the standard emissions equation (activity data x emissions factor = emissions) as well as additional information on specific sources. It is organized by relevant emissions sources and greenhouse gases. The first part includes those calculations and assumptions that apply to all legislative branch operations; the second part includes those that are specific to individual entities. The second part also contains tables that show the results of the emissions calculations by entity, source, and scope. Methane and nitrous oxide emissions from business travel in government-owned and -leased vehicles: We substituted the appropriate carbon dioxide emission factors for the methane and nitrous oxide emission factors. However, unlike carbon dioxide emission factors for vehicles, which are expressed in kilograms per gallon, these emission factors are expressed in grams per mile. Therefore, we used the formula: mileage = fuel use x fuel economy when the mileage was not provided. Except where noted, we obtained the average fuel economy figures from the Federal Highway Administration’s 2004 Highway Statistics. For vehicles fueled with ethanol, we reduced the fuel economy by 30 percent because ethanol has approximately 30 percent less energy per gallon than gasoline. For vehicles fueled with compressed natural gas (CNG), we used an average fuel economy of 13 miles per gallon of gasoline equivalent as found at www.fueleconomy.gov. Since methane and nitrous oxide vehicle emission factors vary by model year and vehicle type, we categorized each entity’s vehicles by type (car, light truck, or heavy truck) and model year to the best of our ability. Since emission factors are available only through fiscal year 2002, we used the fiscal year 2002 figure for all vehicles from fiscal years 2002 through 2007. Similarly, if vehicles were older than the earliest available emissions factors, we used the earliest available factors. To estimate the mileage for each type of vehicle, we calculated the percentage of the vehicle type out of the total number of vehicles and then used that percentage of the total mileage. By equating the percentage of vehicle type with the percentage of mileage, we are assuming that all vehicles are driven equally. Emissions from the release of VOCs: We first calculated the carbon emissions using the formula: carbon emissions = VOC release x carbon content. We used the standard carbon content of VOCs, which is 56 percent of the VOC release, according to the U.S. Environmental Protection Agency (EPA). To convert carbon emissions to carbon dioxide emissions, we used the conversion factor 44/12 as laid out in EPA’s Inventory of U.S. Greenhouse Gas Emissions and Sinks: 1990- 2004. Emissions from the consumption of purchased steam: To convert steam consumption at the Ford House Office Building and GAO from pounds to BTUs, we used the heat content 1,003.342 BTUs/pound. To determine emissions, we calculated the activity data—that is, the fuel used by the General Services Administration (GSA) to generate every mmBTU of steam consumed. We used the formula: activity data [fuel input] = steam produced/boiler efficiency. We took boiler efficiency into account because some fuel input is lost in flue gases when fuel enters the boiler. Since we were unable to obtain the boiler efficiency for GSA’s boilers, we used the default efficiency value of 80 percent recommended by the EPA Climate Leaders program. Next, we divided the activity data into fuel type because the fuel input included both natural gas and oil. We calculated the emissions for each type of fuel and then added them to determine total emissions. Emissions from the consumption of purchased electricity and natural gas at leased facilities: Under the operational control approach set forth by the Greenhouse Gas Protocol, we defined operational control based on the agency occupying the space and, therefore, included the emissions from legislative branch capital leases and operating leases as Scope 2 emissions, even if this required estimating energy use based on an entity’s occupied square footage. Emissions from leased vehicles: Under operational controls set forth by the Greenhouse Gas Protocol, all leased vehicles are Scope 1 emissions. Therefore, there was no need to differentiate between government-owned and -leased vehicles. Adjustment for purchased renewable energy certificates (REC): We used the following formula to calculate emissions from renewable electricity: emissions = activity data for green electricity x emissions factor for power pool where renewable power is generated. We determined the power pool where the renewable power was generated using data provided to us by Pepco Energy Services. These emissions were subtracted from Scope 2 emissions to determine total net emissions. Emissions from business travel in government-owned and -leased vehicles: We needed to calculate activity data because CBO does not maintain fuel use data. The formula we used was: activity data = mileage/fuel economy. We used the average fuel economy figures provided by the Federal Highway Administration’s 2004 Highway Statistics. CBO first obtained a vehicle in the last 2 months of fiscal year 2004. Therefore, the activity data for that year are prorated. Emissions from business travel in government-owned and -leased vehicles: The vehicle activity data were available for fiscal years 2004 through 2006. Therefore, we assumed fuel use remained constant for fiscal years 1998 through 2004. Methane and nitrous oxide emissions from business travel in government-owned and -leased vehicles: We obtained 2006 model year and type data. We assumed the vehicle type data remained constant from fiscal years 1998 through 2006. We also assumed that the model year was 1 year earlier than the year for which we were calculating emissions, unless the model year provided in the fiscal year 2006 data was earlier. In such cases, we kept the earlier year. To convert cubic feet of compressed natural gas to gallons of gasoline equivalent, we used the conversion factor 121.5 cubic feet/gallon of gasoline equivalent found at www.fueleconomy.gov. Emissions from the consumption of purchased electricity and natural gas at leased facilities: LOC has operating leases for two facilities—Landover warehouse and National Library for the Blind and Physically Handicapped. GSA provided us with activity data for both leases. To convert cubic feet of natural gas to BTUs, we used the heat content 1,011.5691 BTUs/cubic feet. The Army Corps of Engineers leases space within GAO’s building. The Architect of the Capitol leases space within the Government Printing Office’s building. Capitol complex operations under the Architect of the Capitol’s (AOC) jurisdiction accounted for 88 percent of legislative branch greenhouse gas emissions in fiscal year 2006 (see fig. 3). The Government Printing Office (GPO) and GAO accounted for 7 percent and 4 percent of emissions, respectively. Capitol complex operations not under AOC’s jurisdiction, such as Senate Sergeant at Arms’ vehicles and release of volatile organic compounds and the Library of Congress’ two leased facilities, made up the remaining 1 percent of emissions. Overall, emissions from Capitol complex operations under AOC’s jurisdiction increased by 8 percent from the base year to fiscal year 2006. There were two decreases in emissions during this time period— a 7 percent decrease from fiscal year 2003 to fiscal year 2004 and a 1 percent decrease from fiscal year 2005 to fiscal year 2006 (see fig. 4). The emissions generated by GPO decreased by 18 percent from the base year (the average of fiscal years 1998 through 2001) through fiscal year 2003 and then continued to decrease through fiscal year 2006, for an overall decrease of 28 percent (see fig. 5). The emissions generated by GAO increased 9 percent through 2004 and then decreased 8 percent through fiscal year 2006, for an overall increase of 0.2 percent (see fig. 6). In addition to the contact named above, key contributors to this report were Sara Vermillion (Assistant Director), Elizabeth R. Eisenstadt, Michael Hix, Bert Japikse, Heather Krause, Sara Ann Moessbauer, Joshua Ormond, Frank Rusco, and Stephanie Sand. | Because of concerns about changes in Earth's climate due to greenhouse gas emissions and the potential economic and environmental consequences of these changes, GAO (1) inventoried greenhouse gas emissions generated by legislative branch operations in fiscal year 2006, as well as identified trends in emissions starting from a base year of the average annual amount emitted in fiscal years 1998 through 2001, and (2) identified a strategy for reducing emissions. To perform this work, GAO followed the Greenhouse Gas Protocol and additional guidance from the Environmental Protection Agency, using data provided by officials responsible for legislative branch operations and the General Services Administration. Legislative branch operations generated about 316,000 metric tons of greenhouse gas emissions (expressed in carbon dioxide equivalents) in fiscal year 2006. The amount of greenhouse gas emissions generated by legislative branch operations is equal to the emissions produced by about 57,455 cars and represents an increase of about 4 percent from the average annual quantity emitted in fiscal years 1998 through 2001. The largest source of these emissions (63 percent) was the consumption of electricity purchased from an external provider that relies primarily on fossil fuel combustion to generate the electricity. The second-largest source of emissions (32 percent) was the combustion of fossil fuels in the Capitol Power Plant to produce steam for the majority of the legislative branch buildings. The remaining 5 percent of emissions came from other sources that each generated 1 percent or less of emissions, such as natural gas and chilled water purchased from outside sources and business travel in government-owned and -leased vehicles. While emissions in 2006 increased 4 percent over the base year levels, emissions in the intervening years varied depending on factors such as fluctuations in weather, the fuel mix used at the Capitol Power Plant, and the quantity of renewable energy used by legislative branch operations. A strategy for reducing emissions includes conducting energy audits to identify and evaluate energy efficiency and renewable energy projects, as well as evaluating other emissions-reduction projects that may fall outside the scope of energy audits. Such a strategy would also involve developing an implementation plan that considers cost-effectiveness, the extent to which the projects reduce emissions, and funding options. Energy audits are a key step because the projects identified through the audits would address the largest sources of emissions--purchased electricity and fossil fuel combustion in the Capitol Power Plant--and would include information on cost-effectiveness and the potential for reducing emissions. Agencies could finance these projects through direct appropriations or contracts with utility or energy service companies. Since fiscal year 1998, the Architect of the Capitol, GAO, and the Government Printing Office have commissioned 11 energy audits of some of their facilities, but the audits have generally not been comprehensive and the agencies have varied in the extent to which they have implemented the projects identified through the audits. Another part of a strategy would involve evaluating the cost-effectiveness, emissions reduction, and funding options of projects that may fall outside the scope of energy audits--such as acquiring fuel-efficient vehicles--on a case-by-case basis. The energy audits and evaluations of other projects would provide information for legislative branch agencies to develop plans for implementing projects to reduce emissions. |
The Food Stamp Program helps recipients—individuals and families with low incomes—to obtain a more nutritious diet by providing food stamp benefits to supplement the funds they have to spend on food. Recipients must use their food stamp benefits to purchase only allowable food products from retail food stores that FNS authorizes to participate in the program. FNS administers the program in partnership with the states. FNS funds all of the program’s food stamp benefits and about 50 percent of the states’ administrative costs. FNS is primarily responsible for developing the program’s policies and guidelines, authorizing retail food stores to participate in the program, and monitoring retailers’ compliance with the program’s requirements. The states are responsible for handling the day-to-day operation and management of the program, including such duties as certifying the eligibility of individuals or households to participate in the program, delivering the benefits to recipients, and monitoring recipients’ compliance with the program’s requirements. Recipients use food stamp coupons or an electronic benefit transfer (EBT) card to pay for allowable foods. EBT systems that provide food stamp benefits to recipients use the same electronic funds transfer technology that many grocery stores use for their debit card payment systems. A food stamp recipient receives an EBT card and a personal identification number, and the recipient authorizes transfer of the food stamp benefits from a federal account to a retailer account to pay for the food received. At the grocery checkout counter, the recipient’s card is run through an electronic reader and the recipient enters the secret personal identification number to access the food stamp account. The Personal Responsibility and Work Opportunity Reconciliation Act of 1996 mandates that all states implement EBT systems before October 1, 2002, unless USDA waives the requirement. As of March 1998, 16 states had implemented EBT systems statewide. Twelve of these states deliver multiple program benefits with their EBT systems, including other federal and state programs. Additionally, 14 states use EBT systems in selected counties, and most of these states are in the process of expanding these systems statewide. All the remaining states are in the process of implementing EBT systems. Collectively, EBT systems supply about 40 percent of all food stamp benefits. According to a 1995 FNS study, about $815 million, or about 4 percent of the food stamps issued, was trafficked—exchanged for cash—by about 9 percent of the authorized retailers during fiscal year 1993. Supermarkets and large grocery stores redeemed 82.5 percent of all food stamp benefits and had an average trafficking rate of 1.9 percent of the benefits redeemed. In contrast, smaller stores redeemed 17.5 percent of the benefits and had an average trafficking rate of 13.0 percent of the benefits redeemed. Table 1 shows the percentage of benefits redeemed and trafficking rates by type of store. In addition, this study found that privately owned stores had much higher trafficking rates than publicly owned stores (i.e., retailers whose stock is traded publicly). For example, publicly owned stores had an average trafficking rate of .2 percent of redemptions. In comparison, privately owned stores had an average trafficking rate of 5.3 percent of redemptions. Like FNS, we found, in our analysis of the 432 cases of food stamp trafficking, that most trafficking occurred in small privately owned retail stores. About 98 percent of the stores engaged in trafficking were small groceries. Only seven stores, about 2 percent, were supermarkets with over $2 million in gross sales. The amount of trafficking may have changed since FNS conducted its 1995 study, which did not consider the effect of EBT. Since then, about 40 percent of food stamp benefits nationwide are supplied electronically, which allows easier identification of food stamp trafficking. Therefore, an analysis of the extent of trafficking using electronic data may indicate that violations are now occurring at a greater or lesser rate. USDA is primarily responsible for monitoring the Food Stamp Program to detect trafficking and for imposing administrative sanctions. Justice is responsible for prosecuting cases referred to it by federal agencies. Each agency’s responsibilities are summarized below. Within USDA, FNS and the Office of Inspector General (OIG) are responsible for monitoring program compliance by the approximately 185,000 stores currently authorized to redeem food stamps. While both agencies identify and investigate possible food stamp trafficking, FNS has the sole authority to impose administrative sanctions on violators, and the OIG concentrates on potential criminal investigations. FNS and OIG identify possible violators through several sources: allegations from USDA’s hotline and analyses of data in FNS’ Store Tracking and Redemption System (STARS) and EBT systems. Of these sources, STARS provides the most comprehensive information. FNS and the OIG use this system to monitor stores’ redemptions of food stamps and to identify retailers for investigation. STARS has a profile of each store, including sales volume, and tracks monthly food stamp redemptions. FNS uses this system to ensure that store owners caught trafficking and disqualified from the Food Stamp Program do not reenter the program. However, FNS officials told us that they do not currently track clerks caught trafficking to keep them out of the program or to help prosecute repeat offenders. They said that FNS plans to implement a system later this year to track these clerks. More recently, FNS and the OIG have begun using data from state EBT systems to identify possible cases of food stamp trafficking. More specifically, all states using EBT systems must provide their data on food stamp transactions to FNS for analysis. These data include the date, time, and amount of the sale; the store authorization number and cashier number; and the recipient’s identification number. Both FNS and OIG personnel analyze the EBT data using a computer program that identifies individual transactions or transaction patterns that indicate trafficking may be occurring. The use of EBT data has a particular advantage: Under the Personal Responsibility and Work Opportunity Reconciliation Act of 1996, federal agencies may use EBT data alone, without the expense of conducting an undercover investigation, to take action against retailers violating the requirements of the Food Stamp Program. USDA has cited the implementation of EBT systems as a significant step forward in identifying and combating food stamp trafficking. Once retail stores are identified as possible violators, FNS’ Compliance Branch, the OIG, or both conduct an investigation. Violations of the Food Stamp Act include trading food stamp benefits for cash (at a discount, such as 70 cents on the dollar) or for nonfood items. FNS takes administrative action against identified violators, such as disqualifying them from the program permanently or temporarily and/or imposing civil fines up to $40,000. FNS also refers cases to the OIG when it believes that a significant amount of trafficking has been occurring at a store and that a more complex case needs to be developed for prosecution. FNS investigated over 38,700 retail stores during fiscal years 1990 through 1997 and found violations of the Food Stamp Program in about 17,600 stores. Table 2 shows that FNS identified over 5,700 trafficking cases during this period. It also shows that for the same period, the OIG accepted only about one-fifth of those cases for investigation, primarily because it did not have the resources to investigate a larger number of cases. The FNS cases not investigated by the OIG were returned to FNS, which can take administrative action against the violators. Within USDA, the OIG is responsible for all criminal investigations and for coordinating the trafficking cases with the Department of Justice and other federal, state, and local agencies. The OIG investigates cases referred from FNS and initiates its own investigations using sources similar to FNS’. Table 3 shows that during fiscal years 1990 through 1997, the OIG reported on 5,551 investigations. In addition to the investigations conducted by FNS and the OIG, the states sometimes work with these federal agencies to investigate retailers’ fraud or abuse in the program. For example, under agreements with states’ law enforcement agencies, FNS provides the states with food stamp coupons to use in conducting their own trafficking investigations. According to FNS, although it has established agreements with 32 states, only 10 have conducted sustained efforts against food stamp trafficking. The OIG has the sole authority for referring trafficking cases to federal, state, or local authorities for prosecution under criminal statutes. Criminal penalties can include fines of up to $250,000 and/or jail sentences of up to 20 years. According to USDA data, during fiscal years 1990 through 1997, Justice and state and local governments prosecuted about 2,650 trafficking cases that had been investigated by the OIG, resulting in about 4,800 indictments, 4,300 convictions, and over $70 million in fines, restitutions, and recoveries. Justice can prosecute traffickers criminally and may pursue civil recovery under the False Claims Act. Justice has 93 U.S. attorneys, one in each federal judicial district, who decide whether to prosecute individual cases of food stamp trafficking. In addition, Justice’s Civil Division also has the authority to prosecute traffickers. According to Justice officials, U.S. attorneys have wide discretion to establish priorities based on the needs of their local jurisdictions and the guidelines set forth in The Principles of Federal Prosecution, as well as various national initiatives and priorities. Therefore, U.S. attorneys prosecute some food stamp trafficking cases while referring others to state or local prosecutors. However, we noted that many food stamp trafficking cases are not prosecuted by federal, state, or local prosecutors. In the absence of criminal prosecution, both the OIG and FNS refer significant trafficking cases to the Department of Justice for action under civil statutes. Civil money penalties, which come under the False Claims Act, can include fines of between $5,000 to $10,000 plus damages of three times the amount of food stamps involved in the trafficking. During fiscal year 1997, 82 settlements of false claims, which USDA had referred to Justice, amounted to civil money penalties of about $1.2 million. Since 1992, when USDA began referring cases to Justice, 566 false claims totaling over $5.9 million have been settled. Our analysis of the 432 cases of food stamp trafficking shows that store owners alone were involved in 40 percent of the cases, clerks alone were involved in 47 percent of the cases, and store owners and clerks together were involved in 13 percent of the cases. In every case, FNS disqualified the store owner from participating in the Food Stamp Program or assessed a monetary penalty against the store owner. Additionally, federal, state and local courts took action against store owners in 92 cases and store clerks in 43 cases. Court-ordered penalties ranged from fines to jail sentences. FNS took administrative action against the store owners in all 432 cases we reviewed. The large number of actions against store owners reflects the fact that, under the Food Stamp Program, store owners are legally responsible for any trafficking occurring in their stores, regardless of who was involved. Specifically, store owners in 410 cases were permanently disqualified from the program, owners in 18 cases were temporarily disqualified, and owners in 4 cases paid civil money penalties to FNS in lieu of being disqualified. In addition, FNS assessed administrative financial penalties totaling $1,077,062 against store owners in 175 cases. (See app. I for more information on the administrative actions FNS took against the 432 store owners.) In addition to FNS’ administrative penalties, federal, state, or local courts took action against store owners in 92 of the 432 cases we reviewed. In 16 cases, store owners were sentenced to jail. Most of these store owners were sentenced to less than 1 year in jail, although sentences ranged from 1 day to 2,310 days. Store owners were fined by courts in 53 cases, and in 30 cases owners were assessed fines of less than $1,000. Owners in 18 cases were assessed fines ranging from $1,001 to $10,000, and owners in 5 cases were assessed fines of over $10,000. The two largest fines were $240,745 and $24,040. According to FNS and OIG officials, the lack of resources at the OIG to conduct investigations to develop sufficient information necessary for prosecution and conviction has limited the number of court actions taken. (See app. II for more details of the court actions taken against the 432 store owners.) The following examples illustrate the court actions taken against store owners for trafficking: One store owner redeemed $4,145 in food stamp benefits for $2,050 in cash and was sentenced to 1 day in jail; another store owner redeemed $4,639 in food stamps for $2,783 in cash and received no punishment other than permanent disqualification; and another store owner redeemed $8,620 in food stamps for $4,310 in cash and received no punishment. Unlike store owners, store clerks who violate food stamp trafficking laws are not subject to FNS’ administrative actions. Clerks, however, can be prosecuted in federal, state, or local courts. Store clerks were caught trafficking by USDA investigators in 260 cases. However, clerks received court-ordered actions in 43 cases, or about 17 percent of those cases. Financial penalties for 33 cases totaled $36,541, ranging from $50 to $2,793. Jail sentences in nine cases ranged from 1 day to 3-1/2 years, although most sentences were for less than 1 year. (See app. III for more information on the court actions taken against the store clerks.) The following examples illustrate the court actions taken against clerks for trafficking: One store clerk redeemed $390 in food stamp benefits for $200 in cash and was sentenced to 1 day in jail; three clerks in one store redeemed $5,600 in food stamp benefits for $3,440 in cash, and none were punished; and one clerk redeemed $885 in food stamp benefits for $532 in cash and was not punished. We provided a draft of this report to the U.S. Department of Agriculture for its review and comment. We met with Food and Nutrition Service officials, including the Director, Benefits Redemption Division, and officials from the Office of Inspector General, including the Director, Program Investigations Division. The Department concurred with the report’s findings. We also provided Department of Justice officials an opportunity to comment on the sections of the report dealing with Justice. The officials of both departments provided a number of editorial and technical comments, which we have incorporated into the report where appropriate. To identify information on the extent of retailer trafficking and the characteristics of the stores engaged in such trafficking, we obtained and used USDA’s 1995 report on the extent of trafficking in the Food Stamp Program and interviewed the USDA personnel responsible for that study. This study was a one-time study to estimate the extent of trafficking. We also collected information on the impact EBT has had on identifying food stamp trafficking by contacting USDA officials in eight states that had statewide EBT systems at the time we began our review. To determine the roles and efforts of various federal agencies in minimizing food stamp trafficking by retailers, we interviewed and obtained information from officials of the departments of Agriculture and Justice. Specifically, we gathered information on their responsibilities relating to food stamp trafficking and obtained data on the number of trafficking cases the two agencies have identified and for which the store owners and clerks were punished, either administratively or through the courts over the last 8 years. To determine whether store owners or clerks were generally caught for trafficking food stamps and the extent of discipline for the trafficking, we reviewed USDA’s files in six states—California, Florida, Georgia, New York, South Carolina, and Texas—to identify who committed the trafficking, who was disciplined, and what disciplinary action they received. We selected these states because they currently distribute about 40 percent of the total food stamp benefits and because some of these states delivered benefits by statewide EBT systems while others did not. We obtained a computer printout from FNS headquarters of all trafficking cases in those six states in which a store owner was disqualified from the Food Stamp Program between July 1, 1996, and June 30, 1997. We then worked with personnel in FNS’ regional and state offices to identify additional cases in which store owners paid a civil money penalty in lieu of being disqualified from the program. We also worked with these officials to verify the accuracy and completeness of the data. We conducted our review from April 1997 through March 1998 in accordance with generally accepted government auditing standards. As arranged with your office, unless you publicly announce its content earlier, we plan no further distribution of this report until 30 days from the date of this letter. At that time, we will make copies available to appropriate congressional committees; the Secretary of Agriculture; the Attorney General of the United States; and other interested parties. We will also make copies available to others on request. Please contact me at (202) 512-5138 if you or your staff have any questions concerning this report. Major contributors to this report are listed in appendix IV. Not applicable. Not applicable. Ron E. Wood, Assistant Director Richard B. Shargots John K. Boyle Jacqueline A. Cook Dennis P. Dunphy William F. Mayo Carol Herrnstadt Shulman The first copy of each GAO report and testimony is free. Additional copies are $2 each. Orders should be sent to the following address, accompanied by a check or money order made out to the Superintendent of Documents, when necessary. VISA and MasterCard credit cards are accepted, also. Orders for 100 or more copies to be mailed to a single address are discounted 25 percent. U.S. General Accounting Office P.O. Box 37050 Washington, DC 20013 Room 1100 700 4th St. NW (corner of 4th and G Sts. NW) U.S. General Accounting Office Washington, DC Orders may also be placed by calling (202) 512-6000 or by using fax number (202) 512-6061, or TDD (202) 512-2537. Each day, GAO issues a list of newly available reports and testimony. To receive facsimile copies of the daily list or any list from the past 30 days, please call (202) 512-6000 using a touchtone phone. A recorded menu will provide information on how to obtain these lists. | Pursuant to a congressional request, GAO reviewed food stamp trafficking at the retail level, focusing on: (1) the extent of retailer trafficking and the characteristics of the stores engaged in such trafficking; (2) the roles and efforts of federal agencies in minimizing food stamp trafficking by retailers; and (3) whether store owners or clerks were generally caught for trafficking food stamps and the extent of discipline for the trafficking. GAO noted that: (1) according to the most recent Food and Nutrition Service (FNS) study available, about $815 million, or about 4 percent of the food stamps issued, was trafficked at retail stores during fiscal year 1993; (2) supermarkets and large grocery stores redeemed 82.5 percent of all food stamp benefits and had a combined trafficking rate of 1.9 percent of all benefits redeemed; (3) smaller grocery stores redeemed 17.5 percent of the benefits and had a combined trafficking rate of 13 percent of the benefits redeemed; (4) this study did not reflect the electronic redemption of food stamps; (5) therefore, an analysis of the extent of trafficking that includes electronic data may detect that violations are now occurring at a greater or lesser rate; (6) the Department of Agriculture (USDA) and Department of Justice (DOJ) are the principal federal agencies responsible for minimizing food stamp trafficking by retailers; (7) within USDA, both the FNS and the Office of Inspector General (OIG) are responsible for identifying and investigating retail stores engaged in trafficking; (8) FNS can take administrative actions against store owners engaged in trafficking, including disqualifying them from participating in the program and assessing fines; (9) OIG conducts criminal investigations and can refer store owners or clerks engaged in trafficking to DOJ or state or local governments for prosecution; (10) during fiscal years 1990 through 1997, FNS identified food stamp trafficking in over 5,700 retail stores, OIG investigated and reported on 5,551 trafficking cases, and DOJ and state and local governments prosecuted about 2,650 cases referred by OIG; (11) DOJ, in some jurisdictions, will pursue civil actions against store owners to collect money under the False Claims Act when it has not allocated resources to conduct criminal prosecutions or when it has a case in which the evidence for criminal prosecution is insufficient; (12) since 1992, when USDA began referring cases to DOJ, 566 false claims totalling over $5.9 million have been settled; (13) in the 432 food stamp trafficking cases GAO reviewed, store owners alone were caught trafficking in about 40 percent of the cases, and store owners and clerks together were caught trafficking in 13 percent of the cases; and (14) FNS permanently or temporarily disqualified the owners caught trafficking from participating in the Food Stamp Program in 428 cases and assessed financial penalities totalling $1.1 million against owners in 175 cases. |
Children in foster care tend to exhibit more numerous and serious medical conditions than other children, including mental health problems. Foster care begins when children are removed from their parents or guardians and placed under the responsibility of a state child welfare agency. Removal from the home can occur for several reasons. For example, parental violence, substance abuse, severe depression, or incarceration may have led to the children’s removal from the home. Other children and youth are referred when their own behaviors or conditions are beyond the control of their families or pose a threat to themselves or the community. The realities of foster care may further contribute to the challenges in meeting these children’s health care needs. Once children are removed from their homes, obtaining information on their health status and health history from their parents or guardians may be challenging. Also, children often move to several different foster homes or treatment facilities during the course of their stay in foster care, which may result in having different health care providers. Changes in placement pose significant challenges for agencies, foster parents, and providers with regard to providing continuity of health care services and maintaining uninterrupted information on children’s medical needs and course of treatment. Finally, in addition to specific characteristics or circumstances that complicate their care, children in foster care encounter some health care challenges in common with other health care users. Child welfare agencies generally expect that foster parents or other caregivers will recognize when children need medical attention and obtain the needed health services, but such services may be in short supply or difficult to access because of a lack of providers who serve Medicaid patients—particularly for some specialties or geographic areas. Children entering foster care may lack medical care prior to entry, and children with prior medical care may have experienced disruptions in care, changes in providers, and have missing or incomplete records. Figure 1 illustrates the steps that are typically involved in addressing health needs of children in foster care. All state child welfare agencies receive federal funds from ACF for children in foster care under two parts of title IV of the Social Security Act. The larger source of federal funds, under title IV-E, provides open-ended reimbursement for a portion of states’ foster care expenses for children meeting federal eligibility criteria, who represented about 43 percent of children in foster care in 2006. Title IV-E provided $4.8 billion to states in 2007 for the federal share of the expense of housing and feeding these children. States cover the remaining costs and 100 percent of the costs to house and feed children in foster care who do not meet federal eligibility criteria. State child welfare agencies also receive funds under title IV-B to provide services to children in foster care and to those remaining in their homes for the purpose of preventing conditions leading to the need to remove children from their homes. In 2007, about $700 million was available under title IV-B. State child welfare agencies cannot use title IV-E or most IV-B funds for the direct provision of health care services. Limited IV-B funds may be used for some health care services but are intended primarily for the support and preservation of families, rather than for children in foster care. Foster children who meet title IV-E eligibility criteria, on the other hand, are explicitly identified as a group that is eligible for coverage under Medicaid. As a condition of receiving federal funds, state child welfare agencies must agree to meet certain federal requirements, including requirements related to the health of children in foster care. Under both titles IV-B and IV-E, states must submit plans to ACF that contain a number of statutorily required elements. For title IV-E, state agencies must have a written case plan for each child that includes specific health information, such as records of immunizations and medications, to be shared with foster care providers at the time of placement. The agencies must also have standards to ensure that children are provided services to protect their safety and health. Because these standards have not been further defined in statute or regulation, states have some flexibility with respect to their form and content. For safety and health standards, some states have cited standards for licensing foster care facilities, training foster care parents, or credentialing staff. In recent years, Congress has twice amended title IV-B, subpart 1 to add new state plan requirements related to the health of children served by child welfare agencies. Congress initially required that state plans describe the involvement of physicians and other medical professionals in the assessment and treatment of children in foster care. This requirement was effective with state plans approved by ACF in 2007. In October 2008, as we completed our review, Congress further amended title IV-B, subpart 1 to require state agencies to develop plans for the ongoing oversight and coordination of health care services for children in foster care. This new requirement expanded on the earlier requirement by mandating that the agencies include in their plans schedules for initial and follow-up health screenings that meet reasonable standards of medical practice; steps to ensure continuity of health care services, which may include the establishment of a medical home—a primary health care provider or group—for every child in care; oversight of prescription medications; and information on how children’s needs identified through screenings will be monitored and treated and how their medical information will be updated and appropriately shared—as for example, by using electronic health records. These requirements apply to all children in foster care, regardless of whether or not the children meet federal eligibility criteria. Starting in 2001, ACF took a new, results-oriented approach to its oversight of state child welfare programs, focusing on whether children and their families served by these programs achieved positive outcomes. This oversight effort involved four phases of Child and Family Services Reviews (CFSR), as shown in figure 2. ACF expects to complete the final phase of the initial round of CFSRs in 2009. In the second phase of the initial round of the reviews completed in 2004, ACF identified significant performance challenges, particularly with respect to meeting children’s mental health needs. ACF assessed state child welfare agency performance on 45 indicators across a wide range of areas, such as children’s safety and statewide information systems. On the two health indicators addressing physical and mental health, ACF identified 20 states as showing strengths in providing services to meet children’s physical health needs, and 4 states also showed strengths in meeting the mental health needs of children in foster care and children remaining in their homes under agency supervision. Nearly all states were required to implement program improvement plans because they did not show strengths in physical health, mental health, or both. ACF is required by statute to offer technical assistance, to the extent feasible, to help such states develop and implement plans to improve outcomes for children, including health outcomes. When ACF determines that a state has not met the jointly developed goals and action steps identified in these plans within 2 years of approval of the improvement plan, ACF regulations specify that it will withhold a portion of the state’s grant funds. In the course of its oversight, ACF identified several challenges that states faced in meeting the health needs of children in their care, as summarized in table 1. Medicaid is the primary health care funding source for most children in foster care. The Medicaid program is administered at the federal level by the HHS’s Centers for Medicare & Medicaid Services (CMS) and is jointly financed by the states and the federal government. All state Medicaid agencies receive federal funds for the Medicaid program under title XIX of the Social Security Act. Within broad parameters set by federal statute and regulation, state Medicaid agencies are responsible for determining eligibility and establishing the services and payments offered. Although many coverage, eligibility, and administrative decisions are left to individual states, the federal government sets certain requirements for state Medicaid programs, such as coverage of certain screening and treatment services. Children who meet federal eligibility criteria for IV-E foster care are required to be covered by state Medicaid programs under federal law. In addition, states have chosen to extend Medicaid coverage to other children in foster care. In 2004, Medicaid expenditures for children in foster care exceeded $5 billion. Children in foster care who are enrolled in Medicaid may receive services through one of two distinct service delivery and financing systems— managed care and fee-for-service. Under a capitated managed care model, states contract with a managed care organization and prospectively pay the plans a fixed monthly fee per patient to provide or arrange for most health services. Plans, in turn, pay providers. In the traditional fee-for- service delivery system, the Medicaid program reimburses providers directly and on a retrospective basis for each service delivered. States are required to offer certain screening and treatment services to children enrolled in Medicaid. Termed Early and Periodic Screening, Diagnostic, and Treatment services (EPSDT), these screenings must include, but are not limited to, a comprehensive health and developmental history, a comprehensive unclothed physical exam, appropriate immunizations, laboratory tests, and health education. The required services include vision, dental, hearing, and services for other conditions discovered through screenings, regardless of whether these services are typically covered by the state’s Medicaid program for other beneficiaries. The state Medicaid agencies establish standards for the timing and frequency of these screening and treatment services and set their own payment rates for fee-for-service providers of these services. Federal regulations require that EPSDT screening services be provided in accordance with reasonable standards of medical and dental practice determined by the state after consultation with recognized medical and dental organizations involved in child health care. In addition to EPSDT, states may choose to offer optional Medicaid benefits, such as rehabilitative services and targeted case management for children in foster care. States have used the rehabilitative services option for children in foster care who have mental or developmental problems as a means of providing a wide range of services designed to help them achieve their highest level of functioning. States have used targeted case management in order to provide case management services to a defined group of Medicaid-eligible individuals, such as children in foster care. Such case management activities have included assessing a child’s needs, developing plans to meet those needs, referring a child to services, monitoring the receipt of such services, and ensuring any necessary follow-up care. Federal Medicaid funds are available for a portion of case management activities, as long as funds are not available from other programs or from other entities, such as other insurers, that would be legally obligated to pay for such services. However, concerns exist that Medicaid funds have been inappropriately used, and CMS has denied payment for services when funds were available from other programs, such as Title IV-E. In 2007, CMS issued rules—an interim final rule for case management services and a proposed rule on Medicaid program coverage for rehabilitative services—that further defined the use of Medicaid funds for these benefits for children in foster care. However, in 2008, Congress passed and the President signed into law a moratorium on certain aspects of the rules that remains in effect until April 1, 2009. In addition to ACF and CMS, other agencies within HHS have roles in sustaining the health of foster children through supporting research, providing grants, or offering technical assistance that may assist with providing necessary health care services to children in foster care, as shown below: The Agency for Healthcare Research and Quality is responsible for supporting research designed to improve the quality of healthcare, reduce its costs, address patient safety and medical errors, and broaden access to essential services; the Health Resources and Services Administration (HRSA) administers programs related to maternal and child health, as well as services specific to particular conditions, such as human immunodeficiency virus and acquired immune deficiency syndrome (HIV and AIDS); and SAMHSA funds programs and services for individuals—as well as their families and communities—who suffer from or are at risk for substance abuse or mental health disorders. To help facilitate the timely identification of foster children’s health care needs, all 10 states we examined had adopted specific policies with regard to the timing and scope of assessments, and 4 of these states also reported using designated providers to conduct the assessments. The policies generally call for assessments shortly after children enter care and take one of two forms: (1) a two-stage assessment comprised of an initial screening followed by a comprehensive assessment or (2) a single comprehensive assessment. Most states we selected for study included a requirement for screening of children’s mental health and developmental needs, and most of the states we studied cited substance abuse screenings. Researchers and state officials have suggested that having designated providers conduct assessments may improve the quality and utility of assessment results. State officials report that these assessment practices have allowed them to make more appropriate and lasting placements of children in foster care and also to provide follow-up treatment more quickly than before these practices were in place. Some research also links specific assessment policies to higher rates of follow-up. While federal law did not specifically require assessments before fiscal year 2009, the 10 states we reviewed had made assessments of children’s physical health mandatory for all children entering care, as recommended by medical and other professional associations. Because children often enter foster care with serious health conditions and, at times, without easily accessible medical histories, it is important to identify their health needs as quickly as possible. Health or developmental status may be a critical factor in determining the appropriate placement and level of care for children, as in the case of children with HIV or significant behavioral problems. Where there are explicit and comprehensive policies mandating assessments of all children entering care, greater percentages of children are likely to be assessed, according to a survey of a nationally representative sample of child welfare agencies. Further analysis of these survey data showed that agencies with comprehensive developmental screening policies were more likely to evaluate children, refer them to early intervention agencies, and engage in joint planning of health care services. Officials from the 10 states we reviewed reported using two general approaches to conducting assessments, but all required some health assessment within 30 days of a child’s removal from his or her home. Florida, Illinois, Massachusetts, and New York generally conduct screenings or assessments in two stages: (1) an initial screening within 24 hours to 7 days to check for immediate health needs and (2) a later, fuller assessment within 30 days of entry into foster care. Some state officials expressed the view that waiting a while for the fuller assessment may give children the opportunity to adjust to their changed circumstances and for this reason may offer providers a more accurate picture of the children’s health. Additionally, they noted that assessments may be lengthy and require significant time to complete. For example, Florida officials explained that their comprehensive assessment of mental health, development, and substance abuse takes 20 hours to complete, double the amount of time the state previously allotted in order to cover all necessary aspects of care. A second approach to identifying children’s health care needs—used by California, Delaware, Oklahoma, Texas, Utah and Washington—invokes a one-stage assessment process mandating that it be completed within 14 to 30 days of entry into foster care depending on the state. Utah officials explained that the state dropped its earlier requirement for an initial screening followed by another assessment, in part because the results were duplicative. However, the state expects caseworkers to be alert to urgent health needs and arrange treatment as needed. The state has written guidelines advising caseworkers that if there is any sign of abuse or neglect or if the child is ill, the child should be seen by a health care provider within 24 hours. Once a child enters foster care and receives an initial assessment, state foster care policies in most of the states we selected for study required that ongoing assessments follow the schedules established by state Medicaid agencies for children’s screening, which are based on the children’s age or the time between routine checkups. Six of the 10 states we selected for our study called for children in foster care to receive at least annual screening, either under a separate health standard applicable to foster children or because their EPSDT standard for all Medicaid enrollees called for at least annual screenings, consistent with the 2008 American Academy of Pediatrics’ recommendation on preventive pediatric care. See table 2 for a summary of the number of EPSDT screens incorporated in the Medicaid EPSDT standard for all children in the Medicaid programs in the 10 states we reviewed. In addition to policies requiring assessments of children’s physical health, 8 of the 10 states we studied also reported requiring screening or assessments of children’s mental and developmental health shortly after entry into foster care. Research indicates that an estimated 30 to 60 percent of children in foster care may have chronic health conditions, and the proportion estimated to have serious health care needs rises to over 80 percent when behavioral, emotional, and developmental concerns are included. Guidelines issued by professional associations emphasize the importance of assessing mental health and other behavioral health issues for children in foster care. An analysis of the results of ACF reviews conducted between 2001 and 2004 found no evidence of policies requiring an assessment of children’s mental health in most states; in one state, stakeholders noted that children did not get mental health assessments unless there were problems observed. The ACF reviews have helped focus attention on the mental health needs of children in foster care, however, and we found that most of the 10 states we selected for study had adopted policies to screen or assess the mental health and development of children entering foster care. Most states we studied had also adopted policies requiring or recommending screening youth entering foster care for substance abuse. For example, Delaware officials told us that—since February 2006—its initial health screening has required the inclusion of a component alerting staff to any mental health or substance abuse problems for all children 4 through 17 years of age. Other state policies varied in whether or not they included specific time frames. For example, New York has no mandatory time frame for its required mental health assessment, although it is recommended that this be completed within 30 days of placement. State guidance also varies on the tools used for the assessments. In some states, such as Massachusetts, the steps taken by individual health practitioners as part of either (1) the comprehensive screening within the first 30 days or (2) in later Medicaid screenings are considered sufficient to meet the policy requirements. In other cases, states have adopted or are considering adopting specific screening tools. For example, Utah reported the state had specified the tools to be used in assessing the development of children ages 4 months to 5 years. Officials in both California and Oklahoma reported they were working to identify assessment instruments for the early identification of children with mental health or developmental needs. Four states we studied reported using designated providers to perform certain initial and comprehensive assessments, which some evidence indicates can increase the consistency and thoroughness with which children’s physical and mental health needs are identified. Illinois, for example, requires that children’s initial health evaluations be conducted by a network of hospital emergency rooms and clinics, while subsequent assessments are generally conducted by a network of community- and facility-based physicians, with foster parents permitted to use others on request. We identified two studies that associated use of designated or specialized health care providers for foster children with higher rates of preventive and specialty care. With regard to physical assessments, states that identified the use of designated providers to perform initial screens and comprehensive assessments reported that these providers functioned as part of a network of providers, as primary providers in specific locations, or both and, in some cases, that the use of such networks had enhanced the numbers receiving assessments. For example, Florida reported that some of its counties have focused on developing a network of trained providers, while Oklahoma and Utah identified specific locations in urban areas—such as clinics or hospitals—where some children could receive assessments. In most cases, these initial providers could serve as medical homes for the children they assessed. (See table 3 for more information on how states use designated providers.) Some state officials commented that the use of a specific network of physicians also facilitated quality improvement efforts. For example, a physician with Cook County’s Healthworks program noted that the quality of health assessments—once a subject of complaint from child welfare field staff—had improved when assessments were channeled to a network of specific providers that could be supported by targeted training efforts. He noted that the health assessment for a child entering foster care requires a more thorough, detailed approach and level of documentation than that involved in a standard EPSDT well-child exam. The states shown in the table as using designated providers elaborated on their practices and, in some instances, noted specific strategies that may contribute to providers’ effectiveness: Illinois requires that the initial health screening be completed within an hour of the child’s arrival at the medical facility. Illinois officials reported that appointments for the screening in Cook County are arranged through a toll-free telephone service called HealthLine, which is staffed around the clock by a child welfare contractor who can obtain priority service for children so they do not experience lengthy waits in hospital emergency rooms. Hospital emergency rooms are used for many initial screenings because they are accessible outside of normal business hours, but the comprehensive health assessments generally take place in physicians’ offices because they require more time. Research on children enrolled in the Illinois program has shown that these children experienced higher rates of preventive and necessary specialty care than other children with similar socio-economic characteristics who were not enrolled in the program. Although the research did not evaluate the effectiveness of the program itself, the researchers concluded that the increased attention and oversight of the health care for the children enrolled in the program affected their outcomes. Oklahoma officials noted that their clinic-based assessment process began with a pediatrician who had experience working with children who had been removed from their homes and placed into shelters. Concerned about the continuity of care for children in these situations, this pediatrician set aside particular times for children in foster care to visit the clinic and see a familiar provider. A second clinic that was opened in another large city is also under the medical direction of a pediatrician familiar with the needs of children in foster care. Officials told us they believe that children’s health care benefits when they are served by providers with knowledge of the foster care population. In addition to using designated providers for physical health screens and comprehensive assessments, a few states reported using a mental health specialist who worked with caseworkers to conduct assessments. The use of specialists to conduct mental health screenings can be an effective means of identifying children’s mental health needs. One study that surveyed a nationally representative sample of agencies found that involving mental health specialists in assessments resulted in a greater identification of mental health needs, as well as improved follow-up care, than were received by children whose assessments did not include a mental health specialist. The mental health assessments used by states we selected varied. In some cases, the assessments were comprehensive social assessments that covered areas such as mental health, emotional health, school, work, and community involvement. In other cases, the focus was narrower, covering specific topics such as indicators of mental illness. Washington officials reported that specialized social workers conducted comprehensive assessments using standardized tools that assess several aspects of social and mental health needs, including behavioral, developmental, educational, family, and social issues. For physical or mental health concerns identified during the screening that require treatment, state officials indicated that the social workers refer children to appropriate health care professionals. To address the challenge of ensuring delivery of appropriate health care services to children in foster care, several of the states we selected for review adopted practices designed to facilitate access to care, coordinate services, and review medications for children in foster care. Practices relating to access to care included efforts to hasten determination of Medicaid eligibility, implement financial incentives for providers to serve children in foster care, and enhance access to medical specialists for various subgroups of children. Care coordination practices that the selected states identified employed either nurses or other health care managers to help ensure that children in foster care received necessary health care services. Officials of specific states we contacted said that such care coordination had increased rates of immunization, initial assessment, and well-child visits. Finally, officials from six of the states we studied pointed to policies that they had implemented requiring the review of prescriptions for psychotropic medications commonly used to treat mental health disorders for children in foster care. Among the states we studied that identified a practice state officials believed noteworthy in enhancing access to care, some had identified assigning certain staff—from their Medicaid offices or from their child welfare offices—to ensure that children in foster care were quickly reviewed for Medicaid eligibility. Because the removal of a child from home can change his or her Medicaid eligibility status, some states we contacted had taken steps to save time in certifying Medicaid eligibility and facilitate new foster care beneficiaries’ access to providers. For example, Delaware had assigned two Medicaid staff to foster care cases, while Florida, Utah, and Illinois used staff members from the child welfare offices to determine eligibility for Medicaid. Utah has a written agreement between the state child welfare and Medicaid agencies that specifies that certain staff in Utah’s Division of Child and Family Services will determine Medicaid eligibility for children in foster care. The purpose of this arrangement is to enhance services to children and families, simplify administration, improve accuracy, conserve state resources by avoiding duplication, and maximize legitimate Medicaid funding. In Illinois, children coming into foster care are presumed to be eligible for Medicaid. For purposes of formal eligibility determination, Illinois officials reported that using specialized staff members in the state child welfare agency’s central office to complete the determination had sped up the process. Specifically, they reported that a process that once took 3 to 4 months could now be completed within 4 weeks of issuance of the temporary medical card. Florida officials also reported that their agreement that staff from the child welfare department determine Medicaid eligibility reduced the amount of time required to make these determinations from 18 days to within 24 hours. Illinois and Washington are among the states that offer financial incentives to providers who treat children in foster care, since providers may be reluctant to serve children in foster care. In Illinois, physicians serving children in foster care are paid a one-time $15 fee to initiate a paper health passport to document the health history and ongoing care of the child. Additionally, the state uses an enhanced payment rate for initial health screenings conducted in hospital emergency rooms. Washington officials reported that the state increased its payments in November 2001 for medical providers who conducted well-child examinations for children in foster care. At the time, these rates were about twice the reimbursement rate paid in other cases. State officials reported that since 2001, other Medicaid rates—such as payments for EPSDT services—have also increased, so that rates for foster care children are no longer twice as high. However, the foster care rates remain equal to or substantially greater than the standard Medicaid rates. In April 2008, Washington officials told us that approximately two-thirds of children received well-child examinations, up from about 17 percent before the state increased the rates in 2001. Utah, Illinois, and New York have instituted a variety of programs to increase access to medical specialists or subspecialists. Under some circumstances, obtaining specialty care can be difficult for Medicaid- eligible children, and such efforts for children in foster care may be even more difficult if the children have complex health needs or changing placements. These states’ efforts typically focused on specific subgroups of children in foster care, such as those in rural areas, those who need mental health services, and those who would otherwise require institutional care. Children in Rural Areas: Utah and Illinois have efforts focused on children living in rural areas where it may be harder to find a pediatric health specialist or subspecialist. For example, Utah has eight clinics to which multidisciplinary teams travel in order to provide specialty services for children with special health care needs across rural Utah. State officials told us that in some cases, children are seen more quickly in these locations than in Salt Lake City. Illinois officials reported transportation is available and sometimes is used to get rural foster children to providers, including oral dental surgeons, orthodontists, and child psychiatrists. Despite these efforts, state child welfare officials cited a continuing challenge in obtaining mental health and substance abuse services, and especially child psychiatry for children in Medicaid and other publicly- funded medical care, not just those in foster care. As a result, Illinois has also begun to look at the use of telepsychiatry in one of its downstate regions. Children Needing Mental Health Services: To address children who are experiencing mental health crises, Illinois developed a psychiatric crisis intervention program with a single, statewide 24-hour, 7-day-a-week crisis hotline. When a person calls the crisis line, a mental health provider is expected to reach the child in crisis within 90 minutes of the call to conduct a screening and determine if the child requires psychiatric hospitalization. Following this decision, the mental health provider is to continue to provide treatment and other service interventions for a minimum of 90 days. State officials reported that this program serves about 18,000 children per year, including all children who receive Medicaid or other public funding for medical care (not just those in foster care). Medicaid covers all the services provided by this program, which began in 2004, on a fee-for-service basis. Children Who Might Otherwise Require Institutional Care: With respect to difficulty in accessing specialty services, New York launched a program in early 2008 for children in foster care who have developmental disabilities, serious emotional disturbances, and medical problems that are so severe they would otherwise likely be in restrictive and high-cost institutions. By making community-based services available to a fixed number of these children, the state hopes to help them function in family and community settings instead. New York officials reported that when the program is fully implemented after 2011, it will serve approximately 3,000 children in foster care. Several states we studied discussed their development of the role of health care managers with the goal of improving health care and health outcomes for children in foster care. While all children in foster care have caseworkers, they focus on issues related to the child’s safety and permanency and do not necessarily have medical expertise. Typically, health care managers are nurses who are colocated with the child welfare agency and work with the child’s foster care caseworker. Officials in California told us that the nurses are colocated in the child welfare offices so they can easily talk directly to caseworkers. These nurses may be able to more quickly spot gaps in care than foster care caseworkers because they are trained to understand children’s health and developmental needs, they are able to communicate clearly with health care providers, and they can provide medical guidance to both foster care caseworkers and foster and biological parents. In some states—such as California and Utah—each child is assigned a nurse, while in other states—such as Illinois and Massachusetts—only those children with specific or medically complex needs are individually assigned to a nurse. In some states, public health nurses provided the care coordination services for children in foster care, whereas in Illinois, the state child welfare agency or a local contracting agency served as health care manager. Some positive results in achieving health-related goals for children in foster care had been documented for a health care management effort in New York. The specific services provided by health care managers varied in the states we contacted, but usually included the development and maintenance of the child’s health history, medical case planning—that is, identifying the child’s medical needs and arranging for receipt of medical services—and identification of medical professionals available to provide services to children in foster care. For example, state officials in Utah told us that the state has 29 Maternal and Child Health agency nurses serving about 90 children each. The nurses may provide medical, mental health, and dental consultation; identify the child’s primary care provider; place the child in the appropriate health plan; gather, evaluate, and document the health history of each child; track ongoing health care; and maintain an up-to- date medical history on each child within an electronic database. Officials in Utah reported that use of public health nurses has reduced errors in transcribing information about medical history and ongoing care into the state’s electronic database. Utah officials also reported that they find that biological parents are more comfortable talking openly with the nurse, who they said biological parents tend to view as an advocate rather than an adversary. According to data provided by state officials, another result of the program is that more children are getting their comprehensive assessments completed than before, and more quickly than required. Specifically, Utah officials reported that about 76 percent of children received these assessments in a timely fashion in 2008, compared to 58 percent in 1998, before the program was implemented. They further noted that these assessments are being conducted in 18 days, on average, rather than taking the full 30 days allowed by state requirements. Health care managers may also provide other services. Caseworkers in Illinois told us that in medically complex situations, families can be assigned to a regional nurse who can provide recommendations and assist a caseworker in communicating with the family on medical needs. Similarly, in Massachusetts, staff told us that nurses in regional offices provide consultation to staff regarding the medical needs of all children and work with children who have difficult or complex medical needs. In Illinois, officials at one of the privately-run case management programs in Chicago became concerned about immunization and well-child exam completion rates. As a result, they implemented a paper-based reminder- recall system that gives foster parents, providers, and caseworkers information about when and what medical services are needed. Prior to the implementation of the reminder-recall system, officials in one agency that had adopted it told us that 77 percent of children had up-to-date immunizations and 44 percent had received appropriate well-child visits. These officials reported that in 2007, after implementation of this reminder-recall system, 96 percent received appropriate immunizations and 90 percent had received well-child care. We were told that the five community-based medical care management agencies in Cook County used the reminder-recall system. In addition, some counties outside of Cook County have instituted a similar system. New York conducted a formal evaluation of its health care management project and found that such care coordination had a significant, positive impact on many aspects of care, including the receipt of both initial physical and dental assessments, access to nonpreventative care, and health-related contacts between agency workers and foster parents. However, funding was not available for the state to continue this program when the initial pilot project was completed and the project did not meet nonhealth and well-being related child welfare goals, such as reducing the number of days spent in foster care and increasing the likelihood of leaving foster care for a permanent placement. Officials in six of the states we selected for interview identified specific policies they had adopted to govern the review of psychotropic medications intended for the treatment of mental health disorders. An Illinois official noted that the use of psychotropic medications is uniquely challenging for children in foster care, given that foster children who change placements often do not have a consistent person to plan treatment, offer consent, and provide oversight. Most of the policies states identified require an extra level of review beyond the person prescribing the medication, either by state officials or local experts. Concerns have been expressed that psychotropic medications have frequently not been tested for their safety and efficacy with children, and one study of children in foster care found that the most frequently prescribed medication was an antipsychotic drug that had not been tested for use by children and adolescents. Some research has also found that use of psychotropic drugs by children in foster care is three to four times greater than by other low-income children insured by Medicaid. Greater prevalence of use is not, by itself, evidence of inappropriate use; children in foster care may be more likely to have conditions for which the drugs are indicated. However, administrative data from one state associated the introduction of its policy with modest decreases in prescribing psychotropic drugs and declines in specific patterns of prescribing, such as prescribing multiple drugs. Texas has developed a policy that notes the importance of conducting a health history, psychosocial assessment, mental status exam, and physical exam before prescribing psychotropic medications. The policy suggests that alternative interventions should generally be considered before beginning the use of psychotropic medications and outlines specific circumstances under which a case may require further review. Data examining the percentage of children prescribed a psychotropic medication for at least 60 days, the percentage prescribed two or more medications concurrently from the same drug class, and the percentage prescribed five or more medications concurrently showed decreases from fiscal year 2004, before the new policies were implemented, through fiscal year 2007. Because of concerns raised about the appropriate use of psychotropic medications, California requires judicial approval for their administration to a foster child. The prescribing physician must make the case to a juvenile court judge that the particular medication is appropriate for the given child and that alternatives have been considered. The Judicial Council of California has adopted rules of court to implement this legal requirement. Specifically, these rules require that an application be made to a juvenile court judge requesting the use of psychotropic medication and that the application include the signature of the physician to request the medication’s use; the child’s diagnosis, the specific medication, and dosage recommended for use; the anticipated benefits and possible side effects of the medication; a list of other medications the child is taking, along with a description of possible drug interactions; a description of other treatment plans; and a statement that the child has been informed of the recommended course of treatment with their responses. The court may grant the application or may delegate that authority to the parent if it is found that the parent poses no danger to the child and that the parent has the capacity to understand the request. In an emergency, the rules allow the administration of psychotropic medications without court approval in accordance with existing law, but court approval must be obtained within 2 days. Other states have worked with universities and local experts to help with the oversight of psychotropic medication use by children in foster care. For example, Illinois has contracted with a university to provide an independent review of each psychotropic medication request to ensure safe and appropriate usage with children in foster care. The request is forwarded to a board-certified child and adolescent psychiatrist who reviews the information and determines whether to approve, deny, or adjust the request. According to state officials, Florida has also worked with a local university to develop a process whereby caregivers of children in foster care receive a consultation with a physician before psychotropic medications are prescribed. The state also has a mandatory preconsent consultation for all children age 5 and under in foster care. The state then tracks information about the medication, such as the prescribing physician, medication, dosage, number of refills, and its purpose. As a result, the state is able to determine the number of children receiving certain types of medication and can then identify areas where there might be concerns about inappropriate use. Oklahoma and New York also work with experts to review and provide training related to the use of psychotropic medications by children in foster care. To address the challenges of documenting and monitoring children’s health care, some states we studied shared health care data across various state systems to acquire more complete medical histories and used quality assurance mechanisms, such as medical audits or specialized case reviews, to track receipt of services. Efforts to share health care data generally focused on enhancing access to existing health information among parties responsible for the health of children in foster care while meeting requirements for data security and privacy protection. For example, through data sharing with Medicaid and other data sources, Texas has developed an electronic health record—known as the Foster Care Health Passport—that can be viewed by authorized individuals involved in the child’s care through a secure Web site. More commonly, states we studied identified initiatives that also combined data from different sources but did not offer electronic access or provide for any updating at the point of care, relying on paper-based transfers of medical histories and providers’ updates via the foster parents. Quality assurance activities have also made use of electronic systems as a means of monitoring the receipt of services for children in foster care. These efforts can be important to ensuring that individual children receive the appropriate level of services, avoiding duplication of services such as immunizations, and ensuring the receipt of needed services. Some states share data with Medicaid and other state systems, such as immunization registries, in order to obtain more complete medical information than might otherwise be available as a child enters foster care. Basic health information should be included in a written case plan and provided to foster parents before children are placed with them. Obtaining information that is important to a child’s health records can be a complex task, which may involve four or more separate systems (see fig. 3). Additionally, information collected from parents and caregivers may also be of assistance in understanding the needs of a child. States that pointed to records management systems as a means of developing health history cited the use of an electronic health record— sometimes termed an electronic passport—or other efforts to combine sources of information. Combining these sources of information is important because few children enter foster care with records that accurately identify their health providers, health conditions, or receipt of services. Without these records, their health care may be delayed until records are available, or their care may be compromised. For example, officials in two states told us of cases in which health providers had refused to provide specific treatments to children in foster care because they did not know their histories or did not have medical records available to prevent improper treatment. Similarly, children may miss immunizations, receive duplicate immunizations, or forego necessary medications. In April 2008, Texas began implementing an electronic passport to track health data for 29,000 children in foster care. This passport can be updated regularly and is accessed through a secure Web site by foster parents, caseworkers, and health care providers who are responsible for making health decisions on behalf of children. The Foster Care Health Passport is operated by a managed care organization that is under contract with the state Medicaid agency. Texas developed and implemented the Health Passport using funds from the state and CMS. Officials told us that total funding data were not readily available. When a child enters the Texas foster care system, his or her electronic health record is created by obtaining information from a variety of sources. The Health Passport is initially populated with Medicaid and State Children’s Health Insurance Program (SCHIP) claims, including pharmacy claims data from the past 2 years for children previously enrolled in Medicaid or SCHIP. Officials told us that generally, data from these sources are available for a majority, but not all, children who enter foster care. Immunization records are entered through a data sharing arrangement with the state’s immunization registry. Once the electronic health record is created, it can be electronically updated with information on any health care services that were delivered by any foster care health provider in the managed care organization’s network. Claims data are added when the claim is processed, which state officials indicated could take a few weeks or months, noting that providers have 90 days after a medical visit to submit a claim. Services provided outside of the contractor’s network must be added manually through an online form mailed or faxed to the managed care organization. Officials told us that the passport also records behavioral health, dental, and vision services. Finally, officials stated that information in the Health Passport remains accessible statewide, even when the child’s placement changes and the child moves to new foster parents, localities, or health providers. When children leave foster care, the electronic health record is printed out for the child or his caregiver. While the Health Passport has not been operational long enough to determine its effectiveness, state officials told us that they are working on baseline measures for several variables, such as well-child outcomes, and have developed measures to assess the contractor’s performance. Officials in several other states we contacted expressed an interest in pursuing the development of an electronic health passport. For example, Illinois uses several data systems to manage Medicaid, foster care, and community health and preventive care for children, but the state is working toward integrating data electronically from the many systems in use, with the ultimate goal being the construction of an electronic passport. Some obstacles to data sharing have included concerns about privacy and security. As states look to sharing individuals’ health data to better serve and treat them, they are also implementing standards governing the transmission of data, policies to ensure that only authorized users have access to records, and provisions to protect individuals’ privacy. CMS has taken steps to provide assistance to states on issues of security and privacy. Several of the states included in this study cited practices they used to create medical histories and agreements they have to address data security and privacy issues. Other forms of data sharing use and combine existing record-keeping systems, usually through a combination of electronic matches and paper exchange of data among doctors, foster parents, and the Medicaid or the foster care agency, as shown in the examples below. Oklahoma officials noted that the state’s efforts to obtain medical information for children entering foster care centered on using Medicaid claims data, which it has been doing on a statewide basis since 2007. State officials reported that the project has been particularly successful because over 90 percent of children entering foster care had some prior Medicaid history and over 80 percent were already on Medicaid when they entered the state’s care. Officials noted that the Medicaid claims data can provide information on developmental assessments, immunizations, as well as the receipt of both physical and mental health services. In Utah and Illinois, nurses enter children’s health information into the state child welfare agency’s database. In Utah, public health nurses who work in collaboration with child welfare workers provide medical care coordination and record visits, diagnoses, and prescriptions for children in foster care. The child welfare agency in Illinois has a memorandum of agreement with its Medicaid agency to share pharmacy claims data for purposes of identifying doctors prescribing psychotropic medications without consent, and it also electronically obtains immunization data on children in foster care from an immunization registry. Both Utah and Illinois state officials told us that they were in the process of creating an integrated system that will store more complete electronic health records for children in foster care. For example, Illinois child welfare officials reported they were working with other state agencies to be able to pull data from Medicaid claims and other sources. Massachusetts uses a combination of paper and electronic records. They exchange medical information with foster parents and health care providers on paper, which they then enter into an electronic database. An official with HHS’s Agency for Healthcare Research and Quality told us that health information exchanges in Colorado and Indiana are being developed with federal demonstration grants that will include foster children along with other patients. The HHS Inspector General reported in August 2007 that at least 27 states are developing at least partially electronic health records for Medicaid with funds from CMS. These efforts may extend to children in foster care but are not focused on them. New York, Utah, Delaware, and Illinois specifically pointed to quality assurance activities relevant to monitoring foster children’s receipt of health care services. Such activities can be used to help track the receipt of services by individual children in foster care, including ensuring that individual children are assessed as required and treated appropriately. Monitoring procedures that aggregate information across foster children can help managers ensure that health policies are consistently implemented and having the intended results. The four states that discussed their quality assurance activities cited practices that included the use of technology and electronic records to collect, analyze, and aggregate health care data, perform medical audits, and conduct evaluations or other checks to ensure the quality of health care services provided to children in foster care. ACF’s reviews found that states with identifiable quality assurance systems that conformed to specific criteria had a higher percentage of cases rated as having met the health needs of children in the states’ custody. Further, ACF’s analysis suggested that states with well-functioning quality assurance systems were more likely to succeed on measures of enhancing a family’s capacity to provide for the needs of their children and ensuring that the children’s physical and mental health needs were being met. The states that identified relevant quality assurance activities to us provided examples of two approaches: (1) requiring managed care organizations to track and report individual or aggregate data on foster children in their care and (2) conducting medical audits of health records for children in foster care. With regard to requiring managed care organizations to track and report certain data, officials in Delaware described a new requirement in its contracts with managed care organizations aimed at ensuring that initial health screenings occur and result in the receipt of necessary services. In 2008, Delaware required that contracts with managed care organizations track and report on services rendered following initial health screenings. According to Delaware Medicaid officials, the reports are intended to provide aggregate data on health screenings provided. The officials told us that no specific concern triggered the 2008 quality check on initial health screenings, but officials noted that the state would like to be able to provide aggregate data on the percentage of children in their foster care program who received an initial health assessment within a set number of days. Utah uses a statewide case management system that can generate detailed data on individual children, as well as aggregate reports. Utah officials explained that these aggregate reports had been used to contact medical providers when the state received alerts from the U.S. Food and Drug Administration on the adverse effects of certain drugs. In this instance, the state sent letters to medical providers urging them to examine specific patients on these medications. Utah officials believed that having a majority of records in electronic form facilitated this effort. Finally, one city and two states reported the use of medical audits to ensure the receipt and quality of health care provided to children in foster care. For example, New York City uses medical care audits to examine the quality of services provided to the 17,000 children in the city’s foster care program. The city reported conducting two types of medical care audits—a routine medical audit conducted every 2 years and a special medical audit for children with HIV, conducted at least annually. These reviews apply an audit tool that is based on local foster care standards for physical and mental health to assess documentation in medical records of the child’s medical history, consent for treatments, comprehensive physical examinations, diagnostic screenings, immunization history and status, developmental and behavioral health screenings, and the use of psychotropic medications. Reviewers provide their results to foster care agencies, noting findings that must be addressed immediately, as well as a corrective action plan. The audit score is incorporated into a cumulative score on the agency’s performance. Officials in Illinois and Utah also reported the use of medical audits to ensure the delivery of appropriate care. Although states are ultimately responsible for meeting the health needs of children in foster care, HHS is required by law to provide technical assistance to the extent feasible to help states develop and implement plans to improve their performance. ACF officials told us that their emphasis is on providing technical assistance that will increase the capacity of state child welfare agencies over the long term to serve the needs of children in their care. ACF officials point out that they do not expect to provide expertise in the area of health care, but instead to help child welfare agencies carry out their mission within the flexibility that states have. ACF’s 25 technical assistance centers—including one center that specializes in children’s mental health—offer states a range of assistance, from on-site consultation to Web-based information on promising practices. In some cases, the centers help state child welfare agencies develop strategies to obtain needed services and coordinate their efforts with others involved in health care, such as the agencies responsible for Medicaid, public health, mental health, and substance abuse treatment. These and other agencies are listed among possible stakeholders in ACF’s reviews of state child welfare agencies. ACF and center staff also referred to the assistance that is available from nonfederal sources, such as universities and private foundations. Technical assistance in the form of on-site consultation is provided at state request, and few states have requested on-site consultation specifically to address health care services for children. On-site consultation generally is requested from ACF regions, coordinated through the National Child Welfare Resource Center for Organizational Improvement, and tracked by ACF through a dedicated data system. The centers we contacted generally report that they have not been asked to provide consultants on site, but have provided other forms of assistance related to the health care needs of children in foster care. Table 4 provides summary information on the centers in ACF’s network that either specialize in an aspect of health care or have reported providing some assistance on health care practices through 2008, including one center with funding from HHS’s SAMHSA that focuses on children’s mental health. Examples of some of the work these centers perform in relation to health care are discussed below. The center that specializes in aspects of children’s health care is the National Technical Assistance Center for Children’s Mental Health, based at Georgetown University, which helps states and other entities build systems to improve access and outcomes for all children with mental health concerns. The center’s focus is on children who have or are at risk of having emotional disorders, including children in foster care. This focus has been extended to include youth facing mental health problems who have also become involved with substance abuse. The center’s services range from the development and dissemination of various publications to consultation on how to increase a state’s capacity to meet children’s mental health needs. Specifically, at state request, center staff and consultants may work for a year or more with mental health leaders in individual states, often along with child welfare directors, to help these states identify and implement strategies to improve services for children. One staff position at the center has been reserved for a consultant with child welfare expertise. According to center staff, the center provides this type of consultation to an average of 8 to10 states each year and has served 22 states through 2008. To reach more agency personnel, the center holds a training institute every other year for approximately 2,000 to 2,500 attendees that in 2008 offered a series of sessions on partnerships between mental health and child welfare agencies for assessment, early intervention and treatment, support services, and care coordination, among other topics. In carrying out their work, center officials reported coordinating closely with other federally funded centers and organizations, state professional associations, private foundations, and research groups. While currently focused primarily on mental health, the center is also concerned with the integration of primary care and mental health, and prior to implementation of the ACF reviews, received funds from the Maternal and Child Health Bureau of HHS’s HRSA to examine promising approaches to providing the full range of health care services for children in foster care. A series of reports were published detailing these approaches that continue to be available through this and other technical centers for use by child welfare agencies in improving their service delivery. In several other centers, staff described information that they have provided on health care practices, including the following examples: Seven audio conferences on topics, such as the use of psychotropic medications, assessing and treating children up through age 3, and other issues concerning the mental health of children in foster care were developed by the National Resource Center for Family-Centered Practice and Permanency Planning at New York’s Hunter College School of Social Work. Among many sample areas of technical assistance, the center lists health and mental health issues for children and youth in foster care, and to that end, hosts a Webpage devoted to health care with multiple links to other relevant sites. Sessions regarding the role of clinics dedicated to assessing and treating children in foster care and the options for financing mental health care were featured at the 2007 annual conference for child welfare agency staff arranged by the National Child Welfare Resource Center for Organizational Improvement at the University of Maine. The sharing of information on the steps states are taking to extend Medicaid coverage to older youth when they leave foster care is a key area of focus for the National Child Welfare Resource Center for Youth Development in Oklahoma. The center connects states that have been successful in this area with states asking for assistance and maintains a list serve for state child welfare agency officials who are responsible for helping youth prepare for independence. ACF regional and central office staff may also share promising practices that they observe during reviews of state programs. These practices are posted to an ACF Web site and include several related to child and family wellbeing. ACF’s Web site notes that the Children’s Bureau does not make any representations pertaining to the effectiveness of the posted approaches, and ACF officials stated they had taken no further steps to share them and that they had not evaluated specific state practices. Other practices have been shared among states at regional meetings, as in ACF Region VII, where Kansas shared information on its medical passport. Regional staff may also share information on various practices adopted by states within the regions. For example, ACF reported that regional staff members have shared strategies for meeting children’s dental needs, such as using hygienists in Kansas and using a traveling dental van in Missouri. Florida officials reported that they received assistance from ACF on referrals to early intervention programs. New York and Utah officials also acknowledged the help that they received from regional ACF staff. To assist in states’ efforts to implement improvement strategies, ACF newly funded five centers in fall 2008 that are expected to provide in- depth, long-term consultation and support to states to improve the quality and effectiveness of their child welfare services starting in July 2009. ACF expects the assistance to help build partnerships to deliver a broad array of integrated services that can be individually tailored to meet the diverse needs of children and families served by child welfare agencies, including their physical, mental, and developmental needs as appropriate. As with the older centers, states’ identification of needs and potential strategies will determine the assistance provided. Some assistance with aspects of health care may be available from these centers if states request it, according to ACF officials. We provided a draft of this report to the Department of Health and Human Services for comment and received a written response, which is included in this report as appendix II. HHS provided some additional information on its technical assistance to state foster care agencies, particularly through collaboration between ACF and SAMHSA, to assist states in addressing mental health and substance abuse issues among foster children. The agency also provided technical comments, which we have incorporated as appropriate. We are sending copies of this report to the Secretary of Health and Human Services, state child welfare agencies, and other interested parties. We will provide copies to others on request. In addition, this report is available at no charge on the GAO Web site at http://www.gao.gov. If you or your staff have questions about this report, please contact Kay E. Brown at (202) 512-3674 or [email protected] or Cynthia A. Bascetta at (202) 512-7114 or [email protected]. Contact points for our Offices of Congressional Relations and Public Affairs may be found on the last page of this report. GAO staff members who made key contributions to this report are also listed in appendix III. Our study had four objectives. These included describing practices that selected states have adopted to address the challenges of (1) identifying health care needs, (2) ensuring delivery of appropriate health services, and (3) documenting and monitoring the health care of children in foster care. In addition, we describe technical assistance the Department of Health and Human Services’ Administration for Children and Families (ACF) provides to states to help improve their performance in providing for the health care needs of these children. To gain an initial understanding of the types of practices states have adopted, we reviewed relevant reports and interviewed various experts and researchers. We reviewed information on promising practices listed on ACF’s Web site that were identified during ACF’s reviews of state performance and a list of state practices that ACF provided to us. We also interviewed several prominent child welfare experts and researchers, including individuals affiliated with the American Academy of Pediatrics, the Center for Health Care Strategies, the Chapin Hall Center for Children, the Georgetown University Child Development Center, and the National Academy for State Health Policy to obtain additional information on practices to improve the delivery of health care to children in foster care. To update information on practices described in available publications and to obtain additional examples that may not have been reported in publications, we e-mailed requests for information on current practices they believed were noteworthy efforts to address children’s health care needs to representatives of child welfare agencies in 50 states and the District of Columbia. To minimize the burden on state representatives, we suggested that they could limit the number of practices they described. We sent our e-mail requests in October 2007, and representatives for 42 of the 51 child welfare agencies provided responses. To gather more detailed examples of these practices, we selected 10 state child welfare agencies for further review—conducting visits to 3 states and telephone interviews with 7. In selecting states and their practices for further review, we considered descriptions of each state’s practices obtained from the states and other research. For practical reasons, in order to collect sufficient examples from each category while limiting the number of distinct states we would contact, we also considered whether a state had more than one practice it considered noteworthy and whether it encompassed practices in at least two of our five broad categories. We also gave some weight to the level of context and information the state had provided about its practices and generally limited our consideration of practices to those that states indicated they had begun to implement. In addition, we made efforts to include states that had achieved a strong rating on the ACF reviews for children’s physical and mental health indicators and to achieve some distribution in geographic location and administrative structure. For 3 of the 10 states selected—Illinois, New York, and Utah—we conducted site visits and interviewed officials of state child welfare agencies and state Medicaid Offices, and when possible, health care providers, interest groups, and foster care parents. For seven states—California, Delaware, Florida, Massachusetts, Oklahoma, Texas, and Washington—we conducted interviews by telephone with officials of each state’s child welfare agency and, in some instances, officials of state Medicaid Offices. Key characteristics of the selected states are shown in table 5. Collectively, the states we contacted account for 53 percent of federal IV-E funds distributed in fiscal year 2007. For our visits and telephone interviews, we developed semistructured interview guides for state and local child welfare agencies, including caseworkers, state Medicaid offices, interest groups, and foster parents. In addition, we obtained from officials of state child welfare agencies detailed information on their identified practices, including the dates of operation; numbers of children served; size of jurisdiction covered; variety of services offered; funding mechanisms used; outcomes, if any, reported; and whether any evaluative studies had been conducted or other documents prepared that discussed the effectiveness of the practice. We conducted our work from November 2007 to January 2009 in accordance with all sections of GAO’s Quality Assurance Framework that are relevant to our objectives. The framework requires that we plan and perform the engagement to obtain sufficient and appropriate evidence to meet our stated objectives and to discuss any limitations in our work. We believe that the information and data obtained, and the analysis conducted, provide a reasonable basis for any findings and conclusions. In addition to the contacts named above, Betty Ward-Zukerman and Carolyn L. Yocom (Assistant Directors), Patricia Elston, Carolyn Feis Korman, Jacqueline Harpp, Darryl Joyce, Jasleen Modi, Alexandra Edwards, Alison Goetsch, Kevin Milne, Mimi Nguyen, James Rebbe, Jay Smale, and Charlie Willson made key contributions to this report. Medicare Physician Payment: Care Coordination Programs Used in Demonstration Show Progress, but Wider Use of Payment Approach May Be Limited. GAO-08-65. Washington, D.C.: February 15, 2008. Department of Health and Human Services, Centers for Medicare and Medicaid Services: Medicaid Program; Elimination of Reimbursement Under Medicaid for School Administration Expenditures and Costs Related to Transportation of School-Age Children Between Home and School. GAO-08-394R. Washington, D.C.: January 11, 2008. Child Welfare: Additional Federal Action Could Help States Address Challenges in Providing Services to Children and Families. GAO-07-850T. Washington, D.C.: May 15, 2007. Medicaid: Concerns Remain about Sufficiency of Data for Oversight of Children’s Dental Services. GAO-07-826T. Washington, D.C.: May 2, 2007. Pediatric Drug Research: Studies Conducted Under Best Pharmaceuticals for Children Act. GAO-07-557. Washington, D.C.: March 22, 2007. Children’s Health Insurance: States’ SCHIP Enrollment and Spending and Considerations for Reauthorization. GAO-07-558T. Washington, D.C.: March 1, 2007. Child Welfare: Improving Social Service Program, Training, and Technical Assistance Information Would Help Address Long-standing Service-Level and Workforce Challenges. GAO-07-75. Washington, D.C.: October 6, 2006. Foster Care and Adoption Assistance: Federal Oversight Needed to Safeguard Funds and Ensure Consistent Support for States’ Administrative Costs. GAO-06-649. Washington, D.C.: June 15, 2006. Administrative Expenditures and Federal Matching Rates of Selected Support Programs. GAO-05-839R. Washington, D.C.: June 30, 2005. Medicaid Financing: States’ Use of Contingency-Fee Consultants to Maximize Federal Reimbursements Highlights Need for Improved Federal Oversight. GAO-05-748. Washington, D.C.: June 28, 2005. Medicaid: States’ Efforts to Maximize Federal Reimbursements Highlight Need for Improved Federal Oversight. GAO-05-836T. Washington, D.C.: June 28, 2005. Child And Family Services Reviews: States and HHS Face Challenges in Assessing and Improving State Performance. GAO-04-781T. Washington, D.C.: May 13, 2004. Child And Family Services Reviews: Better Use of Data and Improved Guidance Could Enhance HHS’s Oversight of State Performance. GAO-04-333. Washington, D.C.: April 20, 2004. Medicaid and SCHIP: States’ Premium and Cost Sharing Requirements for Beneficiaries. GAO-04-491. Washington, D.C.: March 30, 2004. SCHIP: HHS Continues to Approve Waivers That Are Inconsistent with Program Goals. GAO-04-166R. Washington, D.C.: January 5, 2004. Child Welfare: States Face Challenges in Developing Information Systems and Reporting Reliable Child Welfare Data. GAO-04-267T. Washington, D.C.: November 19, 2003. Child Welfare: Most States Are Developing Statewide Information Systems, but the Reliability of Child Welfare Data Could Be Improved. GAO-03-809. Washington, D.C.: July 31, 2003. Child Welfare and Juvenile Justice: Federal Agencies Could Play a Stronger Role in Helping States Reduce the Number of Children Placed Solely to Obtain Mental Health Services. GAO-03-397. Washington, D.C.: April 21, 2003. Medicaid and SCHIP: States Use Varying Approaches to Monitor Children’s Access to Care. GAO-03-222. Washington, D.C.: January 14, 2003. Mental Health Services: Effectiveness of Insurance Coverage and Federal Programs for Children Who Have Experienced Trauma Largely Unknown. GAO-02-813. Washington, D.C.: August 22, 2002. Medicaid and SCHIP: States’ Enrollment and Payment Policies Can Affect Children’s Access to Care. GAO-01-883. Washington, D.C.: September 10, 2001. Medicaid: Stronger Efforts Needed to Ensure Children’s Access to Health Screening Services. GAO-01-749. Washington, D.C.: July 13, 2001. Foster Care: Health Needs of Many Young Children Are Unknown And Unmet. GAO/HEHS-95-114. Washington, D.C.: May 26, 1995. | Providing health care services for foster children, who often have significant health care needs, can be challenging. The Administration for Children and Families (ACF) oversees foster care, but state child welfare agencies are responsible for ensuring that these children receive health care services, which are often financed by Medicaid. In light of concerns about the health care needs of foster children, GAO was asked to study states' efforts to improve foster children's receipt of health services. This report has four objectives. It describes specific actions that some states have taken to (1) identify health care needs, (2) ensure delivery of appropriate health services, and (3) document and monitor the health care of children in foster care. It also describes the related technical assistance ACF offers to states. To address these objectives, GAO selected 10 states and interviewed state officials and reviewed related documentation regarding the nature and results of the states' practices. To describe ACF's technical assistance, GAO interviewed officials and reviewed documents from ACF, states, and relevant technical assistance centers. To identify the health needs of children entering foster care, all 10 states we studied have adopted policies that specify the timing and scope of children's health assessments, and some states use designated providers to conduct the assessments. All of the states we selected for study required physical examinations, most states we studied required mental health and developmental screens, and several of them required or recommended substance abuse screens for youth shortly after entry into foster care. Preventive health examinations for foster children were required at regular intervals thereafter, in line with states' Medicaid standards. Limited research has suggested that having assessment policies and using designated providers who have greater experience in the health needs of foster children may permit fuller identification and follow-up of children's health care needs. To help ensure the delivery of appropriate health care services, states have adopted practices to facilitate access, coordinate care, and review medications for children in foster care. Some states used specialized staff to quickly determine Medicaid eligibility; others issued temporary Medicaid cards to prevent delays in obtaining treatment. In addition, certain states had increased payments to physicians serving children in foster care to encourage more physicians to provide needed care. Nurses or other health care managers were given roles in coordinating care to help ensure that children received necessary health care services. Six states we studied also reported monitoring the use of various medications, including psychotropic medications intended for the treatment of mental health disorders. To document and monitor children's health care, several states we studied had shared data across state programs and employed quality assurance measures, such as medical audits, to track receipt of services. One state has developed a foster care health "passport" that electronically compiles data from multiple sources, including the state's immunization registry, and this passport can be accessed and updated by responsible parties through a secure Web site. Other states used electronic databases to obtain more complete and timely medical histories than otherwise available but provided more limited access to these and continued to update them through use of paper records. ACF's network of 25 technical assistance centers is intended to improve state performance in meeting children's needs, including their health care needs, by increasing the capacity of state agencies to ensure safety, wellbeing, and availability of permanent homes for children in their care. According to ACF officials, the centers are not intended to provide medical expertise, but to help state child welfare agencies collaborate with others involved with health programs. One center in ACF's network focuses exclusively on children's mental health and several others have also assisted in identifying some practices to improve the health of children in foster care. Five of the centers are newly funded and are expected to provide long-term help in implementing plans to improve agency performance in meeting children's needs. |
To implement a changing and highly technical tax code, IRS publishes approximately 400 tax forms and accompanying instructions each year. More detailed guidance is provided in approximately 100 different publications. Frequent changes to the tax laws necessitate revisions to both forms and publications. The development and revision of tax forms and their accompanying instructions and publications are the responsibility of IRS’ Tax Forms and Publications Division. This division is made up of two branches, the Forms Branch and the Publications Branch. Tax forms and instructions are written by tax law specialists in the Forms Branch. Proposed new forms are reviewed by IRS’ Tax Forms Coordinating Committee (TFCC), which represents all major organizational units in IRS. TFCC provides a forum for all key IRS functions to help ensure that forms meet the overall needs of the agency without placing excessive burden on taxpayers. All new forms and major revisions to existing forms must be approved by TFCC. IRS’ Chief Counsel must also approve the forms to ensure their technical accuracy and consistency with laws and regulations. The Office of Management and Budget (OMB) is responsible for reviewing each tax form once every 3 years. The purpose of OMB’s review is to assess IRS’ compliance with the Paperwork Reduction Act. Among other things, this law compels OMB to evaluate the extent of burden imposed by IRS forms and to ensure that the federal paperwork burden for individuals is minimized. As a consequence, all new forms and major revisions to existing forms must also be reviewed by OMB. Tax law specialists in the Publications Branch write and revise publications. Some publications are designed to accompany specific forms, while others provide general information relating to a variety of forms. Because publications supplement information on forms and instructions, they are not subject to TFCC review or OMB approval. Publications are also periodically revised to reflect changes to the tax laws or forms. Each year, some publications are substantively revised through an intensive review by a team that includes tax law specialists, writer-editors, and technical reviewers associated with the publication’s subject matter. These publications are subjectively selected on the basis of circulation and the need for text revision. The objective of this revision is to make a major improvement in the quality and usefulness of the publication. In 1978, we issued a report citing the tension between IRS’ conflicting responsibilities to develop forms that are technically accurate, yet clear and readable. In that report, we noted that writer-editors and graphic experts played a limited role in the development of only a few forms and that, as a result, technical accuracy was favored at the expense of clarity. While acknowledging the importance of being accurate, we reported that the readability of these documents needed improvement. Our report recommended that IRS institutionalize a broader mix of writing and graphics design experts in a continuous review of forms and instructions. Since then, IRS has made greater use of its writer-editors and included more graphics in its forms and publications. Our objectives were to (1) evaluate IRS’ forms and publications development and revision process, (2) identify IRS’ efforts to improve this process, and (3) identify IRS’ initiatives to increase involvement of taxpayers in this process. To assess IRS’ process for developing and revising forms and publications, we examined the agency’s written procedures and discussed them with representatives from IRS’ Tax Forms and Publications Division, the unit with primary responsibility for issuing these documents. We also selected four forms and two publications and tracked their progress through the development and revision phase. We included forms and publications used by individuals and businesses as well as newly created forms and existing forms undergoing revision. To verify IRS’ written procedures and information obtained from IRS officials, we identified the actual steps taken in producing these documents and compared these activities to established procedures. To evaluate the reasonableness of IRS’ process for developing and revising forms and publications, we considered whether its procedures provided for clear lines of responsibility and accountability, specific timeframes, adequate management oversight, sufficient opportunities to evaluate suggestions from internal and external sources, and appropriate strategies for coping with sudden tax law changes. We also interviewed IRS officials involved in preparing these documents and asked them to discuss the development and revision process. To identify IRS’ efforts to improve the process and to increase taxpayers’ involvement in it, we interviewed IRS officials. In addition, we met with OMB officials to discuss OMB’s role in reviewing tax forms for compliance with the Paperwork Reduction Act. We also met with representatives from external professional organizations, which are concerned with the clarity and accuracy of IRS forms and publications. Our discussions with these groups focused on their perceptions of IRS’ willingness to hear their views and to maintain a professional dialogue on matters affecting IRS forms and publications. Appendix I lists these organizations. We also discussed agency initiatives to improve the clarity of tax forms and publications with various IRS officials involved in managing these activities. We did our work at IRS’ National Office in Washington, D.C., from August 1993 to April 1994 in accordance with generally accepted auditing standards. We presented a draft version of this report to appropriate IRS officials including the Chief of Strategic Planning and Communications and the Director of the Tax Forms and Publications Division and obtained oral comments from them on October 25, 1994. IRS’ comments and our evaluation are on page 11 of this report. IRS’ forms and publications are based on a complex and frequently changing tax code. Since 1980, Internal Revenue Code sections have been amended more than 100 times, resulting in numerous modifications to existing forms and the development of nearly 100 new ones. This combination presents a great challenge to IRS, which is expected to issue documents that are not only technically accurate but readable. IRS is responsible for responding to changes in the tax law by modifying forms and publications and issuing forms on a timely basis. In addition to revisions caused by changes in tax law, IRS reviews all forms for possible revision on a periodic basis. Many forms, such as the Form 1040, “U.S. Individual Income Tax Return,” are for use during a particular tax year and must be updated annually. Other forms, such as the Form 709, “United States Gift (and Generation Skipping Transfer) Tax Return,” may have an extended period of use. IRS automatically considers all forms for revision every 3 years before sending them to OMB for review under the Paperwork Reduction Act. According to IRS officials, the agency currently publishes approximately 400 forms of which about 80 percent are revised each year. Factors beyond IRS’ control may complicate its ability to provide clear forms and publications. Its role as a data gatherer for research purposes may have a direct bearing on form clarity. Some forms may include lines requesting information unrelated to computation of the tax. This information may be gathered for valid statistical or research purposes, but the information may have no bearing on tax liability. These lines may also be intended to aid an IRS examiner conducting an audit. Although these data collection efforts may bear no relationship to tax liability and may actually increase taxpayer burden, they may also serve valuable purposes justifying their presence. In addition, the varying literacy levels of taxpayers, the many forms and publications and their relationships to each other, and the sheer number of annual changes, even those adopted for the sake of clarity, can further contribute to general confusion among taxpayers. We found that IRS’ process for developing new forms and publications and revising existing ones is composed of reasonable components. For example, its procedures (1) establish well-defined roles and responsibilities for staff, clear lines of accountability, and specific timeframes for drafting these documents and (2) ensure sufficient management oversight. In addition, the procedures provide steps to accommodate the passage of legislation late in the calendar year. IRS officials involved in this process identified no major problems with agency procedures that would hamper their ability to create and revise forms and publications, and the officials were generally satisfied with the procedures. Representatives from the professional organizations we interviewed also were generally satisfied with IRS’ process. Our tracking of four forms and two publications also indicated that IRS’ procedures were followed and proved reasonable. IRS has taken steps to build greater readability into its development and revision process since we issued our prior report in 1978. Greater use is now being made of writer-editors. While writer-editors were rarely used at the time of our previous report, they now play an integral role in simplifying language and assisting in the development of suitable graphic presentations intended to enhance readers’ understanding. As part of its annual revisions process, IRS obtains suggestions for improving both the accuracy and clarity of its forms and publications from a variety of internal and external sources such as organizations representing tax professionals and tax preparers, taxpayers, and employees. All suggestions are to be referred to an appropriate tax law specialist for consideration during a document’s next scheduled revision. IRS has established an ongoing dialogue with some of these organizations and addresses many of their concerns during meetings or through written responses. Some of these organizations, such as the American Institute of Certified Public Accountants, annually submit written suggestions to IRS. Others, such as the National Association of Enrolled Agents, prefer to provide occasional suggestions on an as-needed basis. These groups sometimes hold conflicting opinions, and IRS must balance their views along with many other factors in making revisions. Although no organization has all of its suggestions implemented, most of the ones we spoke with expressed satisfaction with IRS’ accessibility and the process itself. IRS recognizes that more efforts need to be devoted to enhancing readability, and the agency is taking steps consistent with its mission of improving customer service and informing and educating taxpayers. The agency’s new Business Master Plan for 1995 through 2001 has identified maximizing customer satisfaction and reducing taxpayer burden as one of its objectives. One of the steps IRS plans to take to achieve this objective is the establishment of form simplification teams. Comprised of IRS field personnel, these teams will be charged with performing in-depth reviews of selected forms and simplifying at least four each year. This effort is to be modelled after an earlier forms improvement project that IRS officials considered successful. Simplified versions of approximately 25 high-volume forms were drafted by field personnel during that previous project. IRS officials expect that these new teams will meet with similar success. A major effort stems from IRS’ realization that taxpayers have difficulty understanding its forms and publications, even when the reading level of these documents is relatively low. IRS’ Compliance Research Division is studying factors influencing taxpayer’s comprehension of tax documents. IRS has concentrated its efforts on how the following 10 factors affect reader comprehension: readability, if-then statements, references to other documents, tax vocabulary, abbreviations and acronyms, arithmetic complexity, headings, text, negative terminology, and graphic usage. On the basis of these factors, selected passages of the Form 1040 and Form 1040EZ instructions were rewritten and tested to see if comprehension improved. IRS is now validating its methodology for this study. Ultimately, IRS hopes to improve taxpayer comprehension by using the study’s findings to develop training for staff involved in writing forms and publications. Another development that may improve the quality of the forms and publications is the possible reorganization of the Tax Forms and Publications Division. Currently under consideration, this reorganization would result in tax law specialists’ becoming responsible for preparing related forms and publications. Presently, Forms Branch staff are not involved in the development of publications. Similarly, Publications Branch staff do not prepare forms. According to IRS officials, if implemented, the reorganization would merge staff into two new branches, one addressing individual tax issues and the other addressing business tax issues. Tax law specialists would be assigned one or more forms and accompanying publications. IRS is considering whether such a reorganization would make forms and publications more readable for taxpayers by improving staff expertise and achieving greater consistency in language between the forms and publications among other things. According to IRS officials, the decision on this reorganization has been postponed pending completion of IRS’ broader internal review of its processes. While IRS gets information on the clarity of forms and publications for individual taxpayers from several sources, IRS officials acknowledge that there is not a systematic way for obtaining input from the many individual taxpayers not represented by particular interest groups or associations. These officials told us that IRS has not met with the same success in obtaining the views of individual taxpayers as it has attained among the business community and organizations of tax professionals, but the agency has several efforts underway that may help to improve this situation. To obtain the views of individual taxpayers on such matters as the clarity of forms and publications, IRS solicits written comments from taxpayers, holds periodic town meetings where taxpayers can discuss their concerns, distributes customer satisfaction surveys, and conducts focus group sessions on selected forms revisions. However, IRS officials said that these sources generally do not yield many substantive insights as to what specifically confuses individual taxpayers. IRS officials have told us that the concerns expressed by individuals in these forums have not presented a precise view as to what individuals find wrong with the forms. According to these officials, they also do not generally result in useful suggestions for revising the forms. However, the officials said that while focus groups generally provide better results, the groups are costly to conduct. Because of this cost factor, only a limited number of focus groups are held. Also, focus groups do not cover a broad base of taxpayers and only address one or two forms each year. Nonetheless, officials told us that IRS hopes to find new ways of identifying the concerns of individuals. In an effort to better capture these concerns, the Publications Branch will resume its annual interviews with the agency’s telephone assistors, who respond to questions from taxpayers on the toll-free telephone system. Conducted at the end of the filing season to discuss commonly asked questions and points of confusion, these interviews were previously used to identify and clarify passages in forms and publications for future revisions. Publications Branch staff claim that these interviews yielded hundreds of specific suggestions that were ultimately adopted. These interviews were discontinued several years ago due to budgetary constraints. IRS recently decided to resume these interviews in the spring of 1995, after the next filing season. This approach may be one way to tap into existing sources of information. IRS plans to introduce an additional new feature to its toll-free telephone system in January 1995. A new line will be dedicated to taxpayers who wish to leave recorded messages with the agency. Also, the annual “Message from the Commissioner,” which will be included in the 1994 tax packages, will invite taxpayers to call IRS with their ideas for making the forms simpler. IRS hopes these actions will make it easier for taxpayers to comment on forms and publications and will generate more suggestions. IRS may already possess critical information that could provide insights into what areas taxpayers are specifically having difficulty in understanding. For example, IRS’ existing toll-free telephone system may be a source of information as to what taxpayers find confusing. Tracking specific questions at routine intervals may identify specific sections of forms and publications that taxpayers have difficulty understanding. IRS does limited monitoring of the nature of these calls but information captured is too broad to provide specific guidance for form revision. At least one state relies on call-tracking as an indicator that certain passages in its state tax forms are confusing and uses this information to make appropriate changes to these documents. Taxpayers could also benefit from improved use of observations from IRS employees. One potential source of information may be errors made by taxpayers and discovered by IRS during audits. While some errors are inevitable and others may be indicators of intentional noncompliance, some frequently made errors may point to ambiguities in forms and publications, leaving the taxpayer open to an honest mistake. Another opportunity to simplify forms and publications frequently used by individual taxpayers may reside in the agency’s annual process for proposing legislative changes to Congress. Each year the Department of the Treasury asks IRS to offer suggestions to improve tax administration that need legislative approval to be implemented. The Treasury Department’s ultimate objective is to provide Congress with a list of such proposals for its consideration. Simplification of tax forms is one area of tax administration that generates suggestions requiring legislative action. Tax law specialists told us that some forms contain line items or instructions required by law but no longer serving a useful purpose. Removing such line items and instructions could result in some simplified forms, but only could be accomplished by an act of Congress. However, this process has been perceived by some staff in various units, including the Tax Forms and Publications Division, as not productive. As suggestions are forwarded to officials at increasingly higher levels within IRS, then the Treasury Department, and finally at OMB (which must approve the document before it is submitted to Congress), suggested proposals are eliminated through this process. In recent years, few, if any, suggestions have been forwarded to Congress. IRS managers are presently studying ways of revising the process to make it more useful to the Treasury Department and Congress. If improved, this process may encourage greater staff participation and provide a vehicle for conveying simplification ideas, among others, to Congress. Although it faces many challenges in developing and revising forms and publications, IRS has instituted a process for doing so that includes reasonable components and is seeking opportunities for improvement. While IRS has established a dialogue with organizations representing tax professionals, it has had difficulty in identifying and responding to the needs of individual taxpayers who are not represented by any particular organization. Because clear and understandable forms and publications help to promote voluntary compliance, readability is a continuous concern. Thus, IRS should continue to seek new ways of identifying what individual taxpayers find most difficult to understand. IRS should also explore the use of potentially helpful, but untapped, sources of information that may reveal points of taxpayer confusion and use existing information in new ways. We recommend that the Commissioner of Internal Revenue direct agency staff to make additional efforts to identify the specific concerns of individual taxpayers. Identifying these concerns may be accomplished in a variety of ways, including gathering information concerning the nature of taxpayer questions received through its toll-free telephone system and soliciting information from IRS field personnel including auditors, examiners, and customer-service representatives for the sole purpose of identifying common errors made by taxpayers that may be related to confusing passages in forms and publications. We provided a draft copy of this report to, and obtained oral comments from, appropriate IRS officials, including the Chief of Strategic Planning and Communications and the Director of the Tax Forms and Publications Division. These officials suggested several technical modifications that we incorporated in our final report. While they generally agreed with the facts contained in our report and the importance of identifying the specific needs of individual taxpayers, IRS officials did not think the recommendation we proposed was necessary. The officials stated that IRS is continuously seeking the views of individual taxpayers, receiving many employee suggestions to clarify forms and publications, and using available data to improve these documents. The officials noted that IRS has additional plans to enhance customer satisfaction with regard to forms and publications. For example, in response to a 1993 customer satisfaction survey, IRS intends to develop a learning, business, and communication strategy for making forms and instructions more readable. While acknowledging that improvement is always possible, the officials stated that its many current and planned efforts will meet taxpayer needs. We agree that IRS has made efforts to improve its forms and publications. For example, IRS’ efforts to identify factors influencing taxpayers’ comprehension of tax documents was a positive step. We also consider its future plans to dedicate a telephone line to messages from taxpayers and to resume interviewing telephone assistors to be positive steps. However, we continue to support the need for IRS to obtain more specific information about what individual taxpayers find most confusing about forms and publications. We believe that implementing our recommendation will further clarify forms and publications, thus benefitting individual taxpayers. We are sending copies of this report to other congressional committees, the Secretary of the Treasury, the Commissioner of Internal Revenue, and other interested parties. Major contributors to this report are listed in appendix II. If you or your staff have any questions concerning the report, please call me on (202) 512-9110. American Institute of Certified Public Accountants, Washington, D.C. American Payroll Association, New York American Society of Payroll Management, New York National Association of Enrolled Agents, Rockville, MD National Taxpayers Union, Washington, D.C. Tax Executives Institute, Washington, D.C. Linda Schmeer, Evaluator Donald R. White, Evaluator The first copy of each GAO report and testimony is free. Additional copies are $2 each. Orders should be sent to the following address, accompanied by a check or money order made out to the Superintendent of Documents, when necessary. Orders for 100 or more copies to be mailed to a single address are discounted 25 percent. U.S. General Accounting Office P.O. Box 6015 Gaithersburg, MD 20884-6015 Room 1100 700 4th St. NW (corner of 4th and G Sts. NW) U.S. General Accounting Office Washington, DC Orders may also be placed by calling (202) 512-6000 or by using fax number (301) 258-4066, or TDD (301) 413-0006. Each day, GAO issues a list of newly available reports and testimony. To receive facsimile copies of the daily list or any list from the past 30 days, please call (301) 258-4097 using a touchtone phone. A recorded menu will provide information on how to obtain these lists. | Pursuant to a congressional request, GAO provided information on the accuracy and clarity of the Internal Revenue Service's (IRS) forms and publications, focusing on: (1) the adequacy of the process IRS uses to revise its tax forms; (2) IRS efforts to improve this process; and (3) IRS efforts to increase taxpayer involvement in the process. GAO found that: (1) IRS efforts to provide taxpayers with accurate and easy-to-read tax forms have been hampered by increasingly complex tax codes, frequent tax code revisions, and taxpayers' reading ability; (2) the IRS process for developing and revising its tax forms and publications appears reasonable and provides clear lines of responsibility and accountability, specific timeframes, adequate management oversight, sufficient opportunities to evaluate suggestions from internal and external sources, and appropriate strategies for coping with sudden tax law changes; (3) IRS periodically reviews and revises its publications and tax forms so that accurate forms and publications are available to taxpayers for each filing season; (4) IRS considers comments from taxpayers and tax preparers, payroll professionals, accountants, and lawyers regarding clarity improvements; (5) IRS has initiated several special projects to study taxpayer comprehension problems and to further improve its forms and publications; (6) despite its ongoing commitment to improvement, IRS does not have a systematic way to identify the specific areas that cause individual taxpayer confusion; and (7) IRS needs to find ways to readily identify the specific concerns of individual taxpayers. |
Outpatient therapy services—covered under part B of the Medicare program—comprise physical therapy, occupational therapy, and speech- language pathology to improve patients’ mobility and functioning. Medicare regulations and coverage rules require that beneficiaries be referred for outpatient therapy services by a physician or nonphysician practitioner and that a written plan of care be reviewed and certified by the providers at least once every 30 days. Beneficiaries receiving therapy are expected to improve significantly in a reasonable time and to need therapy for rehabilitation rather than maintenance. Medicare-covered outpatient therapy services are provided in a variety of settings by institutional providers (such as hospital outpatient departments, skilled nursing facilities, comprehensive outpatient rehabilitation facilities, outpatient rehabilitation facilities, and home health agencies) and by noninstitutional providers (such as physicians, nonphysician practitioners, and physical and occupational therapists in private practice). Both institutional and noninstitutional providers—with the exception of hospital outpatient departments—are subject to the therapy caps. For more than a decade, Medicare’s costs for outpatient therapy services have been rising, and widespread examples of inappropriate billing practices, resulting from regulatory ambiguity and weaknesses in Medicare’s payment rules, have been reported by us and others. In 1995 we reported, for example, that while state averages for physical, occupational, and speech therapists’ salaries in hospitals and skilled nursing facilities ranged from about $12 to $25 per hour, Medicare had been charged $600 per hour or more. HHS’s Office of Inspector General reported in 1999 that Medicare reimbursed skilled nursing facilities almost $1 billion for physical and occupational therapy that was claimed improperly, because the therapy was not medically necessary or was provided by staff who did not have the appropriate skills for the patients’ medical conditions. To control rising costs and improper payments, Congress established therapy caps for all nonhospital providers in the Balanced Budget Act of 1997. The Medicare, Medicaid, and SCHIP Balanced Budget Refinement Act of 1999 later imposed a moratorium on the caps for 2000 and 2001. The Medicare, Medicaid, and SCHIP Benefits Improvement and Protection Act of 2000 then extended the moratorium through 2002. Although no moratorium was in effect as of January 1, 2003, CMS delayed enforcing the therapy caps through August 31, 2003. In December 2003, the Medicare Prescription Drug, Improvement, and Modernization Act of 2003 placed the most recent moratorium on the caps, extending from December 8, 2003, through December 31, 2005. The legislation establishing the caps provided for two caps per beneficiary: one for occupational therapy and one for physical therapy and speech-language pathology combined. The legislation set the caps at $1,500 each and provided that these limits be indexed by the Medicare Economic Index each year beginning in 2002. When last in place in 2003, the two caps were set at $1,590 each. To process and pay claims and to monitor health care providers’ compliance with Medicare program requirements, CMS relies on claims administration contractors, who use a variety of review mechanisms to ensure appropriate payments to providers. A system of automated checks (a process CMS terms “edits”) flags potential billing errors and questionable claims. The automated system can, for example, identify procedures that are unlikely to be performed on the same patient on the same day or pairs of procedure codes that should not be billed together because one service inherently includes the other or the services are clinically incompatible. In certain cases, automated checks performed by CMS claims administration contractors may lead to additional claim reviews or to educating providers about Medicare coverage or billing issues. The contractors’ clinically trained personnel may perform a medical review, examining the claim along with the patient’s medical record, submitted by the physician. Medical review is generally done before a claim is paid, although medical review may also be done after payment to determine if a claim was paid in error and funds may need to be returned to Medicare. The data and research available to date are insufficient to determine whether any particular conditions or diseases may justify a waiver of Medicare’s outpatient therapy caps. Medicare claims data are limited in the extent to which they can be used to identify the actual conditions or diseases for which beneficiaries are receiving therapies because the claims often lack specific diagnostic information. In addition, analyses of the claims data show no particular conditions or diseases as more likely than others to be associated with payments exceeding the therapy caps. The data also show that treatment for a single condition or disease, such as stroke, may vary greatly from patient to patient. Finally, available research on the amount and mix of outpatient therapy for people aged 65 and older with specific conditions and diseases also appears insufficient to justify a waiver of the therapy caps for particular conditions or diseases. It is uncertain how many beneficiaries would have medical needs for therapy costing more than the caps and yet be unable to obtain the needed care because they have either insufficient financial resources or no access to a hospital outpatient therapy department. Although Medicare claims data constitute the most comprehensive available information for Medicare beneficiaries who have received outpatient therapy, they do not always capture the clinical diagnosis for which beneficiaries receive therapy. As such, they are insufficient for identifying particular diseases and conditions that should be exempted from the caps. Patients’ conditions or diseases are expressed in claims data through diagnosis codes, and the coding system allows providers to use nonspecific diagnosis codes that are unrelated to a specific clinical condition or disease. A CMS-contracted analysis of 2002 Medicare outpatient therapy claims data, for example, found generic codes, such as “other physical therapy,” to be among the most often used diagnosis codes on claim forms (see table 1). Moreover, current Medicare guidelines for processing claims permit institutional providers, such as outpatient rehabilitation facilities and skilled nursing facilities, to submit services from all three therapy types on the same claim form, with one principal diagnosis for the claim; a claim seeking payment for occupational therapy and for speech-language pathology might therefore be filed under “other physical therapy.” Analysis of 2002 claims data does not show any particular conditions or diseases that are more likely than others to be associated with payments exceeding the therapy caps for physical therapy and speech-language pathology combined or for occupational therapy. Among the top 99 most reported diagnoses for physical therapy and speech-language pathology, the analysis found no particular diagnoses associated with large numbers of beneficiaries for whom payments would have exceeded the combined physical therapy and speech-language pathology cap in 2002 had it been in effect (see fig. 1). A similar pattern existed for occupational therapy. Medicare claims data do not provide information about patients’ therapy needs that could be used to justify waiving the therapy caps. Even in those cases where particular conditions or diseases, such as stroke or Alzheimer’s disease, are identified in the diagnosis codes, different individuals with the same diagnosis can need different intensities or types of therapy. For example, one patient with a stroke might be able to return home from the hospital a day or two after admission, while another may suffer a severe loss of functioning and require extensive therapy of more than one type. The CMS-contracted analysis of 2002 claims found wide variation in the number of treatment days required to conclude an episode of care for beneficiaries who had the same “diagnosis,” such as stroke. For example, the analysis found that while the median number of days per episode of physical therapy for stroke patients was 10, episode length ranged from 1 to 80 days. Similarly wide ranges in treatment length for stroke patients appeared for occupational therapy (1 to 68 days per episode, median 9) and speech-language pathology (1 to 66 days per episode, median 7). Figure 2 shows the range in length of treatment per episode for patients with a diagnosis of acute cerebrovascular disease (stroke) for the three types of therapy. Available research on the efficacy of outpatient therapy for people aged 65 and older with specific conditions and diseases also appears insufficient to justify a waiver of particular conditions or diseases from the therapy caps. Although our literature review found several studies demonstrating the benefits of therapy for seniors and Medicare-eligible patients, this research generally did not define the amount or mix of therapy services needed for Medicare beneficiaries with specific conditions or diseases. One study, for example, examined the benefits of extensive therapy for stroke victims at skilled nursing facilities. The study concluded that high-intensity therapy may have little effect on beneficiaries’ length of time spent in the facility when their short-term prognosis is good; beneficiaries with poorer prognoses, however, may benefit substantially from intensive therapy. Further, because of the complexity of patient factors involved, these studies cannot be generalized to all patients with similar diseases or conditions. In addition, MedPAC, the commission that advises Congress on Medicare issues, suggests that research should be undertaken on when and how much physical therapy benefits older patients and that evidence gathered from this research would assist in developing guidelines to determine when therapy is needed. Medicare claims data suggest that payments for more than a half million beneficiaries would have exceeded the caps had they been in place in 2002. It is uncertain, however, how many beneficiaries with payments exceeding the caps would be adversely affected because they have medical needs for care and no means to obtain it through hospital outpatient departments. According to the CMS-contracted analysis of 2002 claims data, Medicare paid an estimated $803 million in outpatient therapy benefits above what would have been permitted had the therapy caps been enforced that year. Payments for about 17 percent of occupational therapy users and 15 percent of physical therapy and speech-language pathology service users would have surpassed the caps in 2002; these beneficiaries numbered more than a half million (see table 2). Although the claims data show that payments for more than a half million beneficiaries would have exceeded the caps in 2002, it is unknown whether beneficiaries would have been adversely affected had the caps been in place. The data do not show the extent to which these beneficiaries were receiving care consistent with Medicare requirements that therapy improve a beneficiary’s condition and be reasonable in amount, frequency, and duration. Also, it is not clear to what extent hospital outpatient departments would serve as a “safety valve” for Medicare beneficiaries needing extensive therapy and unable to pay for it on their own. Past work by us and others has noted that the therapy caps were integral to the Balanced Budget Act’s spending control strategy and were unlikely to affect the majority of Medicare’s outpatient therapy users. We reported that the hospital outpatient department exemption from the cap was a mitigating factor in the mid-1990s, essentially removing the coverage limits for those users who had access to hospital outpatient departments. CMS-contracted analyses of claims data for 2002, however, show that nearly all the Medicare beneficiaries whose payments would have exceeded the caps did not receive outpatient therapy in hospital outpatient departments. Specifically, an estimated 92 percent (469,850 beneficiaries) of those whose payments would have exceeded the combined physical therapy and speech-language pathology cap—and 98 percent (126,488 beneficiaries) of those whose payments would have exceeded the occupational therapy cap—did not receive therapy services in a hospital outpatient department. These proportions, however, might have been different had the caps been in effect in 2002. Provider groups we spoke with were concerned that a sizable number of beneficiaries with legitimate medical needs whose payments would exceed the caps could be harmed. One group told us that a cap on outpatient therapy services would severely limit the opportunity for patients with the greatest need to receive appropriate care, and another group said that therapy caps could hurt beneficiaries with chronic illnesses. According to a third group, payments can quickly exceed the caps for beneficiaries who suffer from serious conditions such as stroke and Parkinson’s disease or who have multiple medical conditions. Statutory mandates since 1997 have required HHS to take certain actions toward developing a payment system for outpatient therapy that considers patients’ individual needs for care, but the agency has made little progress toward such a system. In particular, HHS has not determined how to standardize and collect information on the health and functioning of patients receiving outpatient therapy services—a key part of developing a system based on patients’ actual needs for therapy. To curb spending growth and ensure that outpatient therapy services are appropriately targeted to those beneficiaries who need them, Congress included provisions related to these services in several laws enacted starting in 1997 (see table 3). These provisions required HHS to report to Congress in 2001 on a revised coverage policy for outpatient therapy services that would consider patients’ needs. The provisions also required HHS to report to Congress in 2005 on steps toward developing a standard instrument for assessing a patient’s need for outpatient therapy services and on a mechanism for applying such an instrument to the payment process. As of October 2005, HHS had not reported its specific recommendations on revising the coverage policy based on patients’ needs. HHS had, however, contracted with researchers to conduct several analyses of Medicare claims data as a means of responding to the mandates. HHS’s response, implemented through CMS, to the principal legislative provisions addressing outpatient therapy services has been to contract for a series of studies, first by the Urban Institute and then by AdvanceMed (see table 4). In general, these studies have found that information available from Medicare claims data is insufficient to develop an alternative payment system based on patients’ therapy needs, and a patient assessment instrument for outpatient therapy services that collected information on functional status and functional outcomes would be needed to develop such a system. They have also found that a needs-based payment system would be key to controlling costs while ensuring patient access to appropriate therapy. As of October 2005, HHS had taken few steps toward developing a patient assessment instrument for assessing beneficiaries’ needs for outpatient therapy. Some health care settings, including inpatient rehabilitation facilities, home health agencies, and skilled nursing facilities, do have patient assessment instruments to collect functional status and other information on Medicare beneficiaries. Officials from HHS’s Office of the Assistant Secretary for Planning and Evaluation and CMS told us they were collaborating to examine the consistency of definitions and terms used in these settings. They expected to report to Congress by the end of 2005 (in response to the requirement in the Medicare, Medicaid, and SCHIP Benefits Improvement and Protection Act) on this effort to standardize patient assessment terminology, although they have no plans to include outpatient therapy services in the effort. CMS officials and one of the provider groups we spoke with estimated that the development of a patient assessment instrument for outpatient therapy services would take at least 3 to 5 years. HHS officials said that the complexity of the task and resource constraints precluded them from including outpatient therapy services in their effort to standardize other patient assessment terminology. CMS has, however, funded a demonstration project with a private-sector firm that has developed a patient assessment instrument that collects functional status and functional outcomes for patients who receive outpatient therapy services, primarily physical therapy, in certain facilities. A report from the firm to CMS is expected in summer 2006. Recent assessments of Medicare claims data have shown that the circumstances that initially led to therapy caps—rising Medicare payments for outpatient therapy and a high rate of improper payments—remain. CMS, however, has not implemented its contracted researchers’ proposal to strengthen its system of automated checks for denying payment of improper claims. Provider groups we spoke with agreed that Medicare was likely paying for some medically unnecessary therapy services and that improvements could be made to help strengthen the integrity of the payment system. According to recent CMS assessments of Medicare claims data, Medicare payments for outpatient therapy services continue to rise. Over the 4-year period from 1999 through 2002, Medicare spending for outpatient therapy more than doubled, from an estimated $1.5 billion to $3.4 billion, according to the CMS-contracted analysis of 2002 claims data released in 2004. Although outpatient therapy spending for 2003 and 2004 has not been fully estimated, overall Medicare part B expenditures—which include spending on outpatient therapy services—showed rapid growth (15 percent) from 2003 to 2004, according to CMS estimates reported in 2005. CMS attributed this growth to five factors, one of which was increased use of minor procedures such as therapy performed by physicians and physical therapists. Payments for certain therapy services, for example, increased by 24 percent or more from 2003 to 2004. CMS officials told us that many valid reasons may exist for the significant growth in payments for outpatient therapy. For example, they said, some of the increase in therapy services could be due to the growth in recent years of elective services such as knee replacements. CMS has also recently reported that improper payments made for outpatient therapy services have increased substantially in recent years. Specifically, in November 2004, CMS reported that the estimated error rate for claims rose steadily from 10.9 percent in 1998 to 20.4 percent in 2000. CMS reported that most of the errors were due to insufficient documentation to support the services claimed, such as lack of evidence of physician review and certification of treatment plans. In January 2005, CMS reported error rates in a random sample of more than 160,000 fee-for- service claims, which included therapy services, from 2003. The agency found that claims submitted for therapy services were among those with the highest rates of payments made in error because of insufficient documentation or medically unnecessary services. Such services included procedures frequently provided by therapists, such as therapeutic exercise, therapeutic activities, neuromuscular reeducation, electrical stimulation, manual therapy, and physical therapy evaluation. For example, 23.5 percent of claims for therapeutic activities lacked sufficient documentation, resulting in projected improper payments of more than $34 million. Claims for therapeutic exercises had a “medically unnecessary” error rate of 3 percent, with projected improper payments of more than $18 million. Our past work found that CMS needed to do more medical reviews of beneficiaries receiving outpatient therapy services. We reported in 2004, for example, that in Florida, comprehensive outpatient rehabilitation facilities were the most expensive class of providers of outpatient therapy services in the Medicare program in 2002. Per-beneficiary payments for outpatient therapy services to providers in these facilities were two to three times higher than payments to therapy providers in other facilities. We recommended that CMS direct the Florida claims administration contractor to medically review more claims from comprehensive outpatient rehabilitation facilities. CMS’s contracted researcher concluded that CMS could improve its claims system by identifying and implementing modifications to the agency’s automated claims review system to better target payments to medically appropriate care. In doing their analysis of the 2002 claims, they identified three types of specific edits that they found to be feasible and that would reject claims likely to be improper: Edits to control multiple billings of codes that are meant to be billed only once per patient per visit. The contracted researchers estimated that in 2002, the impact of this type of improper billing amounted to $36.7 million. Edits to control the amount of time that can be billed per patient per visit under a single code, since most conditions do not warrant treatment times exceeding 1 hour. The contracted researchers estimated that in 2002, the impact of this type of improper billing amounted to $24–$100 million, depending on the amount of time per visit billed under a given code. Edits of clinically illogical combinations of therapy procedure codes. In analyzing 2002 Medicare claims data, the contractor found limited system protections to prevent outpatient therapy providers from submitting claims for procedures that are illogical for a given diagnosis. One example, according to the contractor’s report, was claiming for manual therapy submitted with a diagnosis of an eye infection. The estimated impact of improper billings based on illogical combinations of diagnosis and procedure codes in 2002 amounted to $16.7 million. CMS officials agreed with the contracted researcher that such edits are worth considering, but the agency had not implemented them as of October 2005. A CMS official told us, however, that CMS is implementing the proposed edits to control multiple billings of codes meant to be billed only once per patient per visit; the agency expects these edits to be in place in early 2006. As of October 2005, CMS was still considering whether to implement the other two types of edits. In addition to the three types of edits identified by the contracted researcher, the researcher proposed routine data analysis of Medicare claims to identify other utilization limits that could be applied to better target Medicare payments. CMS is considering whether and how to implement this type of analysis. Provider groups we spoke with agreed that Medicare was likely paying for some medically unnecessary therapy services and that improved payment edits could help ensure that Medicare did not pay for such services. Nevertheless, representatives from these groups stressed the importance of mechanisms that would allow Medicare to cover payments for beneficiaries who need extensive care. The representatives noted that an exception process, based on a medical review, could help determine the appropriateness of therapy services. Such an exception process could be invoked to review the medical records of beneficiaries whose providers seek permission for coverage of Medicare payments in excess of the caps. CMS officials agreed that an appeal process or waiver from the caps could be a short-term approach to focus resources on needy beneficiaries. They added that possible criteria for waiving the caps could include (1) having multiple conditions; (2) having certain conditions, levels of severity, or multiple conditions suggested by research as having greater need for treatment; (3) having needs for more than one type of service, such as occupational therapy and speech-language pathology; or (4) having prior use of services or multiple episodes in the same year. HHS does not, however, currently have the authority to implement a process, or to conduct a demonstration or pilot project, to provide exceptions to the therapy caps. Medicare payments for outpatient therapy continue to rise rapidly, and 20 percent or more of claims may be improper. To date, however, HHS has made little progress toward a payment system for outpatient therapy services that is based on patients’ needs. Furthermore, while CMS is considering ways to reduce improper payments, it has not implemented the contractor’s proposals for improving its claims-processing system. HHS has been required for years to take steps toward developing a payment system based on beneficiaries’ needs, which would require developing a process for collecting better assessment information. Studies contracted by CMS to respond to requirements under three laws suggest that the department would need to develop a standard patient assessment instrument to define a patient’s diagnosis and functional status and thereby determine the patient’s medical need for therapy. In response to a statutory requirement to report on the standardization of patient assessment instruments in a variety of settings, HHS and CMS have an effort under way to study and report to Congress on the development of standard terminology that Medicare providers could use to assess patients’ diagnosis and functional status. Although this provision requires that outpatient therapy services be included in this effort, HHS and CMS have not done so. Concerns remain that when the current moratorium expires and the caps are reinstated, some beneficiaries who have medical needs for therapy beyond what can be paid for under the caps may not be able to obtain the care they need. Some beneficiaries may not be able to afford to pay for care or may not have access to hospital outpatient departments, which are not subject to the caps. In the absence of patient assessment information, therefore, an interim process, demonstration, or pilot project may be warranted to allow HHS to grant exceptions to the caps. For example, such a project could allow beneficiaries, under circumstances that CMS determines, an exception to the cap on the basis of medical review supported by documentation from providers regarding their patients’ needs for extensive therapy. Such a project could also provide CMS with valuable information about the conditions, diseases, and functional status of beneficiaries who have extensive medical needs for therapy. The information gathered through the project could also facilitate development of a standardized patient assessment process or instrument. HHS, however, would need legislative authority to conduct such a project. Although exceptions could increase Medicare payments for outpatient therapy, exceptions could provide one avenue for Medicare coverage above the caps for some beneficiaries who need extensive therapy. Potentially, payment increases due to exceptions could be offset by implementation of the contractor-proposed improvements, such as edits. To provide a mechanism after the moratorium expires whereby certain Medicare beneficiaries could have access to appropriate outpatient therapy services and to obtain better data needed to improve the Medicare outpatient therapy payment policy, including data on the conditions and diseases of beneficiaries who have extensive outpatient therapy needs, Congress should consider giving HHS authority to implement an interim process or demonstration project whereby individual beneficiaries could be granted an exception from the therapy caps. To expedite development of a process for assessing patients’ needs for outpatient therapy services and to limit improper payments, we recommend that the Secretary of HHS take the following two actions: ensure that outpatient therapy services are added to the effort already under way to develop standard terminology for existing patient assessment instruments, with a goal of developing a means by which to collect such information for outpatient therapy, and implement improvements to CMS’s automated system for identifying outpatient therapy claims that are likely to be improper. We provided a draft of this report to HHS for comment and received a written response from the department (reproduced in app. I). HHS did not comment on the matter for congressional consideration, in which we said that Congress should give HHS authority to implement an interim process or demonstration project whereby individual beneficiaries could be granted an exception from the therapy caps. HHS concurred with our recommendation that it ensure that outpatient therapy services are added to the effort already under way to develop standard terminology for existing patient assessment instruments. The department stated that it is preparing to contract for a 5-month study to develop a policy and payment guidance report as it explores the feasibility of developing a post–acute care patient assessment instrument. In commenting on our recommendation to implement improvements to CMS’s automated system for identifying outpatient therapy claims that are likely to be improper, HHS discussed a national edit system to promote correct coding methods and eliminate improper coding. This national edit system has been applied to some therapy-related claims starting in 1996, and HHS plans to apply it more broadly in 2006. While the national edit system is complementary to the edits proposed by CMS’s contracted study, CMS can do more by also implementing improvements to its payment system as suggested by the study’s specific findings. HHS also indicated that it was exploring other methods for automated evaluation of claims but commented that its claims-processing system cannot always identify an improper claim from the information that is available on claim forms. We agree that the current system cannot always identify an improper claim, given the lack of information on the claim forms about a patient’s actual needs for therapy. It was this conclusion that led to our recommendation that HHS include outpatient therapy in its present efforts to improve the collection of patient assessment information. We believe that CMS can make improvements to its current automated system to reduce improper claims, irrespective of its efforts to improve patient assessment information. As we noted in the draft report, CMS’s contracted study found certain edits to be feasible using information already provided on claim forms, such as edits of clinically illogical combinations of therapy procedure codes. We are sending copies of this report to the Secretary of Health and Human Services, the Administrator of the Centers for Medicare & Medicaid Services, and other interested parties. We will also make copies available to others upon request. In addition, the report will be available at no charge on the GAO Web site at http://www.gao.gov. If you or your staff members have any questions about this report, please contact me at (202) 512-7119 or at [email protected]. Contact points for our Offices of Congressional Relations and Public Affairs may be found on the last page of this report. GAO staff who made major contributions to this report are listed in appendix II. In addition to the contact mentioned above, Katherine Iritani, Assistant Director; Ellen W. Chu; Adrienne Griffin; Lisa A. Lusk; and Jill M. Peterson made key contributions to this report. Medicare: More Specific Criteria Needed to Classify Inpatient Rehabilitation Facilities. GAO-05-366. Washington, D.C.: April 22, 2005. Comprehensive Outpatient Rehabilitation Facilities: High Medicare Payments in Florida Raise Program Integrity Concern. GAO-04-709. Washington, D.C.: August 12, 2004. Medicare: Recent CMS Reforms Address Carrier Scrutiny of Physicians’ Claims for Payment. GAO-02-693. Washington, D.C.: May 28, 2002. Medicare: Outpatient Rehabilitation Therapy Caps Are Important Controls but Should Be Adjusted for Patient Need. GAO/HEHS-00-15R. Washington D.C.: October 8, 1999. Medicare: Tighter Rules Needed to Curtail Overcharges for Therapy in Nursing Homes. GAO/HEHS-95-23. Washington D.C.: March 30, 1995. | For years, Congress has wrestled with rising Medicare costs and improper payments for outpatient therapy services--physical therapy, occupational therapy, and speech-language pathology. In 1997 Congress established per-person spending limits, or "therapy caps," for nonhospital outpatient therapy but, responding to concerns that some beneficiaries need extensive services, has since placed temporary moratoriums on the caps. The current moratorium is set to expire at the end of 2005. The Medicare Prescription Drug, Improvement, and Modernization Act of 2003 required GAO to report on whether available information justifies waiving the caps for particular conditions or diseases. As agreed with the committees of jurisdiction, GAO also assessed the status of the Department of Health and Human Services' (HHS) efforts to develop a needs-based payment policy and whether circumstances leading to the caps have changed. Data and research available are, for three reasons, insufficient to identify particular conditions or diseases to justify waiving Medicare's outpatient therapy caps. First, Medicare claims data--the most comprehensive data for beneficiaries whose payments would exceed the caps--often do not capture the clinical diagnosis for which therapy is received. Nor do they show particular conditions or diseases as more likely than others to be associated with payments exceeding the caps. Second, even for diagnoses clearly linked to a condition or disease, such as stroke, the length of treatment for patients with the same diagnosis varies widely. Third, because of the complexity of patient factors involved, most studies do not define the amount or mix of therapy services needed for Medicare beneficiaries with specific conditions or diseases. Provider groups remain concerned about adverse effects on beneficiaries needing extensive therapy if the caps are enforced. HHS does not, however, have the authority to provide exceptions to the therapy caps. Despite several related statutory requirements, HHS has made little progress toward developing a payment system for outpatient therapy that considers individual beneficiaries' needs. In particular, HHS has not determined how to standardize and collect information on the health and functioning of patients receiving outpatient therapy services--a key part of developing a system based on individual needs for therapy. The circumstances that led to the therapy caps remain a concern. Medicare payments for outpatient therapy are still rising significantly, and increases in improper payments for outpatient therapy continue. HHS could reduce improper payments and Medicare costs by improving its system of automated processes for rejecting claims likely to be improper. |
Farmer Mac is a government-sponsored enterprise or GSE that was chartered by Congress in 1987. It is a federally chartered and privately operated corporation that is publicly traded on the New York Stock Exchange. Farmer Mac is also an independent entity within the Farm Credit System or FCS, which is another GSE. As an FCS institution, Farmer Mac is subject to FCA’s regulatory authority. FCA, through OSMO, has general regulatory and enforcement authority over Farmer Mac. According to the 1987 Act, Farmer Mac, in extreme circumstances, may borrow up to $1.5 billion from the U.S. Treasury to guarantee timely payment of any guarantee obligations of the corporation. Congress established Farmer Mac with a mission to create a secondary market—a financial market for buying and selling loans, individually or by securitizing them—in agricultural real estate and rural housing loans, and improve the availability of agricultural mortgage credit. When loans are securitized, they are repackaged into a “pool” by a trust in order to be sold to investors in the capital markets to generate liquidity. Generally, to carry out its mission, Farmer Mac purchases mortgages or bonds directly from lenders using cash generated by issuing debt obligations. It also issues standby agreements for eligible loans whereby Farmer Mac is committed to purchase eligible loans from financial institutions at an undetermined future date when a specific event occurs. The intent for these activities is to provide real estate credit to farmers at rates or conditions more favorable than those that would be available in the absence of Farmer Mac. Farmer Mac also securitizes the mortgages it purchases and issues AMBS and guarantees the timely payment of interest and principal on these securities. However, instead of selling the AMBS in the capital markets to generate cash, Farmer Mac holds most of the AMBS that it issues in its retained portfolio. Farmer Mac faces potential losses primarily from four sources: Credit risk, or the possibility of financial loss resulting from default by borrowers on farming assets that have lost value; Liquidity risk, or the chance that Farmer Mac will be unable to meet its obligations as they come due; Interest rate risk, or possible fluctuations in interest rates that negatively impact earnings or the balance sheet; and Operations risk, or the potential that inadequate or failed internal processes, people and systems, or external events will affect financial condition. Although the federal government explicitly does not guarantee Farmer Mac’s obligations, it is generally assumed in financial markets that the government will not allow the GSE to default on its debt and AMBS obligations. In fact, during the 1980s the federal government provided financial assistance to both Fannie Mae and the Farm Credit System when they experienced difficulties due to sharply rising interest rates and declining agricultural land values, respectively. Because the markets perceive that there is an implied federal guarantee on Farmer Mac’s obligations, Farmer Mac can borrow money at interest rates that are lower than those generally available to comparably creditworthy private corporations and thus can extend credit and other forms of liquidity to financial institutions at favorable rates. The assets associated with Farmer Mac’s activities can generally be divided into program assets and nonmission investments. Program assets are agricultural mortgage loans held by Farmer Mac, the guaranteed securities backed by agricultural loans, and loans underlying Farmer Mac’s standby agreements. As of December 31, 2003, Farmer Mac’s loan and guarantee portfolio and standby agreements totaled about $5.8 billion. Of that total, nearly $3.1 billion was in off-balance sheet standby and similar agreements. Standby agreements represent a potential obligation of Farmer Mac that does not have to be funded until such time as Farmer Mac is required to purchase a loan. As such, these commitments are not on Farmer Mac’s balance sheet and are subject to a statutory minimum requirement of 0.75 percent capital instead of 2.75 percent for on-balance sheet assets. Let me point out that whenever Farmer Mac is obligated under a standby agreement to purchase a delinquent loan, it must also increase the capital held against the loan from 0.75 to 2.75 percent, nearly a 270 percent increase. Farmer Mac funds its loan purchases and other activities primarily by issuing debt obligations of various maturities. As of December 31, 2003, Farmer Mac had $2.8 billion of payable notes due within one year and $1.1billion of payable notes due after one year outstanding. At the same time, Farmer Mac held approximately $1.1 billion in nonmission investments. Farmer Mac’s net income increased from $4.6 million in 1997 to $27.3 million in 2003, for a total increase of 493 percent. Farmer Mac’s two primary revenue sources are (1) interest income earned on its loan portfolio, guaranteed securities, and nonmission investments, and (2) commitment fees earned on standby agreements. In recent years, Farmer Mac’s earnings growth has principally been driven by fees generated by its off-balance sheet standby and similar agreements, which grew rapidly from zero in 1998 to $3.1 billion as of December 31, 2003. Farmer Mac’s risk levels have increased along with its income. First, increased risk is apparent in the growing number of impaired loans, real estate owned, and write-offs of bad loans, as well as in the rapid growth in its on- and off-balance sheet loans, guarantees, and standby agreements. Impaired loans totaled $69.96 million at December 31, 2003, compared to zero at December 31, 1997. Part of our concern about the increased credit risk involves Farmer Mac’s loan loss model, which is based on loans that differ from those held in the corporation’s own portfolios and those covered under its standby agreements in terms of geographic distribution and interest rate terms. This lack of comparability and other limitations of the model may affect the reasonableness and accuracy of Farmer Mac’s estimated losses from credit risk either upward or downward. A complicating factor is that notwithstanding the quality of the loans underlying standby agreements, which have been performing better than the loans on Farmer Mac’s balance sheet, Farmer Mac lacks the historical experience with standby agreements that is needed to accurately estimate the type and amount of loans it may ultimately be obligated to purchase and any associated losses. Farmer Mac also faces potential liquidity risk as a result of these standby and similar agreements, which can create unexpected demands for additional funding. In other words, at a time when either the agricultural sector is severely depressed or interest rates are falling, Farmer Mac could be required to purchase large amounts of impaired or defaulted loans under the agreements, thus subjecting Farmer Mac to increased funding liquidity risks and the potential for reduced earnings. Although our study found that Farmer Mac has maintained sufficient liquidity to support its loan purchase and guarantee activity, Farmer Mac’s liquidity may not be adequate to cover its obligations under its standby or similar agreements. We did not have the necessary historical information to project the number of covered loans that Farmer Mac might need to purchase in the future. Thus, we could not determine the extent of the liquidity risk Farmer Mac might face. At the same time, Farmer Mac management did not have the quantitative data it needed to make accurate risk management and other operating decisions. As noted earlier, we made recommendations to Farmer Mac to enhance its risk management practices. We would like to report that Farmer Mac has responded to our recommendations but it is too early for us to assess the actions taken to implement them. Farmer Mac management recently showed us a loan classification system that will be completed in 2005 that is based on Farmer Mac’s loan loss experience. Staff are also now documenting the supporting underwriting decisions for loans that Farmer Mac management approved by overriding one or more specific criteria based on the compensating strengths of those loans. Farmer Mac has also adopted a formal contingency funding and liquidity plan but this plan does not address our concerns about providing for liquidity if a large amount of standby and similar agreement loans were put to Farmer Mac unexpectedly. Farmer Mac representatives told us they are also developing a capital adequacy model. In addition, Farmer Mac management said that they are working with an outside consultant to develop a prepayment model to ensure accurate interest rate risk measurements. Now I want to focus on an issue involving Farmer Mac’s $1.5 billion line of credit with Treasury that could impact the corporation’s long-term financial condition. This issue is significant because it centers around the AMBS in Farmer Mac’s retained portfolio, which as we have seen, makes up 35 percent of its total on-balance sheet assets of $4.3 billion and 26% percent of Farmer Mac’s total program assets of $5.8 billion—including off-balance sheet loans underlying the standby and other agreements. Treasury has expressed serious questions about whether it is required to purchase Farmer Mac obligations to meet Farmer Mac-guaranteed liabilities on AMBS that Farmer Mac or its affiliates hold. On the other hand, a legal opinion from Farmer Mac’s outside counsel states that Treasury would be required to purchase the debt obligations whether the obligations are held by a subsidiary of Farmer Mac or by an unrelated third party. This disagreement could create uncertainty as to whether Treasury would purchase obligations held in Farmer Mac’s portfolio in times of economic stress. This uncertainty also relates to statements made by Farmer Mac to investors concerning Treasury’s obligation to Farmer Mac, which in turn, could affect Farmer Mac’s ability to issue debt at favorable rates. Ultimately, this uncertainty could impact its long-term financial condition. Farmer Mac’s subsidiary, Farmer Mac Mortgage Securities Corporation, holds the majority of AMBS that Farmer Mac issued. Farmer Mac’s charter (the 1987 Act) gives it the authority to issue obligations to the Secretary of the Treasury to fulfill its guarantee obligations. According to the 1987 Act, the Secretary of the Treasury may purchase Farmer Mac’s obligations only if Farmer Mac certifies that (1) its reserves against losses arising out of its guarantee activities have been exhausted and (2) the proceeds of the obligations are needed to fulfill Farmer Mac’s obligations under any of its guarantees. In addition, Treasury is required to purchase obligations issued by Farmer Mac in an amount determined by Farmer Mac to be sufficient to meet its guarantee liabilities not later than 10 business days after receipt of the certification. However, Treasury has indicated that the requirement to purchase Farmer Mac obligations may extend only to those obligations issued and sold to outside investors. In a comment letter dated June 13, 1997, and submitted to FCA in connection with a proposed regulation on conservatorship and receivership for Farmer Mac (1997 Treasury letter), Treasury stated “…we have ‘serious questions’ as to whether the Treasury would be obligated to make advances to Farmer Mac to allow it to perform on its guarantee with respect to securities held in its own portfolio—-that is, where the Farmer Mac guarantee essentially runs to Farmer Mac itself.” The 1997 Treasury letter indicated that if the purchase of obligations extended to guaranteed securities held by Farmer Mac this would belie the fact that the securities are not backed by the full faith and credit of the United States, since a loan to Farmer Mac to fulfill the guarantee would benefit holders of Farmer Mac’s general debt obligations. The 1997 Treasury letter stated “Treasury’s obligation extends to Farmer Mac only in the prescribed circumstances, and is not a blanket guarantee protecting Farmer Mac’s guaranteed securities holders from loss. Nor is the purpose of the Treasury’s obligation to protect Farmer Mac shareholders or general creditors.” According to Treasury, the 1997 letter remains its position concerning Farmer Mac’s line of credit. Meanwhile, the legal opinion of Farmer Mac’s outside counsel is that the guarantee is enforceable whether AMBS are held by a subsidiary of Farmer Mac or by an unrelated third party. Farmer Mac’s legal opinion also states that Treasury could not decline to purchase the debt obligations issued by Farmer Mac merely because the proceeds of the obligations are to be used to satisfy Farmer Mac’s guarantee with respect to AMBS held by a subsidiary. According to Farmer Mac, if the conditions set forth in the 1987 Act are met—required certification and a limitation on the amount of obligations of $1.5 billion—then there is no exception in the 1997 Act that authorizes Treasury to decline to purchase the obligations. Farmer Mac states that discriminating among Farmer Mac guaranteed securities based on the identity of the holder in determining whether Farmer Mac could fulfill its guarantee obligations would lead to an anomalous situation in the marketplace and thereby hinder the achievement of Congress’ mandate to establish a secondary market for agricultural loans. Before I go into whether Farmer Mac’s activities have had an impact on the agricultural real estate loan market, I want to point out that the enabling legislation contains only broad statements of the corporation’s mission and purpose. The legislation is not specific and does not provide measurable mission-related criteria that would allow for a meaningful assessment of Farmer Mac’s progress in meeting its public policy goals. Our attempt to determine the extent to which Farmer Mac had met its public policy mission led us to conclude that although Farmer Mac has increased its mission-related activities since our previous review, the public benefits derived from these activities are not clear. In trying to assess whether Farmer Mac had made long-term credit available to farmers and ranchers at stable interest rates, we found that from 2001 to 2002, its long-term fixed interest rates on Farmer Mac I loans were similar to the rates offered by commercial banks and FCS institutions. We also found that since 1998, Farmer Mac had been operating under a strategy of retaining the loans it purchased and securitized as AMBS in its portfolio. Farmer Mac stated that this strategy would lower funding costs and increase profitability but as a result, the depth and liquidity of the secondary market for AMBS is unknown. In our report, we recommended that Farmer Mac reevaluate this strategy. Recently, Farmer Mac management said that the corporation had reevaluated its strategy for holding AMBS but determined to continue holding them for economic reasons. However, Farmer Mac management also indicated that the corporation was committed to selling newly issued AMBS periodically, when the conditions of the capital markets and the size of loan pool made such transactions efficient. As I mentioned earlier, Farmer Mac has increased its mission-related activities, primarily by developing the standby agreement program. As of December 31, 2003, all of Farmer Mac’s standby agreements are with FCS institutions and 3 FCS institutions represented 51 percent of the standby agreement program. While standby agreements provide greater lending capacity for those institutions, they also lower the amount of capital lending institutions are required to hold against their loans. Fig. 2 shows the effect of standby agreements on the total capital required to be held against the underlying loans in the entire FCS. Our concern is that standby and similar agreements reduce the sum of capital required to be held by the Farm Credit System and Farmer Mac. Generally, institutions can help mitigate the risks associated with lower capital by maintaining a relatively large number of participating lenders and a geographically diverse portfolio. However, Farmer Mac’s business activities are concentrated among a small number of business partners and its portfolio is concentrated largely in the western United States. Before discussing governance issues at Farmer Mac, I want to describe how Farmer Mac’s board of directors is structured in federal law. Farmer Mac’s 15-member board of directors includes 5 members elected by Class A stockholders, which include banks, insurance companies, and other financial institutions that do business with Farmer Mac; 5 members elected by Class B stockholders, which are FCS institutions that do business with Farmer Mac; and 5 members appointed by the President of the United States. Farmer Mac also issues nonvoting Class C stock to the general public. Class A and Class B shareholders are concerned with the use of Farmer Mac services, while Class C shareholders are generally investors concerned with maximizing their profits. According to statements made at the time Farmer Mac’s enabling legislation was being considered, this structure was intended to protect the interests of both FCS and commercial lenders by providing for equal representation by FCS, commercial lenders, and the public sector. Under this structure, Farmer Mac resembles a cooperative. At the same time, however, it is a publicly traded company, because its Class A and C stock are traded on the NYSE. But unlike most other publicly traded corporations, Farmer Mac is controlled by institutions with which it has a business relationship. For this reason, the board may face difficulties representing the interests of all shareholders. Good corporate governance requires that the incentives and loyalties of the board of directors of publicly traded companies reflect the fact that the directors are to serve the interests of all the shareholders. However, we found that the statutory structure of Farmer Mac’s board and the voting structure of its common stock hamper Farmer Mac’s ability to have such a focus. Farmer Mac is subject to NYSE listing standards on corporate governance, as well as statutory and regulatory requirements such as the Sarbanes- Oxley Act of 2002. Collectively, these standards and provisions require that a majority of the board be independent and that key committees (audit, nominating or corporate governance, and compensation) consist entirely of independent directors. During our review, the listing standards were being revised and criteria for independence had not been finalized. Based on the proposed standards, our assessment was that business relationships between Farmer Mac and the directors of its board may have prevented these individuals from meeting the standards of independence under NYSE rules. In updating our information for this testimony, we noted that Farmer Mac’s 2004 annual proxy statements had identified 2 of 15 directors as not meeting the independence standards. One of the 2 directors is not a nominee for re-election. The other director has decided to withdraw as a member of the corporate governance committee if elected as a director at 2004 annual meeting. We found that Farmer Mac’s board nomination process, director training, and management succession planning were not as concise, formal, or well documented as best practices would suggest. We also found that Farmer Mac’s stock option vesting program appears generous compared to general industry practices. We made recommendations to Farmer Mac’s board to improve the transparency and disclosure of these processes and to reevaluate stock option levels and vesting period. Since our 2003 report, according to Farmer Mac management, the board has reviewed and confirmed that all board members fully understand the nomination process and that it has established a formal executive management succession plan. Further, the board has initiated a formal training program for its members that included external training and briefings on subjects relevant to the operations of Farmer Mac. Finally, the board had extended the vesting period of the corporation’s stock options. The final area of our 2003 review involved regulatory oversight of Farmer Mac. We reported that since 2002 FCA had taken several steps to enhance supervisory oversight of Farmer Mac but it faced significant challenges that could limit its regulatory effectiveness. We made several recommendations to FCA designed to enhance the risk-based capital model, improve off-site monitoring of Farmer Mac, and help assess and report how well Farmer Mac is achieving its mission. In updating our information for this testimony, we found that FCA had taken or planned to take a number of actions to further address many of our concerns and recommendations. During our 2003 review, we noted that FCA had begun strengthening its oversight of Farmer Mac by doing a more comprehensive safety and soundness examination and undertaking initiatives to expand its regulatory framework. These initiatives included developing regulations to limit the level and quality of Farmer Mac’s nonmission investments and issue specific liquidity standards, and studying the implications of regulatory capital arbitrage between FCS institutions and Farmer Mac. However, we found that FCA continued to face significant challenges in sustaining and improving its oversight and more remained to be done to improve its off-site monitoring, assessment of risk-based capital, and mission oversight. For example, FCA had not been updating and reformatting Farmer Mac’s call report schedules and corresponding instructions to fully conform to FCA regulations and to reflect recent accounting changes. We also identified a number of issues related to the data used in and structure of FCA’s risk-based capital model, but the overall impact these issues have on the estimate of risk-based capital for Farmer Mac’s credit risk is uncertain. Some concerns, such as the potential undercounting of loans which experienced credit losses, or greater prepayment of the loans in the database used to build FCA’s credit risk model relative to the kinds of loans that Farmer Mac now purchases, may result in the FCA credit risk model underestimating the credit risk capital requirement. Other issues, such as lacking a variable to track land price changes for any but the year with the most economic stresses, may cause the model to overestimate the credit risk capital requirement. Augmented data and more analysis could better determine the relative magnitudes of these effects. Our study found that FCA’s oversight of Farmer Mac had typically focused on safety and soundness and that FCA lacked criteria and procedures to effectively oversee how well Farmer Mac achieves its mission. At the same time, Farmer Mac’s enabling legislation is broadly stated and does not include any measurable goals or requirements to assess progress toward meeting its mission. More explicit mission goals or requirements would help FCA in improving its oversight of Farmer Mac. Since our 2003 report, FCA has continued to make a concerted effort to further enhance its oversight of Farmer Mac. First, FCA staff are drafting regulatory revisions to the risk-based capital model that covers a range of issues. They plan to present a proposed rule to the FCA board for consideration in the fall of 2004. According to FCA officials, they are engaged in efforts to address the issues related to the risk-based model raised in our report but there are certain elements of our recommendation they have considered and decided not to adopt, including a “run-off” approach, the effect of yield maintenance penalties, and the use of land value declines as the independent variable in loan loss regression. Second, FCA has made some revisions to the Farmer Mac quarterly call reports, and is in process of making additional revisions. These initial revisions included adjustments to call report schedules that were identified during our 2003 review. FCA has a number of capital-related projects in progress that, taken collectively, may address the issue of capital arbitrage within the Farm Credit System. In addition, FCA has a number of ongoing projects that may address our recommendation related to requiring Farmer Mac to obtain a credit rating. Finally, FCA has begun planning for a project that will consider different approaches for assessing the impact Farmer Mac’s activities have on the agricultural real estate lending market. Our 2003 review showed that Farmer Mac’s income, mission-related activities and risks have all increased since we last reported in 1999. At the same time, we found that Farmer Mac, FCA, and Congress could each take actions to ensure that Farmer Mac operates in a safe and sound manner while fulfilling its public policy mission. We recommended in our report that Farmer Mac strengthen its risk management and corporate governance practices and reevaluate its strategies to carry out its mission. Our report also recommended that FCA make several enhancements to its oversight tools to more effectively oversee both the safety and soundness and mission of Farmer Mac. Farmer Mac and FCA agreed with several of our report’s findings and conclusions. During our recent discussions with Farmer Mac and FCA, both entities demonstrated that they are taking steps to implement many of our recommendations. Finally, our report suggested that Congress consider making legislative changes to ensure that Farmer Mac’s public benefits can be measured and FCA has the necessary flexibilities to carry out its oversight responsibilities. Mr. Chairman, this concludes our prepared statement. We would be happy to respond to any questions you or other members of the Committee may have at this time. For information about this testimony, contact Davi D’Agostino, Director, Financial Markets and Community Investment, at (202) 512-8678, or Jeanette Franzel, Director at (202) 512-9471. In addition to the individuals named above, Rachel DeMarcus, Debra Johnson, Austin Kelly, Paul Kinney, Bettye Massenburg, Kimberley McGatlin, John Treanor, and Karen Tremba made key contributions to this testimony. This is a work of the U.S. government and is not subject to copyright protection in the United States. It may be reproduced and distributed in its entirety without further permission from GAO. However, because this work may contain copyrighted images or other material, permission from the copyright holder may be necessary if you wish to reproduce this material separately. | This testimony is based on GAO's October 2003 report, Farmer Mac: Some Progress Made, but Greater Attention to Risk Management, Mission, and Corporate Governance Is Needed (GAO-04-116). GAO's testimony presents a brief overview of Farmer Mac and discusses issues raised in its 2003 report, including Farmer Mac's risk management practices and line of credit with Treasury, mission related activities, board structure, and oversight, which is provided by the Farm Credit Administration (FCA). Farmer Mac, a government-sponsored enterprise (GSE), was established to provide a secondary market for agricultural real estate and rural housing loans and to increase agricultural mortgage credit. In 2003, GAO reported that several aspects of Farmer Mac's financial risk management practices had not kept pace with its increasing risk profile. First, Farmer Mac had $3.1 billion in off-balance-sheet commitments and other agreements that could obligate it to buy the underlying loans or cover related losses under certain conditions. Farmer Mac and the Farm Credit System institutions that participate in the agreements are required to hold far less capital than is otherwise required. Because Farmer Mac's loan activities are concentrated in a small number of financial institutions and in the West, the risk is not reduced while less capital is required to be held. Under stressful agricultural economic conditions, Farmer Mac could be required to purchase large amounts of impaired or defaulted loans if large amounts of the commitments were exercised. Second, the coverage of Farmer Mac's $1.5 billion line of credit with the U.S. Treasury was controversial, as the entities disagreed on whether the securities it has issued and kept in its portfolio would be eligible. Third, GAO reported that while Farmer Mac had increased its mission-related activities since its 1999 report, their impact on the agricultural real estate market was unclear. The effects were difficult to measure partly because Farmer Mac's statute lacks specific mission goals. For this and other reasons, GAO concluded that the public benefits derived from Farmer Mac's activities are not clear. Finally, for profitability reasons, Farmer Mac had a strategy of holding securities it issued in its portfolio instead of selling them to investors in the capital markets. As a result, the depth and liquidity of the market for Farmer Mac's securities is unknown. Farmer Mac's board structure, set in federal law, may make it difficult to ensure that the board fully represents the interests of all shareholders and meets independence and other requirements. The board structure contains elements of both a cooperative and an investor-owned publicly traded company. For example, two-thirds of the board members do business with Farmer Mac and hold the only voting stock, while the common stock holders have no vote. GAO also identified challenges FCA faced in its oversight of Farmer Mac, including a lack of specific criteria for measuring how well it was achieving its mission. Although FCA had taken steps to improve its safety and soundness oversight, more needs to be done to improve its offsite monitoring and assessment of risk-based capital. Farmer Mac and FCA have efforts underway to address many of GAO's recommendations and it was too early to assess them. |
Alaska is the largest state in the union—encompassing 586,412 square miles, it is one-fifth the size of the lower 48 contiguous states combined. The state is bounded on three sides by saltwater bodies—the Beaufort and Chukchi Seas to the north, the Bering Sea to the west, and the Gulf of Alaska to the south (see fig. 1). Measured on the most detailed maps available, including islands, Alaska has 33,904 miles of shoreline. In addition, there are more than 3,000 rivers in Alaska, including the major interior river systems of the Yukon and the Kuskokwim Rivers. Despite its size, Alaska is one of the least populated states, with about 680,000 people—90,000, or about 13 percent, of which are Alaska Natives. Many Alaska Natives live in places long inhabited by their ancestors in rural areas in western, northern, and interior Alaska. Alaska Natives are generally divided into six major groupings: Unangan (Aleuts), Alutiiq (Pacific Eskimos), Iñupiat (Northern Eskimos), Yup’ik (Bering Sea Eskimos), Athabascan (Interior Indians), and Tlingit and Haida (Southeast Coastal Indians). Many of these Alaska Natives live in villages near the sea or river waters, which they rely on to hunt, fish, and gather wild plants for food. These subsistence activities are intricately woven into the fabric of their lives and form the foundation for continuity between generations by promoting the basic values of Alaska Native culture—generosity, respect for elders, self-esteem for the successful hunters, and community cooperation. Typically, a coastal or river Native village has a population of a couple of hundred people and generally contains only basic infrastructure—homes; school; village store; health clinic; church; city or tribal offices; post office; and washateria that provides laundry, shower, and toilet facilities for a fee to residents of villages without running water. Most of the villages are not accessible by roads; instead, they have an airport runway adjacent or nearby that provides the only year-round access to the community. Other infrastructure in a village may consist of a bulk fuel tank farm; a power plant; a water treatment facility; a water tank; meat drying racks; a village sewage lagoon or dump site; and, for some villages, commercial structures, such as a tannery or fish processing plant. Most river villages also have a barge landing area where goods are delivered to the community during the ice-free period. While villages on Alaska’s shorelines and river banks provide Alaska Natives with access to food, transportation, and recreational and cultural benefits, these locations also present dangers to the inhabitants. In particular, these dangers include flooding—in coastal communities, from seismic activity, such as tsunamis associated with earthquakes, erosion, and surges from coastal storms, or in river communities, from heavy rainfall, snow melt, or the sudden release of water from behind breaking ice jams. According to the Alaska Division of Homeland Security and Emergency Management, since 1978, there have been 228 flooding events that have led to state disaster declarations for 119 different Alaska communities. About 40 percent of these flood disasters occurred from 2000 to 2008, with 23 occurring in 2005, the worst year on record. Figure 2 shows the 2005 state flooding disaster in Golovin, on Alaska’s northwest coast. The effects of climate change are believed by state officials to be growing in Alaska, potentially having the greatest impacts on the already vulnerable Alaska Native villages and the subsistence lifestyles of their inhabitants. Permafrost (permanently frozen subsoil), which is found over approximately 80 percent of Alaska and in northern barrier island communities, literally helps to hold the land together. Rising temperatures in recent years have led to widespread thawing of permafrost, causing village shorelines and riverbanks to slump and erode, threatening homes and infrastructure. Rising temperatures also affect the thickness, extent, and duration of sea ice that forms along the western and northern coasts. The loss of sea ice leaves shorelines more vulnerable to waves and storm surges and, coupled with the thawing permafrost along the coasts, accelerates the erosion threatening Alaska Native villages (see fig. 3). In addition, the loss of sea ice changes the habitat and accessibility of many of the marine mammals that Alaska Natives depend upon for subsistence. As the ice melts or moves away early, walruses, seals, and polar bears move out of hunting range. The state of Alaska’s government structure that may interact with Native villages to help them meet their needs, including making decisions about how to address flooding and erosion, may involve several distinct entities. Alaska’s constitution and state laws allow for several types of regional and local government units—such as boroughs, which are units of government that are similar to the counties found in many other states. About one-third of Alaska is made up of 16 organized boroughs. The remaining two-thirds of the state is sparsely populated land that is considered a single “unorganized borough.” Of 213 Alaska Native villages, 147 (or 69 percent) are located within the unorganized borough. At the village level, a federally recognized tribal government may coexist with a city government, which may also be under a borough government. In other cases, the tribal government may be the only form of local government if the village (1) is located in the unorganized borough and (2) is not an incorporated city; however, these tribal governments are not political subdivisions of the state. Alaska’s Governor and DCCED have taken the lead for the state in addressing flooding and erosion threats to Alaska Native communities. The Immediate Action Workgroup of the Governor’s Sub-Cabinet on Climate Change is responsible for the early assessment and development of an action plan addressing climate change impacts on coastal and other vulnerable communities in Alaska. The workgroup is cochaired by state and federal representatives from DCCED and the Corps, and includes representatives from other key state agencies as well as the Denali Commission, a federal-state cooperative entity. In April 2008, the workgroup provided its initial recommendations for actions—including relocation planning—that should be taken in the ensuing 12 to 18 months to prevent the loss of life and property in Alaska’s communities at greatest peril from the effects of climate change. The workgroup updated those recommendations in March 2009. DCCED is responsible for coordinating and directing state agencies in providing relocation assistance to villages. As we reported in 2003, there is no single federal agency responsible for managing and funding flooding and erosion programs in Alaska. Instead, the Corps and NRCS administer key programs for constructing flooding and erosion control projects to protect threatened villages from further damage, and other federal agencies operate programs that can address the consequences of flooding and erosion by, for example, repairing roads or rebuilding airport runways. In 2003, congressional committees acknowledged the impacts on Alaskan villages due to climate change and directed the Corps to assess the erosion threat and estimate relocation costs for 7 coastal villages—Bethel, Dillingham, Kaktovik, Kivalina, Newtok, Shishmaref, and Unalakleet. The Corps completed the Alaska Village Erosion Technical Assistance program assessment in April 2006, and estimated that the villages of Kivalina, Newtok, and Shishmaref have 10 years to 15 years before their current locations are lost to erosion, and that the cost to relocate these villages ranged from between $80 million and $200 million each. In 2004, a congressional committee directed the Corps to conduct an Alaska erosion baseline study. In addition, the Corps was provided with authority “to carry out, at full federal expense, structural and non-structural projects for storm damage prevention and reduction, coastal erosion, and ice and glacial damage in Alaska, including relocation of affected communities and construction of replacement facilities.” However, this authority was repealed in March 2009. The extent to which additional villages may need to relocate as the impacts of climate change increase and of how federal agencies in collaboration with state agencies can assist the villages in their relocation efforts was discussed in an October 11, 2007, congressional field hearing. Testimony was provided by representatives from the Corps; FEMA; the state of Alaska’s Division of Homeland Security and Emergency Management; and the villages of Kivalina, Newtok, Shishmaref, and Unalakleet. The federal agency representatives described how their programs have provided assistance to villages and the challenges they face in prioritizing and coordinating assistance with other federal agencies, the state, and the villages. The senators at the hearing also explored with the witnesses ways to expedite assistance to villages (e.g., by waiving the National Environmental Policy Act of 1969 (NEPA) requirement for environmental analyses of the impacts of federal projects) and to improve project coordination (e.g., by appointing a coordinator for all federal agencies to work with state and local partners to assist villages needing immediate action). Under NEPA, agencies evaluate the likely environmental effects of projects they are proposing by using an environmental assessment or, if the projects likely would significantly affect the environment, a more detailed environmental impact statement. If an agency determines that the activities of a proposed project fall within a category of activities that the agency has already determined has no significant environmental impact— called a categorical exclusion—then the agency generally need not prepare an environmental assessment or environmental impact statement. In the event that more than one federal agency is involved in the same action or involved in a group of actions directly related to each other, NEPA regulations require that a lead agency supervise the preparation of the environmental assessment or environmental impact statement. NEPA analysis can occur at both the programmatic and project levels. At the programmatic level, larger-scale, combined effects and cumulative effects can be evaluated and addressed, and overall management objectives are defined. At the project level, the analysis of the effects of a particular action, in a place, at a particular time are addressed. The Council on Environmental Quality, which oversees the implementation of NEPA and reviews and approves federal agency NEPA procedures, has issued regulations governing federal agencies’ implementation of NEPA. In emergency circumstances, however, the federal agency can take action to control the immediate impact of the emergency without observing these regulations, but must consult with the council for alternative arrangements for NEPA compliance. While the flooding and erosion threats to Alaska Native villages have not been completely assessed, a growing number of imminently threatened villages have been identified, and some have decided to relocate or are exploring relocation options. Since our 2003 report, federal, state, and village officials have identified 31 villages that face imminent threats. At least 12 of the 31 imminently threatened villages have decided to relocate—in part or entirely—or to explore relocation options. In December 2003, we reported that flooding and erosion affect 184 of 213 (or about 86 percent) Alaska Native villages to some extent, and that the villages of Kivalina, Koyukuk, Newtok, and Shishmaref were in imminent danger from flooding and erosion and were planning to relocate. Since our 2003 report, federal, state, and village officials have identified 31 villages that are imminently threatened by flooding and erosion (see table 1). The 31 imminently threatened villages are located throughout the state of Alaska’s river and coastal areas (see fig. 4). “A field hearing was held in Anchorage, Alaska on June 29 and 30, 2004, on the impacts of severe erosion and flooding on Alaska Native villages. There is no Federal or State agency to coordinate and assist these communities in the relocation or in the interim provide preventative measures to slow the effects of the erosion and flooding. The conference finds there is a need for an Alaska erosion baseline study to coordinate and plan the appropriate responses and assistance for Alaska villages in the most need and to provide an overall assessment on the priority of which villages should receive assistance. Therefore, the conference has provided the $2,000,000 for this study.” The Corps identified these 26 priority communities through a process of stakeholder meetings, research of prior reports, correspondence with communities, and follow-up investigations of select communities. These communities were assessed on various criteria, such as the level of threat to critical infrastructure, human health and safety, housing, and other factors. However, the Corps did not assess flooding threats because, according to Corps officials, it lacked the authority for such an assessment. While the Conference Report language that led to the Corps assessment refers to both flooding and erosion threats in the setup for the study, the specific language calling for the study refers to it as “an Alaska erosion baseline study.” As a result, the Corps interpreted this language to mean that it was only authorized to conduct a baseline assessment of erosion threats. Without a comprehensive assessment of both erosion and flooding threats that villages face, federal agencies lack the necessary information on the magnitude of the problem and on how best to prioritize and target limited resources. For example, the village of Koyukuk, which we identified as threatened in our 2003 report, was not included on the Corps’ list of priority communities because it primarily suffers from repetitive flooding, rather than erosion. The Corps’ erosion study recognizes the importance of assessing flooding threats and recommends seeking authority to expand the assessment scope to include flooding, so that the Corps can provide a more comprehensive assessment of the threats that Alaska Native villages face. In addition to the 26 villages imminently threatened by erosion that the Corps identified, we included 5 additional imminently threatened villages on the basis of our current and prior work and on the work of the Alaska Governor’s Sub-Cabinet on Climate Change Immediate Action Workgroup. The additional villages of Allakaket, Hughes, Koyukuk, Nulato, and Teller predominantly face flooding threats. For example, according to the Tribal Administrator of Koyukuk, the lower-lying location of much of the village makes it very susceptible to flooding from the Koyukuk and Yukon Rivers. Koyukuk was also one of the imminently threatened villages identified by the Immediate Action Workgroup’s April 2008 report. Similarly, we have included the villages of Allakaket, Hughes, Nulato, and Teller on our list of imminently threatened villages on the basis of our conversations with local village or city leaders and regional tribal organizations. Specifically, officials from the Tanana Chiefs Conference, a regional nonprofit tribal organization that serves villages in the central interior region of Alaska, identified Allakaket, Hughes, and Nulato as member villages that have suffered severe or repetitive flooding or erosion impacts. Similarly, officials from Kawarek, Incorporated, and the Bering Straits Regional Housing Authority told us that the village of Teller has suffered repetitive flooding and is building new homes outside of the flood area. Local leaders confirmed the information provided to us by these regional tribal organizations. According to federal, state, and village officials, at least 12 of the 31 imminently threatened villages have decided to relocate—in part or entirely—or to explore relocation options. The villages of Kivalina, Newtok, Shaktoolik, and Shishmaref will likely need to move all at once and as soon as possible, since they continue to suffer flooding and erosion and have limited emergency evacuation options (see table 2). The remaining 8 villages that are considering relocation have the option of gradually migrating to a safer location over time because they have access to higher ground nearby and can move existing structures to these sites or build new structures at the sites. The 12 villages that are exploring relocation options are located in river and coastal areas (see fig. 5). Federal programs to assist threatened villages prepare for and recover from disasters and to protect and relocate them are limited and unavailable to some villages. While FEMA administers several disaster preparedness and recovery programs, villages often fail to qualify for these programs. Other federal agencies have individual programs, but there is no single comprehensive proactive federal program to assist villages with their relocation efforts. FEMA, the lead federal agency for disaster preparation and recovery, has several programs that could supplement state disaster mitigation and recovery programs, but villages have had difficulty in meeting program requirements. FEMA’s five disaster mitigation programs and two disaster recovery programs are summarized in table 3. Small and remote Alaska villages often fail to qualify for assistance under these FEMA disaster mitigation and recovery programs because (1) most villages lack approved mitigation plans, (2) few federal disaster declarations have been made for flooding and erosion problems, and (3) many villages cannot participate in the National Flood Insurance Program. Most villages lack approved mitigation plans: Four of FEMA’s hazard mitigation grant programs require applicants to submit mitigation plans for FEMA’s approval to qualify for project funding, unless the grant is intended to fund the development of such a plan. As of April 2009, only 33 Alaska Native villages had these plans in place, and, thus, they are the only villages that can apply for these mitigation programs. Twelve of these villages are among the 31 imminently threatened villages identified in this report, and 5 of the villages—Golovin, Kivalina, Koyukuk, Newtok, and Unalakleet—are exploring relocation options. In addition, FEMA distributes its mitigation grants, with the exception of grants to develop hazard mitigation plans, on the basis of the cost- effectiveness of the proposed project. With low populations and high construction costs in rural Alaska, village relocation projects have low benefit-to-cost ratios. As a result, the 33 villages that can apply for the mitigation grant programs to fund projects also face significant challenges to being selected for these grants, according to FEMA officials. Few federal disaster declarations for flooding and erosion problems: Eligibility for FEMA’s two disaster recovery programs and the Hazard Mitigation Grant Program is generally limited to areas that have been declared federal disasters, but since many of the villages are facing gradual erosion problems and have not received a declared disaster designation, they do not qualify for these programs. Since 1953, Alaska has had 32 federal disaster declarations. While none of these federal disaster declarations were for erosion issues, 15 were for flooding. However, only 4 Alaska Native villages—Alatna, Alakanuk, Allakaket, and Shishmaref—received funding from FEMA’s Hazard Mitigation Grant Program for relocation activities associated with the 15 flooding disaster declarations. After a 1994 flood, Alatna received $6,322,495 to relocate the entire village to higher ground, and Allakaket received $919,191 to build 13 temporary homes and extend its road, power, and telephone services to higher ground. Alakanuk received $208,898 to relocate and elevate 15 homes and 1 city building after a 2002 flood. Most recently, Shishmaref received $21,485 to relocate 1 cottage after a 2004 flood. Many villages cannot participate in the National Flood Insurance Program: FEMA’s Flood Mitigation Assistance Program, Repetitive Flood Claims Program, and Severe Repetitive Loss Pilot Program require participation in FEMA’s National Flood Insurance Program. No village in the unincorporated borough qualifies for this program, unless it is an incorporated city. FEMA’s former Administrator of Region X also testified in 2007 that FEMA’s mitigation programs have insufficient funds to comprehensively address the Alaska Native villages’ erosion problem. “Notwithstanding any other provisions of law, the Secretary of the Army is authorized to carry out, at full Federal expense, structural and non-structural projects for storm damage prevention and reduction, coastal erosion, and ice and glacial damage in Alaska, including relocation of affected communities and construction of replacement facilities.” Despite this new authority, which was subsequently repealed in March 2009, the Corps’ role in village relocation efforts has generally remained unchanged since our 2003 report and has been limited to evaluating potential relocation sites for Kivalina, Koyukuk, and Shishmaref and to designing an evacuation center and road for Newtok. Other individual agencies have been providing planning assistance for Newtok’s relocation. While the Corps had discretionary authority under section 117 to carry out, at full federal expense, projects to address storm damage and erosion, this authority was applied to few villages. Referring to this authority, in fiscal year 2006, a congressional committee directed $2.4 million of the Corps’ appropriation to the Alaska coastal erosion projects. The 9 villages eligible to receive these funds were the same 9 villages covered in our 2003 report—Barrow, Bethel, Kaktovik, Kivalina, Koyukuk, Newtok, Point Hope, Shishmaref, and Unalakeet. An additional $10 million was directed to Alaska coastal erosion projects in fiscal years 2007 and 2008 ($5 million per year). These funds have been used to construct shoreline barriers in Kivalina, Shishmaref, and Unalakleet to provide temporary erosion protection. Assistance with relocation activities has consisted of evaluating potential relocation sites for Kivalina, Koyukuk, and Shishmaref, and designing an evacuation center and road for Newtok. None of these funds have been used in Barrow, Bethel, or Kaktovik, and funding for Point Hope has been limited to the initiation of studies. Also in fiscal year 2008, the Corps elected to assist the city of McGrath with an erosion control project and the city of Yakutat with a flood damage reduction study at full federal expense. Table 4 describes the Corps projects added since 2003 to assist villages affected by flooding and erosion. With a few exceptions, the list of other federal programs that could assist villages with flooding and erosion issues has mostly remained the same as it was when we reported in 2003 (see app. I). Two notable changes have occurred since our 2003 report. First, NRCS in 2005 amended its Emergency Watershed Protection Program’s regulations to allow the purchase of floodplain easements on nonagricultural land as an emergency measure. Structures located within the easement may be demolished or relocated outside of the floodplain. As a result of this amendment, NRCS has funded the purchase of floodplain easements from 2 Alaska Native villages—Evansville and McGrath. In Evansville, NRCS plans to decommission one building and relocate another building out of the floodplain, and in McGrath, the service plans to remove structures. Also, NRCS’s Watershed Protection and Flood Prevention Program has received no funding appropriations in the last 2 years and, thus, has been mostly inactive, according to agency officials. Second, an issue has arisen since our last report regarding the distribution of funds under HUD’s Community Development Block Grant program, which provides funding for housing, economic development, and other community development activities, including affordable housing and relocation assistance for displaced persons. On the basis of a March 2007 determination by HUD, a number of Alaska Native villages have been deemed ineligible to receive funds under this program because the federal law governing the program does not take into account Alaska’s unique state government structure. Generally, these block grant funds are distributed by the state to “units of general local government” that are political subdivisions of the state. However, 64 Alaska Native villages, including 3 imminently threatened villages (Kwigillingok, Lime Village, and Newtok), located in the state of Alaska’s unorganized borough do not have an incorporated municipal government. As a result, there is no unit of local government within the state government structure to receive these block grant funds. In an attempt to remedy this problem, in September 2006, the state requested to serve as the recipient on behalf of the unincorporated villages in the unorganized borough. However, in March 2007, HUD determined that the state was ineligible to receive grants on these villages’ behalf because the state was not a unit of general local government, and this would entail the state distributing the grants to itself. The 64 unincorporated villages in the unorganized borough are at a competitive disadvantage for funding because they are ineligible to receive HUD Community Development Block Grant funds through the state. While these villages do not have a local unit of state government, they do have tribal governments, and the tribal governments or their designated tribal organizations do receive funds under HUD’s Indian Community Development Block Grant. Unlike the two-thirds of the Alaska Native villages that are eligible for both the regular Community Development Block Grant program and the Indian Community Development Block Grant program, these 64 villages currently face more limited funding options to address some of the impacts of flooding and erosion in their communities. Of the 12 villages exploring relocation options, only Newtok has made significant progress among the 4 villages that will likely need to relocate all at once. Varying levels of progress have been made by the 8 villages that are gradually migrating to new locations over time. Newtok officials began evaluating the village’s erosion problems on the banks of the Ninglick River in 1983, when they hired a consultant to assess the erosion problem and evaluate options for erosion control. The assessment found that unchecked erosion would endanger community structures within 25 years to 30 years, and that providing full protection to stop erosion over the length of the riverbank would be prohibitively expensive. Figure 6 shows the most recent update of projected erosion. On the basis of this information, the Newtok Traditional Council determined that the village must relocate. In 1994, the council started the relocation planning process by analyzing six potential village relocation sites. In 1996, the village residents were surveyed and they selected a relocation site known as Mertarvik, located on the north end of Nelson Island approximately 9 miles southeast of Newtok. In 2000, the council hired a planning consultant to assist in the development of relocation plans, and the site layout and transportation plan for the selected relocation site was completed in 2001. In 2002, the Corps assessed the site and confirmed that it was feasible for community development. In 2003, Congress approved a land exchange between the Newtok Native Corporation and Interior’s U.S. Fish and Wildlife Service to provide the relocation site, which is within the Yukon Delta National Wildlife Refuge. According to village, federal, and state officials, the commitment of the village residents to relocate and the proactive approach of the village have been major contributors to the progress made by Newtok. For example, subsequent to the initial site selection survey, the village conducted two additional surveys, most recently confirming in 2003 that 92 percent of the villagers favored the selected site. The results and methodology of this survey are documented in the January 2004 Newtok Background for Relocation Report prepared for the Newtok Traditional Council. The council hired a consultant to produce the report specifically to provide background documentation to government agencies and officials to justify the relocation effort and support future requests for government assistance in the process. To meet these objectives, the consultant summarized previous studies, mapped the historic advance of the river erosion, reported impacts on the village and resident perspectives, and documented the proactive approach of the village in response to the problem. The council submitted this report to initiate a dialogue with agencies, obtain their advice and assistance, and determine how their needs fit with existing government programs. In April 2006, the Corps estimated that the cost to relocate Newtok could range from $80 million to $130 million. In May 2006, representatives from state, federal, and nongovernmental organizations formed the Newtok Planning Group. The purpose of the group is to identify agency resources and to establish an overall strategy to assist Newtok in its relocation efforts, addressing both the short-term needs in the existing village and the critical infrastructure at the new village as well as long-term relocation planning. The group is composed of the Newtok Traditional Council; the Newtok Native Corporation; nine Alaska state departments and offices; nine federal departments, commissions, and offices; and five Alaska regional organizations. Since 2006, the collaborative efforts of the Newtok Planning Group have resulted in significant progress toward the relocation of Newtok, including the following: The completion of a community layout plan to guide the efficient and orderly development of the new village with a grant funded by the Denali Commission. The completion of a preliminary layout of water and sewer infrastructure by the Alaska Department of Environmental Conservation’s Village Safe Water Program as well as ongoing water source investigations. The completion of geotechnical studies of the new site by the Corps in collaboration with state agencies. The completion of a housing market survey to determine the housing needs and desires of the community and submission of a grant proposal to the Rural Alaska Community Action Program, Inc., for a demonstration project for affordable, sustainable housing at the new site incorporating design concepts from the University of Alaska, Fairbanks, Cold Climate Housing Research Center. Three homes have been constructed by Newtok residents at a temporary site, through grants from Interior’s Bureau of Indian Affairs Housing Improvement Program. These homes will eventually be moved to the new village. Reconnaissance for the placement of a new airport by the Alaska Department of Transportation in collaboration with the Federal Aviation Administration. The design and planned construction of a barge ramp, dock, and staging area at the new village site to be completed in July 2009, with grant funding from the Department of Commerce’s Economic Development Administration and state matching funds. The completion by the Corps in July 2008 of a project-level environmental assessment for the construction of an evacuation center and associated features, such as an access road, at the new site. The Department of Defense’s Innovative Readiness Training Program, which partners military services with communities in need to provide assistance and increase military readiness, has made a 5-year commitment of troops and equipment to begin construction in 2010. While the efforts of the Newtok Planning Group have accelerated the village relocation, certain challenges may prevent the relocation from proceeding as rapidly as possible in the future. A primary matter of concern is how to address NEPA requirements, which require federal agencies to review the likely environmental effects of major federal actions. If more than one federal agency is involved in the same action or group of actions directly related to each other, NEPA regulations require a lead agency to supervise the NEPA evaluation. Currently, the Corps is the lead agency for funding and planning the design and construction of the evacuation center to be built at the new village site, but there is no designated lead federal agency for the overall relocation of the village. The Corps issued an environmental assessment that found no significant impacts in July 2008. However, the Corps assessed only the environmental effects of the evacuation center and associated project features, including an access road from the barge landing, a sewage lagoon and landfill, a quarry site, and connecting roads. Participants in the Newtok Planning Group are concerned that until a federal lead agency is identified for funding, planning, designing, or constructing all of the other components of the village relocation, the NEPA requirements for these other relocation components will remain unfulfilled. Kivalina, Shaktoolik, and Shishmaref—the other 3 threatened villages that will likely need to move all at once due to the imminent threat—are significantly behind Newtok in their efforts to relocate. Specifically, none of these villages have yet identified relocation sites that federal, state, and village officials agree are safe, sustainable, and desirable for the subsistence lifestyle of the villagers (see table 5). According to officials from these three villages, reaching consensus to relocate has been difficult. None of the decisions to relocate have been unanimous, even in the case of Newtok, with some residents preferring alternative locations, preferring different solutions, or preferring to remain in place. In addition, villagers fear that making the decision to relocate could hurt their ability to address immediate needs at the existing site, such as maintaining or replacing aging infrastructure. For example, the Newtok Planning Group found that the decision to relocate, combined with the imminent threat of flooding and erosion, rendered Newtok ineligible for capital funding for improvements to existing infrastructure, such as water and sewer, bulk fuel tanks, and power plants, to meet needs at the current village until the relocation was complete. Investment guidance for state agencies discourages investments where there is an imminent environmental threat, but also gives priority to the infrastructure needs of existing communities over new communities, creating a reluctance both to invest in a threatened community as well as to invest in a future village site. Officials in Kivalina, Shaktoolik, and Shishmaref also told us that they believed that the decision to relocate had caused federal and state agencies to lower their villages’ priority for funding of needed infrastructure projects in the existing village or has caused delays in ongoing projects. The Immediate Action Workgroup has recommended changes to state investment guidelines to address these issues. While relocation sites are being identified and evaluated, protection projects to prevent further flooding and erosion are also under way for Kivalina and Shishmaref. However, some officials fear such actions could slow the momentum toward relocating by creating a false sense of safety at the existing villages. In 2008, Corps contractors constructed 400 feet of a planned 2,000-foot seawall in Kivalina, and constructed 625 feet of a planned 1,900-foot seawall in Shishmaref (see fig. 7). According to federal and state officials, these seawalls could protect the villages for at least 15 years, and up to 25 years if properly maintained. However, DCCED officials told us that they are concerned that such protective measures may reduce the urgency among village leaders to make relocation decisions and may prolong their stay in perilous conditions. Officials from Shishmaref agreed and told us that any work done to protect the existing village could prolong the relocation effort by reducing the urgency to move, and they are concerned that the move will only become more costly and difficult to fund the longer they wait. However, officials from both villages told us that they are committed to moving expeditiously to relocate once new sites are selected. On the basis of the recommendations of the Immediate Action Workgroup, state agencies are taking additional actions to prepare villages for disasters while accelerating the relocation process. The Alaska Division of Homeland Security and Emergency Management has taken the lead in implementing the workgroup’s recommendation that a suite of emergency plans, training, and drills be developed for 6 villages—the 4 villages likely to relocate all at once as well as the villages of Koyukuk and Unalakleet. State contractors are first helping the villages to produce hazard assessments and mitigation plans, which will allow them to qualify for FEMA hazard mitigation program funds, followed by emergency operations and evacuation plans. The plans, training, and drills are scheduled for completion by the end of 2009. In addition, to implement the workgroup’s recommendation for relocation planning, DCCED is administering the Alaska Climate Change Impact Mitigation Program. This program may award grants of up to $150,000 to 4 of the 6 villages and grants of up to $50,000 to other communities for relocation planning—for example, to hire professional consultants to assist them. Eight of the threatened villages are gradually migrating to a new location over time or considering doing so, although the extent of progress among the villages varies. Four villages—Allakaket, Huslia, Nulato, and Teller— have moved existing structures or have built new structures in nearby elevated sites away from the flooding and erosion threat (see table 6). Four other villages—Golovin, Hughes, Koyukuk, and Unalakleet—have identified readily accessible elevated sites, and are in the process of identifying options for establishing infrastructure in these sites to support and encourage gradual relocation (see table 7). In the absence of a lead entity, federal agencies individually prioritize assistance to villages on the basis of their programs’ criteria, which do not necessarily ensure that the villages in the greatest peril get the highest priority for assistance. The lack of a lead federal entity has impeded village relocation efforts, including the fulfillment of the environmental analysis requirements under NEPA. Federal agencies generally prioritize assistance to relocating villages collaboratively with state agencies and villages on the basis of the applicable criteria for the programs they administer. Some examples of the criteria federal agencies use include the following: Congressional direction: In section 117 of the fiscal year 2005 Consolidated Appropriations Act, the Corps was authorized to address storm damage and erosion issues in Alaska communities at full federal expense. In fiscal years 2006 and 2007, a congressional committee referred to this authority and directed appropriations to certain specific villages for Alaska coastal erosion projects. Although section 117 was repealed in March 2009, a congressional committee directed $3.328 million to the same 9 villages covered in our 2003 report for Alaska coastal erosion projects in fiscal year 2009. Cost-sharing: Several agencies use cost-sharing to prioritize assistance to relocating villages. The Corps’ Continuing Authorities Program generally requires villages to fund between 25 percent and 50 percent of project costs. Similarly, FEMA’s Hazard Mitigation Grant Program and Pre-Disaster Mitigation Program require a cost share of 10 percent to 25 percent, and its Flood Mitigation Assistance Program and Severe Repetitive Loss Pilot Program have a recipient matching requirement. The NRCS Emergency Watershed Protection program also typically requires a 25 percent cost share for the cost of emergency measures, with certain exceptions. Cost-effectiveness: FEMA’s mitigation grant programs require applicants to prepare a cost-benefit analysis that includes flood hazard information and flood history for the project area, the property inventory, and the estimated project costs; the Corps’ Continuing Authorities Program gives priority to projects that provide benefits greater than their estimated costs; and the NRCS Emergency Watershed Protection program requires applicants to prepare a cost- benefit analysis, which can include social or environmental factors— such as protecting the subsistence lifestyle of an Alaska Native village. Village needs: NRCS prioritizes Emergency Watershed Protection program funding on the basis of a damage survey to determine the village need for assistance; FEMA’s Hazard Mitigation Grant Program provides assistance only if an effective response is beyond the capabilities of the state and the affected local governments with a federal disaster declaration; and HUD’s Imminent Threats Grants Program prioritizes funding for housing assistance to villages with imminent threats to health or safety. Village commitment: The Department of Transportation’s Federal Aviation Administration gives priority for funding a new airport to villages that are committed to relocating once the new airport is constructed, because it is not cost-effective to keep two airports open simultaneously; and Interior’s U.S. Fish and Wildlife Service will make every effort to accomplish a land exchange—a time-consuming and costly activity—for those villages located within refuge boundaries that need to relocate. Although state agencies and villages have been able to obtain federal assistance for some projects in relocating villages under these criteria, assistance may not necessarily go to the highest priority villages. For example, as we reported in 2003, villages have difficulty in meeting the cost-sharing criteria for federal agency protection or relocation projects. To help the most threatened villages overcome this problem, the state of Alaska appropriated funds to augment federal erosion control and mitigation project capital costs by 35 percent—as suggested by the Corps—to ensure that federal funds would be allocated to Alaska. As a result, even though the Corps had the authority under section 117 to conduct the projects at full federal cost, the state designated most of its fiscal year 2009 $12.6 million erosion control appropriation to serve as a nonfederal cost share for the Corps’ Alaska coastal erosion projects in 5 villages. However, the state could not use such leverage to assist Shaktoolik—1 of the 6 top priority villages identified by the Immediate Action Workgroup in 2008—because it was not among the 9 villages eligible for assistance under the program. In addition, as discussed in our 2003 report, even the most imminently threatened Alaska Native villages have difficulty in qualifying under cost-effectiveness criteria because the value of their infrastructure is usually less than the cost of proposed erosion or flood control projects. This problem is exacerbated by the high cost of construction in remote villages where labor, equipment, and materials have to be brought in from distant locations. Finally, few villages meet emergency needs criteria, particularly in dealing with erosion, which is a gradual process that does damage over time, and, as we have previously stated in this report, some villages have found it challenging to identify suitable relocation sites that the entire village population can commit to accepting. Moreover, federal agencies have not had the necessary information or guidance that would allow them to prioritize assistance on the basis of the level of threat, until just recently. As we have previously discussed in this report, in March 2009, the Corps completed its Alaska Baseline Erosion Assessment, identifying 26 communities that it recommends for immediate and substantial action to manage erosion issues. While the Corps plans to use the assessment to prioritize its future assistance to villages, it does not have the authority to require other agencies to prioritize assistance on the basis of its assessment. Furthermore, there is no federal lead agency for relocating villages with the authority to provide overall guidance and coordination in prioritizing assistance to the most threatened villages. Since our 2003 report, no lead federal entity has emerged to coordinate and help prioritize federal assistance to relocating villages, and the lack of a lead entity has become an impediment to village relocation efforts. For example, although Newtok has made significant relocation progress, in October 2007, the Newtok Planning Group identified key challenges to further progress, with several directly related to the need for a lead federal—and state—agency. First, there was no designated lead agency for state or federal efforts to coordinate and leverage relocation assistance, which the group considers essential to the orderly and efficient use of resources between agencies. Second, lacking lead agencies with a mandate for relocating villages, there was no relocation strategy to guide and define the roles of participants in the process. Third, lacking a dedicated funding source, relocation efforts were limited to a patchwork of agency funding and grants, which was time-consuming and difficult to coordinate, and not available on an expedited basis to address critical needs at both the existing and new sites. While these challenges were specific to Newtok’s relocation experience, the Newtok Planning Group asserted that these challenges would be applicable to other village relocation efforts. Moreover, a key issue for Newtok that directly related to the lack of a lead federal agency is that further progress in the village relocation effort is dependent on pending projects undergoing NEPA analysis. The Newtok Planning Group reported that the responsibility for fulfilling NEPA requirements is uncertain without a lead federal agency, presenting a significant challenge to the expeditious planning and development of the new community. In our discussions with agency officials involved in or potentially involved in village relocation efforts, some said that there is a reluctance among federal agencies to initiate a project at a new village site because doing so could potentially make them responsible for taking the lead in preparing a programmatic environmental analysis for the entire village relocation—not just for their specific project. Agency officials told us that preparing a programmatic environmental analysis entails significant cost and effort, such as coordinating with other agencies, performing a detailed review of project alternatives, acquiring permits, and conducting public outreach. If no agency takes lead responsibility for a programmatic environmental analysis, it is likely that each agency will conduct individual project environmental analyses, as the Corps has done by completing an environmental assessment specifically for the Newtok evacuation center. According to a Corps program manager, this would be inefficient, repetitive, and costly. Whether Newtok must wait for a lead federal agency to step forward or for each agency to independently assess the environmental effects of their projects, any delay in the relocation process increases costs because of inflation and the inefficiency of the uncoordinated process. Because of the concerns raised by the Newtok Planning Group regarding the lack of federal and state lead agencies, the state designated DCCED as the lead state coordinating agency for all village relocation assistance in 2008. Since then, DCCED and the Immediate Action Workgroup have been instrumental in coordinating and prioritizing activities at the state level and in preparing a budget justification for the state legislature that resulted in an appropriation of $12.6 million for fiscal year 2009, and in a recommendation for nearly $9 million in appropriations for 2010. Furthermore, to ensure continued success in leveraging the state’s resources through coordination and collaboration with other state and federal agencies—as well as regional and community organizations—the Immediate Action Workgroup recommended in March 2009 that its ad hoc collaborative approach should be replaced with a formal, standing committee or workgroup embedded in the state’s administrative operations. Confirming the concerns of the Newtok Planning Group, federal, state, and village officials with whom we spoke told us that a lead federal entity is needed to coordinate village relocation efforts. Federal officials identified an overall lack of leadership and the absence of an entity with the authority to take charge and direct the actions of other agencies as key challenges to the relocation of threatened villages. According to state officials, the lack of a single federal agency with a budget and mission dedicated to assisting villages has forced the state and villages to take the less efficient, time-consuming approach of cobbling together assistance from numerous federal agencies with varying missions. Some village leaders told us that providing them with assistance does not appear to be a priority for federal agencies, and that there is no clear leader among the agencies for them to go to for relocation assistance. To address these concerns, a lead federal entity could identify the most threatened villages, prioritize federal investments and provide guidance to other agencies, assist Congress on new legislation or revisions to existing law that could benefit relocating villages, and be the go-to agency to assist and guide villages throughout the relocation process. Guidance for the villages is important, because both the Immediate Action Workgroup and the Newtok Planning Group found that threatened villages may lack the capacity and resources to obtain and administer government funding for relocation, particularly in times of crisis. The village of Allakaket provides an example of a village that, lacking guidance and coordinating assistance from a lead entity, has been unable to complete its relocation, even though it has had a comprehensive relocation plan in place for over a decade. After it was flooded in 1994 and almost completely destroyed, 15 HUD homes were moved out of the floodplain to a ridge south of Allakaket, but many homes and infrastructure components were rebuilt or replaced in or near the floodplain. In August 1995, FEMA and the Alaska Division of Emergency Services provided a comprehensive plan to the people of Allakaket to use as guidance for completing the relocation process over a 20-year period. Subsequently, without a lead federal or state entity for providing relocation assistance and lacking the internal capacity and resources to sustain the relocation process, Allakaket has made minimal progress over the last 14 years. Allakaket officials and residents believe that the federal and state governments have not fulfilled their obligations to help them relocate, and they are concerned, for example, that 19 emergency homes for residents who had lost their homes in the 1994 flood are now dilapidated, deteriorating, and overcrowded, but remain in use by residents within the floodplain. The two entities suggested to lead federal relocation efforts by those with whom we spoke were the Corps—which has extensive involvement in village protection projects and conducted the Alaska Baseline Erosion Assessment—and the Denali Commission—the existing federal-state body for coordinating assistance to rural Alaska. However, Corps officials commented that they should not necessarily be the lead in every relocation case because there are a number of other federal agencies with key responsibilities for important relocation assistance, such as providing housing, transportation, health, and education services. Denali Commission officials stated that significant staffing and funding increases would be needed for the commission to take the lead role for village relocations in addition to its existing responsibilities. Alternatively, a new entity could be formed to lead, oversee, and coordinate village relocation efforts. Congress and the state of Alaska have made a commitment to assist Alaska Native villages that are threatened by flooding and erosion. While some progress has been made to determine the scope of the problem since our 2003 report, the full extent of the threat to villages remains unknown. Because the Corps’ Alaska Baseline Erosion Assessment did not consider flooding, the status of the threat to many villages cannot be properly taken into account by federal and state officials when planning and prioritizing assistance to villages, thereby creating the potential that villages may not receive the assistance they need due to a lack of complete information for decision makers. Because of Alaska’s unique structure of organized boroughs and an unorganized borough, unincorporated Native villages in the unorganized borough do not qualify for federal housing funds from HUD’s Community Development Block Grant program. The disqualification of the villages in this borough is not because they lack the need for these funds, but because there is no local government that is a political subdivision of the state to receive the funds. The exclusion of Native villages from this existing federal program contributes to the difficulties they face in obtaining resources for relocation. Even in the cases where the imminent flooding or erosion threat is clear, the efforts of federal and state programs to provide assistance, thus far, have resulted in little progress toward relocation. Collaborating together, the federal government and the state government have an opportunity to address these threats in a thoughtful, reasonable, and environmentally sound manner. As time passes without significant progress being made on these village relocations, the potential for disaster increases, as does the ultimate cost of moving the villages out of harm’s way. The paradox is that funding would be made available to respond to a disaster, but no comprehensive program exists to proactively assist these villages to prevent an impending disaster. Responding to these disasters in an emergency situation may result in rushed decisions and solutions that are not optimal and less environmentally sound. Moreover, the lack of a lead federal entity for providing relocation assistance has emerged as an impediment to village relocation efforts. A lead entity would be able to ensure compliance with NEPA and to ensure the efficient development and setting of priorities across agencies and better coordination among all levels of government. To obtain a more complete understanding of the flooding threats facing Alaska Native villages, Congress may want to consider directing the U.S. Army Corps of Engineers to conduct an Alaska Baseline Flooding Assessment to augment the Corps’ recently completed Alaska Baseline Erosion Assessment. To provide the state of Alaska with additional flexibility in its distribution of HUD Community Development Block Grant funds, Congress may want to consider amending the Housing and Community Development Act of 1974 to acknowledge the unique governmental structure in the state of Alaska and enable the 64 unincorporated Alaska Native villages in Alaska’s unorganized borough to be eligible grant recipients for HUD Community Development Block Grant funds distributed through the state. Determining the means and extent of federal assistance to relocating Alaska Native villages is a policy decision that rests with Congress. We have provided information indicating that establishing a lead federal entity for prioritizing and guiding federal assistance to relocating villages may have benefits to the villages, to federal and state agencies, and to Congress. In its deliberations regarding assistance to relocating villages, Congress may want to consider designating, or creating, a lead federal entity that could work in conjunction with the lead state agency to coordinate and oversee village relocation efforts. We provided a copy of our draft report to the Departments of Agriculture, Defense, Health and Human Services, Homeland Security, Housing and Urban Development, the Interior, and Transportation; the Denali Commission; and the state of Alaska. In its written response, the Denali Commission agreed with each of our matters for Congressional consideration and stated that it is prepared to assist in future relocation and erosion efforts to the extent that Congress deems appropriate and necessary. The Denali Commission’s comments are presented in appendix II. The Departments of Defense, Housing and Urban Development, and the Interior provided technical comments, which we incorporated into the report as appropriate. The Departments of Agriculture, Health and Human Services, Homeland Security, and Transportation, and the state of Alaska did not provide comments. We are sending copies of this report to the appropriate congressional committees; the Secretaries of Agriculture, Defense, Health and Human Services, Homeland Security, Housing and Urban Development, the Interior, and Transportation; the federal and state cochairs of the Denali Commission; the Governor of the state of Alaska; and other interested parties. In addition, this report will be available at no charge on the GAO Web site at http://www.gao.gov. If you or your staff members have any questions about this report, please contact me at (202) 512-3841 or [email protected]. Contact points for our Offices of Congressional Relations and Public Affairs may be found on the last page of this report. GAO staff who made major contributions to this report are listed in appendix III. Provides emergency streambank and shoreline erosion protection for public facilities. Authorizes flood control projects. Authorizes flood control activities. Protects shores of publicly owned property from hurricane and storm damage. Mitigates shoreline erosion damage caused by federal navigation projects. Department of Agriculture’s Natural Resources Conservation Service (NRCS) NRCS/Watershed Protection and Flood Prevention Program Provides funding for projects that control erosion and prevent flooding. Limited to watersheds that are less than 250,000 acres. Provides assistance where there is some imminent threat—usually from erosion caused by river flooding. Provides technical assistance to communities and individuals to solve natural resource problems, including reducing erosion, improving air and water quality, and maintaining or restoring wetlands and habitat. Provides assistance to protect and develop the economies of communities. This assistance could involve building erosion or flood control structures to protect village commercial structures, such as canneries. Provides grants to Indian tribes and Alaska Native villages to develop economic opportunities and build decent housing for low- and moderate-income residents. Provides grants and technical assistance to Indian tribes and Alaska Native villages to develop affordable housing for low-income families. The funds may also be used to move homes that are threatened by flooding and erosion. Provides funding to alleviate or remove imminent threats to health or safety for nonrecurring events. Provides funding for maintaining and repairing roads, culverts, and airstrips to provide a foundation for economic development. Provides grants and technical assistance to replace substandard housing, including housing that is threatened, damaged, or lost due to erosion or flooding. Provides funding to improve airport infrastructure—including those threatened by flooding and erosion. May fund relocation of an airport if necessitated by community relocation, providing the airport meets criteria for funding—airport is in the National Plan of Integrated Airport System and meets agency design standards. However, the villages first need to be relocated before the new airport is built. Provides funding through the state of Alaska for roads, pedestrian facilities, and snowmobile trails. Funding may be available to assist villages with improving or repairing roads/boardwalks. In addition to the contact named above, Jeffery D. Malcolm, Assistant Director; Allen T. Chan; Brad C. Dobbins; Alison D. O’Neill; and Jeanette M. Soares made key contributions to this report. | In December 2003, GAO reported that most of Alaska's more than 200 Native villages were affected to some degree by flooding and erosion (GAO-04-142). Since 2003, state officials have identified the growing impacts of climate change, increasing the urgency of federal and state efforts to identify imminently threatened villages and assess their relocation options. GAO was asked to report on (1) the flooding and erosion threats that Alaska Native villages currently face, (2) the federal programs that are available to assist villages facing potential disasters, (3) the status of village relocation efforts, and (4) how federal assistance to relocating villages is prioritized. GAO interviewed and gathered documentation from federal and state agency officials as well as regional organizations and village representatives. While the flooding and erosion threats to Alaska Native villages have not been completely assessed, since 2003, federal, state, and village officials have identified 31 villages that face imminent threats. The U.S. Army Corps of Engineers' (Corps) March 2009 Alaska Baseline Erosion Assessment identified many villages threatened by erosion, but did not assess flooding impacts. At least 12 of the 31 threatened villages have decided to relocate--in part or entirely--or to explore relocation options. Federal programs to assist threatened villages prepare for and recover from disasters and to protect and relocate them are limited and unavailable to some villages. The Federal Emergency Management Agency has several disaster preparedness and recovery programs, but villages often fail to qualify for them, generally because they may lack approved disaster mitigation plans or have not been declared federal disaster areas. Although there is no single comprehensive proactive federal program to assist villages with their relocation efforts, individual federal agencies can assist villages on specific projects, such as funding the construction or relocation of homes. However, 64 villages do not qualify for affordable housing and relocation assistance from the Department of Housing and Urban Development's Community Development Block Grant program because the federal law governing the program does not recognize unincorporated Alaska Native villages in Alaska's unorganized borough as eligible units of general local government. Of the 12 villages exploring relocation options, Newtok has made the most progress in its relocation efforts. The Newtok Planning Group, formed in 2006 by federal, state, regional, and village partners, has helped to accelerate the relocation process that the village proactively initiated in 1994. The 3 other villages that will likely need to relocate all at once--Kivalina, Shaktoolik, and Shishmaref--have yet to identify sites that federal, state, and village officials agree are safe, sustainable, and desirable for the subsistence lifestyle of the villagers. Eight other villages have begun to gradually migrate to new locations over time or are evaluating options for doing so. In the absence of a lead entity, federal agencies individually prioritize assistance to villages on the basis of their programs' criteria. These criteria do not necessarily ensure that the villages in greatest peril get the highest priority, and although the Corps has assessed erosion threats, there is no lead federal entity to prioritize and coordinate assistance using this information. In 2007, the Newtok Planning Group reported that the lack of designated federal and state lead entities to guide, coordinate, and fund assistance impeded village relocation efforts and created uncertainty regarding the fulfillment of environmental analysis requirements under the National Environmental Policy Act. In 2008, the state designated a lead agency for village relocation assistance, and federal, state, and village officials told GAO that a similar lead federal entity is needed. Lead authority could be provided to an existing agency or commission, or a new entity could be formed for this purpose. |
Various organizations across DOD perform functions related to the recruiting, accessions, and training of active-duty enlistees as shown in figure 1. Enlistment processing and qualification determinations for age, citizenship, education, dependency status, and moral character are made by each military service. Their respective recruiting entities conduct preliminary screening of applicants to determine if they meet overall and medical DOD enlistment requirements. Among other things, recruiters also, for example, conduct a background review to screen an applicant for potentially disqualifying moral factors, review the applicant’s education credentials, and assist in completing a medical history report. When an applicant answers any question on the preliminary medical screening form affirmatively, they are expected to obtain, or authorize others within DOD, which could be their recruiter who is assisting them, to obtain additional documentation regarding that medical condition to include with the medical prescreen questionnaire. Once completed, recruiters forward the medical prescreening report and any other documentation collected to military service recruiting liaisons located at a MEPS location to schedule the applicant for further review prior to scheduling the applicant for a medical examination. USMEPCOM officials perform various functions, which include verifying personal identity; performing medical exams; documenting, reviewing, and updating applicant medical history; determining the extent to which applicants meet DOD’s medical qualification standards; supporting the military service medical waiver review process; administering the Armed Services Vocational Aptitude Battery and special purpose tests; conducting pre-enlistment interviews; conducting the oath of enlistment; and verifying signed enlistment contracts. The locations of the MEPS are displayed in figure 2. Each MEPS location is staffed with military and civilian personnel, including a chief medical officer, with additional medical personnel and recruiting liaisons representing each military service. MEPS medical personnel collect blood and urine specimens to send for Human Immunodeficiency Virus (HIV) and drug testing and examine applicants in physical and behavioral health areas in accordance with DOD’s medical qualification standards for enlistment. Finally, a MEPS physician will make a final determination as to whether an applicant does or does not meet accession medical standards based on applicant’s medical history, a physical examination, and test results. USMEPCOM designated physicians are the DOD medical authority for applicants processing with USMEPCOM for determining if an applicant medically meets the requirements of Title 10 to be qualified, effective, and able-bodied prior to enlistment. For those found to have disqualifying conditions, the MEPS physician will recommend for or against pursuing a medical waiver to the military services’ medical waiver authorities, who are authorized to grant medical waivers. Only applicants who are medically qualified are allowed to go to basic training. Some enlistees leave for basic training from their home towns and some return to the MEPS to undergo a brief follow-up physical inspection to determine whether they continue to meet the medical qualification standards for military service. For information on selected DOD and military service instructions, policies and guidance regarding medical screening of applicants, see appendix II. New enlistee basic training varies between 7 to 12 weeks depending on the military service. The Air Force basic training program lasts 7.5 weeks and is given at one training site located at Joint Base San Antonio- Lackland in San Antonio, Texas. Navy recruits remain in basic training for approximately 7 weeks at one training site, located at the Naval Station Great Lakes in North Chicago, Illinois. The Marine Corps’ basic training is 12 weeks and recruits are trained in San Diego, California, or Parris Island, South Carolina. The Army’s basic training is 10 weeks and recruits are trained at Fort Benning, Georgia; Fort Jackson, South Carolina; Fort Sill, Oklahoma; or Fort Leonard Wood, Missouri. After completing basic training, most enlistees complete follow-on training in technical skills, though the length of such training can vary widely by military service from a few weeks to a year or more. Figure 3 summarizes the most common recruiting, screening, and training process for new enlistees. Based on our analysis of DOD accession and attrition data, early attrition rates due to medical reasons during an enlistee’s initial term of commitment were generally stable for fiscal years 2005 through 2015. Although there were some increases and some decreases across the years for each of the time intervals we assessed, these changes were relatively small, with an average change of just over 1 percentage point. Figure 4 shows the estimated cumulative medical early attrition rates at the 6-month, 12-month, 24-month, 48-month, and 72-month points for servicemembers who separated prior to fulfilling their first term of commitment by accession year cohorts for fiscal years 2005 through 2015. For example, the medical early attrition rate at the 48-month point of enlistees’ initial term of commitment was an estimated 14.9 percent in fiscal year 2005 and an estimated 13.7 percent in fiscal year 2011—the most recent year for which 48 months of data were available—with fluctuations between these years. Additionally, the medical early attrition rate at the 6-month point of enlistees’ initial term of commitment was an estimated 5.2 percent in fiscal year 2005 and 3.6 percent in fiscal year 2015, with fluctuations between these years. Based on our analysis of DOD separation categories that were explicitly of a medical nature, we identified the leading categories of early attrition due to medical reasons, as shown in figure 5. According to this analysis, the leading category of early attrition due to medical reasons is “Unqualified for active duty, other” which DOD defines as a nondisability medical condition, such as obesity, motion sickness or allergies, that interferes with the performance of duties and contributes to the failure to meet physical readiness standards. Other leading categories of early attrition due to medical reasons include drug abuse, disability with severance pay, and failure to meet weight or body fat standards. Military service officials stated they have taken numerous steps to decrease early attrition due to medical reasons by taking steps to help improve the new enlistees’ physical and mental condition while in basic training. For example, Army officials at Fort Benning stated that they are piloting a program called the Initial Entry Training Physical Resiliency Enhancement Program. This program trains enlistees who may be prone to injury for 3-5 weeks before shipping them to basic training in an attempt to improve physical fitness and reduce injuries. Air Force officials at Joint Base San Antonio-Lackland stated that they are piloting a program to embed sports medicine experts throughout basic training to identify poor physical fitness practices and intervene before injuries occur. Moreover, Air Force officials also are piloting the use of a questionnaire called the Lackland Behavioral Questionnaire. Under this pilot, Air Force enlistees complete a questionnaire with over 70 questions on mental and behavioral health in an attempt to identify recruits with potential mental or behavioral issues so they can be interviewed by medical professionals and provided any necessary help or counseling early. Marine Corps officials stated that they place enlistees who fail the Marine Corps’ initial strength test into a physical conditioning platoon for further physical conditioning before they begin basic training to help improve physical fitness and reduce injuries. Further, a Navy official stated that a specialized machine is used to measure enlistees’ feet to select the proper shoes in an attempt to reduce injuries. For comparison purposes, we also analyzed overall early attrition rates during enlistees’ initial terms of commitment. Analyzing DOD accession and attrition data, we found that, similar to early attrition rates for medical reasons, overall early attrition rates during enlistees’ initial terms of commitment were generally stable for fiscal years 2005 through 2015. Although there were some increases and some decreases across years for each of the time intervals we assessed, these changes were relatively small, with an average change 2 percentage points. Figure 6 shows the estimated cumulative overall early attrition rates at the 6-month, 12- month, 24-month, 48-month, and 72-month points of enlistees’ initial terms of commitment by accession year cohorts for fiscal years 2005 through 2015. For example, the overall early attrition rate at the 48-month point of enlistees’ initial terms of commitment was an estimated 29.9 percent in fiscal year 2005 and an estimated 26.9 percent in fiscal year 2011—the most recent year for which 48 months of data were available— with fluctuations between these years. Additionally, the 6-month overall early attrition rate was an estimated 10.9 percent in fiscal year 2005 and an estimated 10.2 percent in fiscal year 2015, with fluctuations between these years. Our analysis of DOD separation categories for overall early attrition indicated that, as with our analysis of early attrition due to medical reasons, the leading category of overall early attrition is again “Unqualified for active duty, other.” Other leading categories of overall early attrition include drug abuse, poor entry level performance and conduct, and commissions of serious offenses. Figure 7 shows the reported leading categories of overall early attrition for enlistees by accession year for fiscal year 2005 through fiscal year 2015. USMEPCOM does not fully obtain, analyze, or use information for early attrition due to medical reasons within enlistees’ first 180 days of service. This is because DOD does not have a process for the military services’ training bases to provide USMEPCOM all of the medical records of enlistees who separate early due to medical reasons. Additionally, the database that USMEPCOM uses to perform complete statistical analyses on the early separation medical records it does receive is inoperable, impacting its ability to conduct such analyses. Finally, USMEPCOM does not use the information from these medical records to provide regular and specific feedback regarding early separations to MEPS medical personnel to improve the quality of applicant screening. A 2001 memorandum from the Assistant Secretary of Defense for Force Management Policy requests that basic training bases send medical records of enlistees who separated within the first 180 days of their military career for disqualifying medical conditions determined to have existed before the enlistee began military service (separations commonly known as Existed Prior to Service or EPTS discharges) to USMEPCOM for review and analysis. However, not all basic training bases provide medical records in accordance with the memorandum. In fact, for fiscal year 2015, the latest full fiscal year of data available, USMEPCOM reported receiving medical records for only 2,017 of 8,592 EPTS separations, a rate of 23 percent. USMEPCOM officials and basic training site officials we met with provided four reasons as to why all EPTS medical records are not provided to USMEPCOM. First, USMEPCOM officials stated that no uniform, standardized process to collect the necessary documentation from basic training sites has been established by any higher level headquarters. Standards for Internal Control in the Federal Government state that management, in order to achieve its objectives, should design control activities to achieve objectives and respond to risks. Moreover, the standards state that management should document—in policies for each unit—its responsibilities for all operational processes. Management should also review related policies, procedures, and related control activities for continued relevance and effectiveness in achieving the entity’s objectives. Officials stated that no specific process or instructions have been developed that clearly lay out the roles and responsibilities of USMEPCOM and the military services as well as the specific information that the services should provide to USMEPCOM. As such, inconsistent information is sent to USMEPCOM, and in some cases, certain medical records may not be sent at all, making analysis difficult, if not impossible. For example, USMEPCOM officials told us that Air Force officials were not sending medical records for psychological EPTS separations and were told it was due to Air Force officials’ confusion as to whether these cases were considered medical separations because of their interpretation of DOD separation classifications and coding. Second, language used in the 2001 memorandum has led to some confusion by the military services as to whether the memorandum is simply a request or a requirement for them to send medical records of enlistees with EPTS separations at their training bases. Third, military service officials stated that since the memorandum was very old, they were unsure if it was still active or who was specifically responsible at the training bases for sending the medical records to USMEPCOM— personnel officials or medical professionals. Fourth, USMEPCOM officials stated that some military service officials cited Privacy Act and concerns regarding their responsibilities for handling personal health information and the ability of USMEPCOM to safeguard the information adequately as reasons for their failure to send USMEPCOM the medical records for EPTS separations. USMEPCOM officials acknowledge the reluctance to send medical records because of the personal health information contained. As such, they believe the use of electronic health records would be useful in providing stronger safeguards that they believe should mitigate concerns about the handling of enlistees’ medical records to USMEPCOM. For example, recent discussions between USMEPCOM and Navy training base officials have led the Navy to draft a memorandum of understanding to clarify responsibilities regarding sending EPTS records and handling medical information. As of April 2017, the Navy had not completed this memorandum of understanding with USMEPCOM, and USMEPCOM was still not receiving the Navy EPTS separation medical records. DOD is planning to reissue a DOD instruction in July 2017 with changes that would require basic training sites to forward EPTS medical information to USMEPCOM, according to DOD officials. We obtained and reviewed the draft instruction and noted that it does require the submission of the medical records to USMEPCOM, but the draft instruction does not contain specific instructions aimed at addressing many of the reasons USMEPCOM and military service officials gave for the current failure to provide records. Specifically, the draft instruction does not identify a clear process with defined roles and responsibilities. As a result, we were unable to determine if the draft instruction will resolve any of the issues noted above, other than eliminating doubts about the currency and mandatory nature of the direction to provide the records to USMEPCOM. Without a clear process with defined roles and responsibilities, USMEPCOM may continue to not receive the majority of EPTS medical records for its review and analysis. USMEPCOM has been unable to fully analyze the medical records it does receive because its internal EPTS database has been nonoperational since September 2015 due to technical issues. Prior to September 2015, USMEPCOM officials told us that they scanned the paper medical records for EPTS separations that they received from basic training bases into this internal database. This allowed them to use information from these medical records to analyze specific data points, such as the cause of the separation and the MEPS location where the enlistee was medically qualified. This analysis allowed them to examine trends over time, such as a trend in separations due to errors related to a specific medical diagnosis or trends in processing errors to gain insight into problem areas. Without an operational EPTS database, USMEPCOM officials said that they can only conduct a limited, manual analysis of EPTS separation medical records, and are not able to fully analyze and utilize this information. Additionally, officials stated that the dependence on hard-copy medical records requires a large amount of resources to perform the manual analysis of these records and incurs large administrative costs associated with organizing medical records as they arrive, scanning them, manually coding results, and then repackaging the records. USMEPCOM officials stated that they are currently in the process of repairing the database, but they could not provide a schedule for its completion. We have previously reported that having a well-planned schedule is a fundamental management tool. In addition, the 2001 memorandum we previously discussed states that the findings from EPTS analysis form an important part of USMEPCOM’s quality control process, particularly in identifying and correcting physician errors and reducing the number of erroneous enlistments. Analyzing these particular separations provides insight into medical conditions that were not detected during the medical qualification process at a MEPS, allows USMEPCOM officials to identify trends in errors related to specific diagnoses, and provides information to improve the medical qualification process. According to USMEPCOM’s analysis of the limited number of EPTS medical records it received for fiscal year 2015, 47 percent of all such separations occurred due to enlistees concealing their medical history and 29 percent occurred due to the enlistee being unaware of the medical condition. For the same year, only 3 percent of such separations occurred due to an error on the part of MEPS personnel during the medical qualification process. Given the importance of the database to the analyses that USMEPCOM conducts, as long as it is unavailable, USMEPCOM will be hampered in its ability to conduct these analyses. The lack of a schedule for implementing the repairs to the database raises concerns about the timeliness of these repairs. As we have previously noted, a well-planned schedule is important for ensuring that projects, such as the database repair, are completed on time. Without a schedule for these database repairs, USMEPCOM has limited assurance that this tool will be available to it expeditiously. USMEPCOM’s regulation for its Medical Qualification Program states that USMEPCOM will provide feedback to MEPS chief medical officers regarding EPTS separations, but the feedback that USMEPCOM gives them is limited due to the small number of EPTS separation medical records received from the training bases and the partial manual analysis being done on those received. Standards for Internal Control in the Federal Government states that management, in order to achieve its objectives, should use quality information by identifying information requirements, obtaining relevant data from reliable internal and external sources in a timely manner, and processing the obtained data into quality information. However, USMEPCOM officials stated individual feedback regarding EPTS separations has been limited to cases in which USMEPCOM alerted chief medical officers to an obvious error at their MEPS location during the medical qualification process. For example, two chief medical officers we contacted reported receiving feedback at least once regarding EPTS separations that were classified as “MEPS errors.” While MEPS chief medical officers do receive feedback through other methods, none of these methods are individually tailored to the performance of MEPS chief medical officers as it relates to EPTS separations. Specifically, USMEPCOM officials stated that feedback regarding EPTS separations occurs during more general forums such as the annual MEPS chief medical officer conference or during monthly conference calls where USMEPCOM can discuss questions or concerns that could affect all MEPS. Additionally, USMEPCOM has implemented its Peer Review Program where physicians at each MEPS review each other’s medical qualification decisions on a daily basis, if possible, as a local means of quality control. USMEPCOM officials also stated that they can provide feedback if a MEPS chief medical officer contacts USMEPCOM requesting clarification on an EPTS issue. However, these methods of feedback, while useful, do not provide individual feedback to MEPS chief medical officers regarding their specific decisions to medically qualify applicants who ultimately separated from military service within 180 days due to a medical reason. Six of the twelve MEPS medical officers that we contacted stated that they receive very limited to no feedback regarding EPTS cases specific to their MEPS and each said it would be helpful if they did. USMEPCOM officials acknowledge that it has been difficult for them to provide a large amount of feedback to the MEPS because of having to rely on paper medical records from the training bases and because of the technical difficulties they have had in analyzing what records they have received. The USMEPCOM officials believe that if they had an electronic medical record rather than the voluminous paper medical records, it would be easier to analyze information and share the results. Receiving feedback on EPTS separations could allow MEPS chief medical officers to refine and improve their performance during the medical qualification process, thereby disqualifying applicants at the MEPS rather than after the military services have invested significant resources in enlistees at the basic training sites. As previously noted, DOD’s Accession Medical Standards Analysis and Research Activity estimates that the average cost to recruit, screen, and train each enlistee is approximately $75,000. However, until USMEPCOM uses EPTS separation information to provide regular and specific feedback to MEPS chief medical officers, USMEPCOM may not be assured that it is adequately identifying medically disqualifying conditions among applicants for military service before the military services invest substantial resources in the applicants’ initial training. DOD has not implemented its new electronic health record system at the MEPS and its schedule to do so is uncertain. As a result, the MEPS rely largely on self-disclosed medical conditions, history, and records from the applicants to make their medical qualification decisions, and they use a paper-based system for recording and processing applicant medical information. DOD recognizes the need to upgrade the enlistee accession process; however, its schedule for implementing a new electronic health record system to support this process is uncertain. Without an electronic health record system that enables MEPS chief medical officers to electronically obtain the medical history of applicants and document health conditions in an electronic health record, MEPS officials rely on applicant self-disclosure and a paper-based process to evaluate the array of information related to each applicant’s medical history and current condition to determine if an applicant is medically qualified to join the military. At the beginning of the accession process, an applicant must self-disclose personal medical information by answering a medical prescreening questionnaire with over 160 questions covering major body systems along with sleep disorders; learning, psychiatric, and behavioral issues; and medicine usage. When an applicant answers any of these questions affirmatively, they are expected to obtain—or authorize others, such as their recruiter, to obtain—additional documentation regarding that medical condition to include with the medical prescreen questionnaire. While current medical processing provides valuable information, reliance is placed heavily upon applicant self-disclosure of his/her medical history, leaving a potential void in details if the applicant does not disclose any known medical conditions. This creates the possibility that an applicant could conceal a potentially disqualifying medical condition that should be considered during the medical qualification process. According to a DOD review, reliance on applicants’ self-disclosed material limits information for review, constrains analysis and hampers efforts to identify applicants who do not meet standards early in the military recruiting and accession process. As mentioned previously, USMEPCOM analysis shows that, in 2015, about 75 percent of early attrition due to medical reasons within the first 180 days of service was attributed to either applicant concealment of known medical conditions or due to the enlistee being unaware of the medical condition. Even if an applicant self-discloses that they have or previously had a medical condition to either a recruiter or later to MEPS medical physicians and provides their medical records for further review, the MEPS use a largely paper-based documentation system that requires manual processing of the medical information collected on applicants. DOD has noted that enlistment across the military force requires processing 70 to 80 million pieces of paper every year—a slow, duplicative, and expensive process. Throughout the accession process for enlistees, paper is still mailed, faxed, hand-carried, and scanned, often multiple times, to the MEPS for use in processing the applicant for further review. In addition to the applicants’ hard copy medical prescreen questionnaire and any supporting medical documents that are submitted to the MEPS, MEPS medical personnel record on paper forms the additional medical history and physical examination results and comments they obtain during their evaluation of the applicant. Additionally, there may be numerous other forms used during an applicant’s medical processing that are not captured electronically, including authorizations for medical testing, consultation requests and results, and chain of custody documents. Officials at each of the MEPS locations we visited or contacted characterized the volume of paper they deal with on a daily basis as being challenging, overwhelming, an administrative burden, or time- consuming. Further, they said that handling, transferring, and manual processing of the paper records is often done multiple times in order to advance an applicant through the medical qualification process. Figure 8 illustrates examples of the possible paper forms and documentation that may be used for enlisted applicants and accession processing activities. DOD is in the process of implementing a new integrated electronic health record system, but DOD’s schedule for deploying this system at MEPs to assist with the medical screening of enlisted applicants is uncertain. In July 2015, the Program Executive Office, DOD Healthcare Management System, under the authority and direction of the Under Secretary of Defense for Acquisition, Technology, and Logistics, awarded a $4.3 billion contract for a new integrated electronic health record system known as MHS GENESIS. This new system is intended to give DOD the capability to electronically share more complete medical data with and between both federal and private sector medical facilities that are similarly equipped. More specifically, currently USMEPCOM has no electronic interfaces to electronic medical information holders for it to independently obtain medical history information on applicants including information held by other DOD (e.g., Military Health System), government (e.g. Veterans Affairs, Social Security Administration, etc.), and public/private sector (e.g., medical insurance, pharmacy beneficiary, etc.) entities. If implemented within USMEPCOM, this new electronic health record system could provide this electronic interface as well as other capabilities to improve USMEPCOM’s ability to access data and share medical information. A USMEPCOM concept of operations paper discusses how USMEPCOM believes the use of an electronic health record system could reduce both its reliance on applicant self-disclosure and its paper-based process of recording applicant medical information. For example, with MHS GENESIS’ planned interoperability and data exchange capabilities, USMEPCOM officials could reduce their reliance on applicant self- disclosure and improve the medical qualification decision-making process by interfacing with and accessing applicant electronic medical records that may exist to independently obtain and verify applicant medical history information. Additionally, the ability to electronically exchange information would allow USMEPCOM to share the information more quickly with other accession stakeholders like service medical waiver review authorities. Further, a transition to an electronic health record system would begin to reduce the use of the paper-based system—and its associated costs and challenges—for recording the medical information obtained or generated during the accession process. Thus, integration of an electronic health record system into the accession community could enhance DOD’s ability to obtain and document complete, accurate, detailed medical information that is fully accessible, could be used to improve USMEPCOM officials’ medical qualification decisions, and perhaps affect early attrition rates. Recognizing the potential for MHS GENESIS to support the MEPS, in June 2016 the Acting Principal Deputy Under Secretary of Defense for Personnel and Readiness emphasized that the modernization of accession processes is a priority and requested that the MHS GENESIS program management office coordinate with the accession community to include the MEPS in the deployment schedule for the new system. In response to this request, in August 2016 the program management office issued a memorandum stating it fully intends to work with USMEPCOM to ensure MEPS locations are included in the implementation of MHS GENESIS. Subsequently, officials from Accession Policy within the Office of the Under Secretary of Defense for Personnel and Readiness and USMEPCOM stated that they had initial coordination meetings in January and April 2017 with MHS GENESIS program management officials to discuss the inclusion of MEPS locations into the system deployment plans. According to USMEPCOM officials, the latest meeting produced an expectation that MHS GENESIS will meet its initial operating capability at one MEPS location in the fall of 2018. However, according to a MHS GENESIS program management official, detailed plans for deploying MHS GENESIS to the MEPS are in the earliest stages of development and no deployment decisions or timelines have been established. Thus, DOD’s schedule for deploying MHS GENESIS at MEPS locations and ensuring that the system supports its accession programs is uncertain. We have previously reported that projects such as MHS GENESIS can benefit from the effective use of project planning and management practices. These practices can significantly increase the likelihood of delivering promised capabilities on time and within budget. Additionally, we and others have issued guidance calling for the development of essential documentation needed for project planning execution and management. According to this guidance, project planning involves, among other things, establishing a schedule of actions required to attain project objectives. We have also reported that a well-planned schedule is a fundamental management tool that can help government programs use public funds effectively by specifying when work will be performed in the future and measuring program performance against an approved plan. Moreover, an integrated and reliable schedule can show when major events are expected as well as the completion dates for all activities leading up to them, which can help determine if the program’s parameters are realistic and achievable. Further, a reliable schedule can contribute to an understanding of the cost impact if the program does not finish on time. Until DOD completes development of a schedule that includes dates for MHS GENESIS’ deployment to MEPS locations, the department will not have assurance that its efforts to modernize the department’s medical screening process through reducing its reliance on self-disclosure and the processing of paper files is moving forward expeditiously and as planned. The military services enlist thousands of new servicemembers each year, but if incomplete medical information is gathered or if inadequate medical screening is performed, the military services may increase the likelihood that some of these enlistees may leave the military before their initial terms of commitment are fulfilled. Early separation is costly, and enlistee early attrition during their initial term of commitment due to medical reasons—many of which may be either not disclosed or unknown— constitutes a significant loss to the military services. Even when an enlistee separates from military service within the first 180 days due to a medical reason, DOD can use information from those cases to improve its accession medical qualification process; however, DOD does not have a clear process to ensure that complete medical information is available about early separation cases from the military services. Moreover, it has not set a schedule to repair a key database at USMEPCOM to analyze this information. As a result, DOD may not be able to review and analyze information that could help improve the medical qualification decision process and ensure that MEPS are adequately identifying medically disqualifying conditions among applicants for military service. Further, DOD primarily relies on the self-disclosure of medical information by enlisted applicants and a paper-based system to process and obtain medical information for new enlistees. As DOD begins its planning efforts for integrating a new multibillion dollar electronic health record system and transforming the current manual accession medical process to an automated one, it is important that DOD have a clear and complete schedule and plan in place to effectively manage this effort. Without a clear and complete schedule for implementation of its new system, DOD has limited assurance that the system will be support the MEPS as planned. We recommend that the Secretary of Defense direct the Under Secretary of Defense for Personnel and Readiness to take the following three actions: In coordination with the Director, USMEPCOM, and the military services develop a clear process with defined roles and responsibilities to ensure that complete EPTS separation medical records for enlistees who separated within 180 days of service from the military services’ basic training sites are provided to USMEPCOM. In coordination with the Director, USMEPCOM, establish a schedule to repair the internal EPTS database so that USMEPCOM can provide more regular and specific feedback to MEPS chief medical officers. In coordination with the Under Secretary of Defense for Acquisition, Technology, and Logistics and the DOD Healthcare Management Systems Program Executive Office, develop a schedule of actions for deploying its new electronic health record system, MHS GENESIS, within USMEPCOM that includes key activities such as the major actions required to accomplish this effort, completion dates for all actions leading up to these events, and dates for the system’s deployment to MEPS locations. We provided a draft of this report to DOD for review and comment. In written comments, reproduced in appendix III, DOD concurred with two recommendations; partially concurred with one recommendation; and separately provided technical comments, which we incorporated as appropriate. DOD concurred with our first recommendation to develop a clear process with defined roles and responsibilities to ensure that complete EPTS separation medical records are provided to USMEPCOM and described actions that the department plans to take to implement this recommendation. DOD concurred with our second recommendation to establish a schedule to repair the internal database it uses to analyze medical records for EPTS separations so that USMEPCOM can provide more regular and specific feedback to MEPS chief medical officers. In its comments, DOD stated that the database is being reviewed as part of a multi-year information technology modernization effort that includes the use of business intelligence tools found within DOD’s new electronic health record system known as MHS GENESIS. DOD stated that once these tools are available, USMEPCOM will be able to conduct the EPTS medical record reviews and provide detailed feedback to the MEPS chief medical officers. We believe that having access to MHS GENESIS’ business intelligence tools should improve USMEPCOM’s ability to conduct a more thorough analysis of EPTS separation medical records. However, the MHS GENESIS implementation schedule within USMEPCOM has not been finalized and is not expected to be approved until a Full Deployment Decision certification is issued some time in 2018. This means that the phased implementation of MHS GENESIS at the MEPS is likely to be several years away at a minimum. Therefore, we continue to believe that in the interim it would be beneficial for USMEPCOM to establish a schedule specific to repairing its current database that will allow for a more thorough analysis of EPTS separation medical records. DOD partially concurred with our recommendation to develop a schedule for deploying the new electronic health record system, MHS GENESIS, within USMEPCOM. After receiving our draft report, DOD officials expressed concerns regarding the office to which this recommendation was directed. DOD officials stated that since the Under Secretary of Defense for Personnel and Readiness is the functional owner of the new electronic health record system, the recommendation should be directed to that office, instead of to the Under Secretary of Defense for Acquisition, Technology and Logistics. After consideration of this information and a discussion with these officials, we agreed to revise the recommendation to be directed to the Under Secretary of Defense for Personnel and Readiness in conjunction with officials from the Office of the Under Secretary of Defense for Acquisition, Technology and Logistics. Further, in its comments, DOD stated that it has already taken actions to implement our recommendation, as the Program Executive Office for DOD Healthcare Management Systems has developed proposed schedules for incorporating MHS GENESIS into the MEPS. DOD also stated that because these schedules were unofficial and unapproved, it could not share them with us. We are very concerned with DOD’s statement that the department is unable to share this unapproved information with us. Throughout the audit, we were repeatedly told by the Program Executive Office that details for the MHS GENESIS deployment to MEPS facilities did not exist. When we asked for clarification about whether schedules really did not exist or rather if officials were refusing to provide any existing schedules to us, we received no response. Our access authority under 31 U.S.C. § 716 provides us authority to obtain documents that may be “pre-decisional” in nature. Absent our ability to review these schedules, we continue to believe that our recommendation remains valid and we will continue to monitor DOD’s actions in this area related to the development, approval and implementation of a schedule for deploying the department’s new electronic health record system, MHS GENESIS, within USMEPCOM. We are sending copies of this report to the appropriate congressional committees; the Secretary of Defense; the Under Secretary of Defense for Personnel and Readiness; the Under Secretary of Defense for Acquisition, Technology, and Logistics; the Commander, U.S. Military Entrance Processing Command; the Secretaries of the Army, the Navy, and the Air Force; and the Commandant of the Marine Corps. In addition, the report is available at no charge on the GAO website at http://www.gao.gov. If you or your staff have any questions about this report, please contact me at (202) 512-3604 or [email protected]. Contact points for our Offices of Congressional Relations and Public Affairs may be found on the last page of this report. GAO staff who made key contributions to this report are listed in appendix IV. The scope of our review included Department of Defense (DOD) offices involved in the accession, training, or separation of enlisted active-duty servicemembers in the Army, the Air Force, the Navy, and the Marine Corps. Table 1 contains a list of the organizations, offices, and military installations that we visited or contacted during the course of our review. To determine the extent to which servicemembers are unable to complete their initial terms of commitment because of medical reasons, we analyzed data from the Defense Manpower Data Center (DMDC) on accessions and early attrition of active-duty enlistees from the four military services during their first terms of commitment, often between 4 and 6 years of active-duty service, for fiscal years 2005 through 2015. Fiscal year 2015 is the most recent year for which an entire year’s worth of attrition data are available and, for relevancy purposes, we obtained data not more than 10 years old, beginning in fiscal year 2005. We analyzed these data to show overall early attrition and early attrition due to medical reasons over selected intervals by military service for each fiscal year. We also analyzed DOD separation codes assigned to each separation to examine the leading categories of early attrition. We reviewed the data to check for their completeness and for obvious errors such as out-of-range date values. We also interviewed a knowledgeable official from DMDC regarding data quality and reliability. We determined that the data were sufficiently reliable for reporting historical early attrition trends. We also interviewed DOD, USMEPCOM, and military service officials to obtain their perspectives on early attrition rates. To determine the extent to which USMEPCOM obtains, analyzes, and uses information about enlistee early attrition due to medical reasons, we reviewed DOD memorandums and USMEPCOM regulations related to obtaining, analyzing, and using information about enlistee early attrition due to medical reasons. We also compared USMEPCOM practices for obtaining, analyzing, and using information from medical records for enlistees who separated within the first 180 days of their service due to medical conditions that existed prior to their service with the Standards for Internal Control in the Federal Government. This included the importance of designing control activities to achieve objectives and respond to risks and using quality information by identifying information requirements, obtaining relevant data from reliable internal and external sources in a timely manner, and processing the obtained data into quality information. Additionally, we interviewed officials at USMEPCOM and officials from four of the military services’ training bases to further understand the collection and reporting of early medical attrition information. These bases were selected on the basis of geographical dispersion and included one from each of the military services. To determine the extent to which DOD has implemented its new electronic health record system at the MEPS to obtain and document applicants’ medical information, we reviewed selected DOD, USMEPCOM, and military regulations related to applicant medical screening processes. Additionally, we selected a convenience sample of four MEPS that were located in large geographically dispersed U.S. cities that were also near a military service recruiting office and a basic training base to observe medical-related MEPS operations and interview officials. During our visits to the selected MEPS locations, we also interviewed officials from nearby military service recruiting organizations to discuss their perspectives on recruiting potential applicants and the process and challenges associated with medically screening applicants. We supplemented our visits to the large MEPS locations with questionnaires sent to MEPS command officials, chief medical officers, and military service recruiting liaisons of a nongeneralizable selection of eight small or medium-sized MEPS as determined first by workload level, then sorted randomly, and then chosen to ensure distribution across all MEPS battalions. Further, regarding DOD’s efforts to implement an electronic health record into MEPS locations, we interviewed officials from Accession Policy within the Office of the Under Secretary of Defense for Personnel and Readiness and USMEPCOM as well as contacted the Program Executive Office Defense Healthcare Management System to obtain information regarding the implementation status of DOD’s new electronic health record within USMEPCOM at the MEPS locations. We compared their efforts against selected information technology project management practices for developing well-planned schedules. We conducted this performance audit from July 2016 to July 2017 in accordance with generally accepted government auditing standards. Those standards require that we plan and perform the audit to obtain sufficient, appropriate evidence to provide a reasonable basis for our findings and conclusions based on our audit objectives. We believe that the evidence obtained provides a reasonable basis for our findings and conclusions based on our audit objectives. Table 2 provides a selected list of DOD and military service instructions, guidance, and policies regarding the medical screening and processing of military applicants. In addition to the contact named above, Kimberly C. Seay (Assistant Director), Vijay Barnabas, Rebecca Beale, Vincent Buquicchio, Cynthia Grant, Mae Jones, Amie Lesser, Josh Ormond, Amber Sinclair, Rachel Stoiko, Wade Tanner, and Sabrina Willard made major contributions to this report. | For fiscal years 2005 through 2015, the military services enlisted over 1.7 million servicemembers at an estimated cost of approximately $75,000 each. Incomplete medical information or inadequate screening of enlistees at MEPS may result in them not fulfilling their initial terms of commitment and the military services losing their investment in them. The House Report accompanying a proposed bill for the Fiscal Year 2017 National Defense Authorization Act included a provision for GAO to review applicant medical screening issues at the MEPS. This report assesses the extent to which (1) enlistees have not completed their initial terms of commitment due to medical reasons; (2) USMEPCOM obtains, analyzes, and uses information about enlistee medical early attrition; and (3) DOD has implemented its new electronic health record system at the MEPS. GAO analyzed accession and attrition data for fiscal years 2005 through 2015 (the most recent available), visited selected MEPS near services' training bases, and reviewed selected DOD, USMEPCOM, and service policies. GAO's analysis of Department of Defense (DOD) accession and attrition data found that early attrition rates due to medical reasons during an enlistee's initial term of commitment were generally stable for fiscal years 2005 through 2015. As shown in the figure, the medical early attrition rate at the 48-month point was an estimated 14.9 percent in fiscal year 2005 and an estimated 13.7 percent in fiscal year 2011—the most recent year for which 48 months of data were available. The leading category for early attrition was “unqualified for active duty, other,” which DOD defines as a nondisability condition such as obesity. U.S. Military Entrance Processing Command (USMEPCOM), DOD's organization responsible for medically qualifying applicants for military service, does not fully obtain, analyze and use information about enlistees who separate early due to medical reasons. This is because DOD does not have a clearly defined process for the military services to provide USMEPCOM with all relevant medical records. Further, the database that USMEPCOM relies on to analyze these records is inoperable and no schedule has been developed to repair it. As a result, USMEPCOM has provided limited feedback to chief medical officers—responsible for the medical qualification decisions—that they could use to improve screening outcomes. Without addressing these issues, DOD has limited assurance that medically disqualifying conditions among new enlistees will be identified before the services invest substantial resources in their initial training. DOD has not implemented its new electronic health record system at the Military Entrance Processing Stations (MEPS) and its schedule to do so is uncertain. Known as MHS GENESIS, this new system is intended to give DOD the capability to electronically share more complete medical data with and between both federal and private sector medical facilities that are similarly equipped. Without a clear and complete schedule for implementation of MHS GENESIS, DOD has limited assurance that the system will support the MEPS as planned. GAO recommends that DOD develop a clear process for USMEPCOM to obtain medical early separation records, a schedule to repair the database used to analyze the records, and a schedule to deploy MHS GENESIS at the MEPS. DOD concurred with the first two recommendations and partially concurred with the third, stating it is already developing such a schedule. GAO continues to believe action is needed as discussed in the report. |
Medicare, the nation’s largest health care payer, provides insurance coverage to more than 38 million elderly and disabled Americans. The program provides protection under two parts. Part A, the hospital insurance program, covers inpatient hospital care, posthospital care in skilled nursing homes, hospice care, and care in patients’ homes. Part B, the supplementary medical insurance program, primarily covers physician services but also covers home health care for beneficiaries not covered under part A. In 1996, Medicare paid approximately $17.7 billion for home health services under part A and $300 million under part B. HCFA uses six contractors (usually insurance companies) to process and pay home health claims. At the inception of the Medicare program, the home health benefit under part A provided limited posthospital care—up to 100 visits for 1 year, following a hospitalization of at least 3 days, and for the same illness that required the hospitalization. Similar requirements applied to SNFs. Part B had no prior hospitalization requirement and covered up to 100 visits per year that were not covered by part A. However, legislative and regulatory changes in the 1980s (1) dissolved the direct link to prior hospitalization under part A; (2) abolished limitations on the number of covered visits; and (3) in effect, expanded the home health care benefit to include long-term home care for the chronically ill. The Balanced Budget Act of 1997 (P.L. 105-33) defined the conditions under which part A or part B will pay for home health care. To provide home health services to Medicare beneficiaries, an HHA must be certified by HCFA and assigned a provider number for billing purposes. In recent years, about 800 to 900 HHAs per year have been initially certified to serve Medicare beneficiaries, and the demand for initial certification continues. HHAs may be freestanding or hospital based, for-profit or not-for-profit, public or private. Some are associated with regional or national health care provider organizations. A growing number operate branch offices as a way of expanding their operations. As defined by HCFA, branch offices provide services within the geographic area served by the parent office and share administration, supervision, and services with the parent office. Home health services covered by Medicare include part-time or intermittent skilled nursing and home health aide services, physical and occupational therapy, speech language pathology services, medical social services, and the provision of certain medical supplies and equipment. With the exception of providing medical supplies and equipment, no copayments or deductibles are associated with these services. To qualify for services, beneficiaries must be confined to their homes; have a plan of care signed by a physician; and need intermittent skilled nursing care, physical therapy, or speech language pathology services. HCFA contracts with state health departments to survey HHAs and determine if they comply with Medicare’s conditions of participation.There are 12 conditions of participation covering such topics as patient rights, acceptance of patients and plans of care, skilled nursing services, and clinical records. Most conditions are subdivided into more detailed standards and requirements. For example, the “skilled nursing services” condition of participation is divided into two broad standards that cover the duties of a registered nurse and the duties of a licensed practical nurse. These standards, in turn, are further defined by 15 requirements: 8 for a registered nurse, 5 for a licensed practical nurse, and 2 overall general requirements. (See app. II for a complete list of conditions of participation.) Surveyors assess whether an HHA is meeting the requirements and, ultimately, whether the HHA is in compliance with the “skilled nursing services” condition of participation. Noncompliance with an overall condition is considered a “condition-level” deficiency, and all other deficiencies are considered “standard-level” deficiencies. HCFA proposed significant revisions to the conditions of participation in March 1997. The proposed new conditions emphasize improving patient outcomes and establishing performance improvement programs within HHAs. HCFA is now assessing comments received on its proposal. During an initial HHA survey, the surveyor conducts a “standard survey” to assess the HHA’s capacity to deliver quality care. Once an HHA passes its initial survey and meets certain other requirements, HCFA certifies it as a Medicare provider and issues it a provider number for billing purposes. The HHA is then supposed to be recertified every 12 to 36 months following the same survey process, with the exact frequency dependent upon factors such as whether HHA ownership changed and the results of prior surveys. But complaints about HHA services may trigger an earlier survey. Certified HHAs can lose their certification if they are out of compliance with one or more conditions; for example, an HHA providing substandard skilled nursing care that threatens patient health and safety can be terminated. If the deficiency jeopardizes patient health and safety and is considered immediate and serious, the HHA is placed on an accelerated termination timetable; otherwise, HCFA follows a 90-day termination procedure. HHAs can avoid termination by implementing corrective actions that bring them back into compliance with Medicare’s conditions of participation. An HHA can continue to participate in Medicare even if multiple standards are unmet, provided it has prepared an acceptable plan of correction. Medicare’s initial survey and certification process was not designed to screen out potentially fraudulent or abusive billers, but rather to assess whether an HHA is capable of delivering quality home health services. Therefore, it is not surprising that unscrupulous HHAs obtain certification. But although the certification process was intended to screen out HHAs that are unlikely to deliver quality care, it does not adequately do so. HHAs do not need health care experience to be certified by Medicare. In addition, the certification process covers fewer than half of Medicare’s conditions of participation, is carried out too soon after an HHA has begun providing services, and does not involve a complete review of HHA operations. The overall result is that practically anyone who meets state or local requirements for starting an HHA is virtually guaranteed Medicare certification—a circumstance that probably contributes to Medicare fraud and abuse. Moreover, although Medicare requires HHAs seeking certification to complete a form detailing ownership and management information, HCFA has only recently begun verifying the accuracy of that information. It is unclear if or how the proposed new conditions of participation would affect the initial certification process and the problems we identified with this process. Practically anyone who meets state and local requirements for starting an HHA can be almost certain of obtaining Medicare certification. It is rare for an HHA to not meet Medicare’s three fundamental certification requirements: (1) being financially solvent; (2) complying with title VI of the Civil Rights Act of 1964, which prohibits discrimination; and (3) meeting Medicare’s conditions of participation. HHAs self-certify their solvency, agree to comply with the law, and undergo an initial certification survey that few fail. On September 15, 1997, the HHS Secretary announced a moratorium on the entry of any new HHAs into Medicare while regulations are written to address fraud in the home health industry. Among the actions announced by the Secretary, HCFA will require HHAs to demonstrate experience and expertise in home care by serving a minimum number of patients before seeking Medicare certification. Before September 1977, Medicare was certifying about 100 new HHAs each month. HHAs face few other obstacles to becoming certified. For example, Medicare law does not require HHA owners to have health care experience. We identified one owner whose most recent work experience was driving a taxicab, another who owned and operated a pawn shop in addition to his HHA, and a third who was a realtor specializing in ranch sales. None had experience in the health care field. Further, until passage of the Balanced Budget Act of 1997, a criminal background was not a deterrent to HHA certification unless that criminal activity was related to Medicare, other federal health programs, or illicit drugs. The law now allows HHS to refuse Medicare participation to HHA owners if they have a felony conviction under federal or state law that is considered detrimental to the best interests of the program or its beneficiaries. Regarding service delivery, Medicare law requires only that HHAs provide skilled nursing services plus one other covered service and that HHAs deliver one of their covered services exclusively by their own staff. Except for the one covered service that HHAs must provide directly, HHAs may decide how to deliver their services—either directly or by another individual or entity under contract with them. Such contractors do not have to be Medicare certified; the certified HHA is responsible for supervising their work. The one service delivered directly does not have to be skilled nursing care, physical therapy, or speech language pathology services—one of which individuals must need in order to qualify for the home health benefit. In 1996, for example, Medicare certified a Massachusetts HHA that delivered medical social services directly with one social worker but relied upon 12 registered nurses from another entity to deliver all of its skilled nursing services. While contracting for services can give HHAs certain advantages, such as the flexibility to manage staffing as patient populations fluctuate, it can also lead to problems. For example, HHAs that rely heavily on contractors may not exercise full control over the care they provide, and excessive contracting may be an indication the HHA is exceeding its capacity to effectively care for its patients. Further, heavy use of contractors may indicate that the HHA is a “shell”—that is, little more than a fax machine and a nurse used to bill Medicare for services. HCFA regional office officials, for example, told us that HHAs that rely extensively on contractors for skilled nursing services often cannot provide a list of patients with their diagnoses or their clinical records because the HHAs have little contact with the contract nurses. HCFA recognizes these problems and has proposed under its new conditions of participation that HHAs deliver at least half of their skilled services directly. Medicare’s initial certification process does not provide a sound basis for judging whether an HHA does or will provide quality care in accordance with Medicare’s conditions of participation. Initial surveys often cover fewer than half of Medicare’s conditions of participation, occur too soon after an HHA has begun providing services, and do not involve a complete review of an HHA’s operations. As a result, state surveyors and HCFA do not have sufficient, adequate information to verify that the HHA is capable of furnishing quality care for all its services or is in compliance with all of the conditions of participation. During the initial certification process, surveyors conduct a standard survey that is required by statute to assess the quality of care and scope of services the HHA provides, as measured by indicators of medical, nursing, and rehabilitative care. The standard survey addresses the HHA’s compliance with 5 of the 12 conditions of participation—and with one standard associated with a sixth condition—that HCFA believes best evaluate patient care. During the initial survey, according to HCFA officials, reviewing HHA compliance with all of the conditions is often impractical because some of them measure HHA activities over a period of time. For example, the “group of professional personnel” condition calls for an advisory panel to meet frequently and participate in evaluating the HHA’s program; at the time of an HHA’s initial survey, the panel may not yet have met. However, HCFA does not require HHAs to demonstrate compliance with all conditions of participation at any point following their initial certification, unless the surveyors find at least one condition-level deficiency. Medicare sets no minimum standards for how long HHAs must be operational before being surveyed, and these surveys typically occur soon after HHAs begin providing services. As a result, surveyors have limited information with which to judge the quality of care provided by HHAs. For example, HCFA certified a Massachusetts HHA that had 1 month’s operational experience at the time of its initial survey, and a Texas HHA had been delivering care for 7 weeks when it was initially surveyed. Because of the short time period between their opening and their initial certification survey, many HHAs have treated few patients. California, Massachusetts, and Texas surveyors told us that it is not uncommon for HHAs to be caring for just one patient at the time of their initial survey. Several HCFA regional offices recently issued guidance to their state survey agencies suggesting that HHAs should have cared for at least 10 patients before the initial survey. Such a criterion is not required at the national level. HCFA central office officials said that imposing such a requirement in rural states would create an access problem for some beneficiaries if their HHA cared for only a few patients during the year. We also found that, at the time of their initial survey, HHAs may not have delivered all the services they will become certified to provide. For example, an HHA certified to provide physical therapy services may not have cared for a patient that needed this service at the time of its initial certification. Further, surveyors do not always conduct home visits to patients receiving care from HHAs, although such visits are recognized by HCFA and state surveyors as the best indicator of an HHA’s performance. Surveyors told us that they prefer to conduct home visits when HHA staff are delivering services, but patients may not always be scheduled to receive care when the surveyors are on site at the HHA. Also, the patient may refuse a visit by the surveyor. The relative ease with which HHAs become certified has likely resulted in certifying some HHAs that fail to provide high quality care and that abuse or defraud Medicare. For example: An individual with no experience in health care started her Texas HHA in the pantry of her husband’s restaurant. Within 4 months of the HHA’s certification, state surveyors started receiving complaints that the HHA had been (1) enrolling patients who were either ineligible for the Medicare home health benefit or who had been referred for care without a physician’s order and (2) hiring home health aides on the condition that they first recruit a patient. Approximately 10 months after initial certification, state surveyors substantiated the complaints and also found that the HHA was not complying with four conditions of participation and multiple standards, including four standards that the HHA had been cited as not meeting during its initial survey. The surveyors also identified 13 cases in which they suspected the HHA provided unnecessary services or served ineligible beneficiaries; the surveyors referred these cases to HCFA’s claims processing contractor. One month later, the surveyors conducted a follow-up survey and found that the HHA had implemented corrective actions, as it had following its initial survey. No further surveys had been conducted at this HHA at the time of our review. Another individual with no home health care experience started a California HHA, which was Medicare certified in 1992. Within 1 year of certification, state surveyors and HCFA’s contractor received numerous complaints alleging that the HHA had served patients ineligible for the Medicare benefit, falsified medical records, falsified the credentials of the director of nursing, and used staff inappropriately. A recertification survey about 15 months after initial certification found that the HHA was not complying with multiple conditions of participation and had endangered patient health and safety. By September 1993, after Medicare had paid the HHA over $6 million, the HHA had closed. The owner, who was a former drug felon, and an associate later pleaded guilty to defrauding Medicare of over $2.5 million. HCFA regional office and state survey agency officials recognize that the initial certification process provides little assurance that an HHA can and will provide quality care to its patients in accordance with Medicare’s conditions of participation. They believe that newly certified HHAs should be resurveyed after several months of actual operation, when they have treated a number of beneficiaries and demonstrated the quality of their care. They also said that the HHAs should be assessed against all of Medicare’s conditions of participation at this time, thus providing assurance that an HHA is in total compliance with Medicare’s participation requirements. HCFA central office officials told us that, while they have the statutory authority to assess new HHAs against all of the conditions of participation at any time and that it would be desirable to resurvey an HHA several months after initial certification, these actions would require additional funding for state survey agencies, which is currently unavailable. HCFA recently established an enrollment process for different types of health care organizations, including HHAs, that are seeking initial entry into the Medicare program or whose ownership has changed. Starting in mid-1997, those owners of an HHA with a 5-percent or greater financial interest in the HHA began to be required to supply HCFA with information, such as their names and whether they had ever been excluded from participating in Medicare, before an initial certification survey could be carried out. The Medicare claims-processing contractors are responsible for verifying this information within 21 days of receipt; in particular, they verify that (1) the owners, managing employees, and subcontractors have not been sanctioned or otherwise excluded from participating in the program; (2) the HHA, if applicable, is appropriately licensed by the state;and (3) on the basis of a check with the current or prior Medicare contractor that dealt with these individuals, there are no indications, or proof, of fraud or abuse committed by the owners or managing employees. The Balanced Budget Act of 1997 strengthened the HHA enrollment process further by requiring HHA owners to supply HCFA with their Social Security numbers; before this legislation, HCFA asked HHA owners for this information but could not require it. Having owners’ Social Security numbers, Medicare contractors should be better able to use various databases to determine if an owner has previously been sanctioned by, or barred from, Medicare or other federal health programs. If the enrollment process does not identify any problems, the Medicare contractor notifies the state survey agency so that it can conduct an initial certification survey of the HHA. Medicare’s recertification process does not ensure that only those HHAs that provide quality care throughout their operations and comply with all of Medicare’s conditions of participation retain certification. The process does not require HHAs to periodically demonstrate compliance with all conditions of participation, nor does it require a complete assessment of an HHA’s branch operations. Thus, shortcomings with the recertification process may cause quality of care issues to go undetected, to the potential harm of beneficiaries. Rapidly growing HHAs are surveyed as frequently as other HHAs, even though rapid growth is an indicator of compliance deficiencies with Medicare’s participation requirements. Also, most state survey agencies do not routinely receive information from HCFA contractors, such as average number of services per patient provided by an HHA and its average Medicare payments per patient, that would be useful to them when surveying HHAs; recent ORT studies have demonstrated that such information sharing would be advantageous to Medicare. HCFA recertifies most HHAs without requiring them to demonstrate compliance with all the conditions of participation. As in the initial survey process, state surveyors conduct a standard survey and assess HHAs against 5 of the 12 conditions plus one standard associated with a sixth condition; if they find an HHA out of compliance with one or more of these conditions, they must expand the survey to check an HHA’s compliance with all of the remaining conditions. Each year, on average, only about 3 percent of all certified HHAs are cited for having one or more conditions out of compliance. Therefore, many HHAs function for years without ever being assessed for compliance with all of Medicare’s conditions of participation. As a result, neither HCFA nor beneficiaries know whether HHAs are complying with the conditions not included in a standard survey. HCFA believes that the standard survey effectively evaluates an HHA’s patient care and its compliance with Medicare’s conditions of participation. Evaluating HHAs against all of the conditions on each recertification survey would take additional resources that are not available, according to HCFA officials. However, legislation passed in 1996 provides HCFA with increased flexibility, given existing resources, to periodically evaluate HHAs against all conditions of participation. This legislation increased the allowed intervals between recertification surveys to up to 36 months, from the previous requirement of approximately every 12 months. Because fewer existing HHAs have to be recertified each year, the resources needed to assess some against all of the conditions of participation might become available. When selected HHAs were assessed against nearly all of Medicare’s conditions of participation in a recent ORT study in California, surveyors identified significant quality-of-care problems that led to terminating many of the HHAs. During this ORT study, HCFA targeted 44 HHAs that provided unusually high numbers of services to their patients and received high levels of Medicare payments, compared with their peers. HCFA and state surveyors evaluated these HHAs against 11 of the 12 conditions of participation rather than the 5 conditions and one standard reviewed during a standard survey. Approximately 80 percent of the targeted HHAs, when first surveyed, were out of compliance with at least one of the conditions not covered in a standard survey, and 21 of these targeted HHAs either voluntarily withdrew from Medicare or were terminated by HCFA from the program. The following examples describe some of the problems identified in the California ORT that relate to conditions of participation not covered in a standard survey. Surveyors found an HHA out of compliance with all of the conditions they surveyed and identified the following quality of care issues: (1) The HHA could not provide the surveyors with a list of active patients, did not know which patients would receive care on a particular day, and did not exercise control over the services provided by contractor staff; (2) HHA staff provided patients with medication that had not been ordered by a physician; and (3) the HHA failed to ensure that therapists were qualified and prepared progress notes. HCFA subsequently terminated the HHA’s Medicare certification. Another HHA was found out of compliance with seven conditions, including four not covered in a standard survey. Quality-of-care problems identified by the state surveyors included the following: (1) The HHA failed to monitor or control laboratory services and ensure that they were provided as ordered, (2) nurses did not provide care as ordered and failed to initiate necessary revisions to patients’ plans of care, and (3) the HHA failed to verify that therapists hired under contract were qualified to deliver therapy services. HCFA terminated the certification of this HHA. Since the mid-1980s, more and more HHAs have created branch offices at increasingly greater distances from the parent office, with many HHAs operating multiple branches. In Texas, for example, we identified 106 HHAs as of January 1997 with 3 or more branch offices, including 1 HHA that had 25 branch offices. Figure 1 shows that there were nearly 5,500 branch offices in January 1997—over four times the number that existed in November 1993. HCFA considers branch offices integral parts of an HHA and, therefore, does not require them to be surveyed and certified. Without such an investigation, however, HCFA has no way of knowing whether a new site actually meets Medicare’s definition of a branch office or should more appropriately be classified as an independent HHA, which must be surveyed and certified. As a result, HHAs can expand their operations by creating new branch offices and avoid the scrutiny of the survey and certification process. Further, HHAs may open new branches before demonstrating their own capability for providing quality care. For example, a Massachusetts HHA planned to open three branch offices in different parts of the state immediately following its initial certification, which was based on care provided to two patients. Significantly, Medicare does not require surveyors to conduct home visits with patients served by any of the branch offices at the time of an HHA’s recertification. This means that quality-of-care issues within an HHA’s overall operations may be missed, especially if the branch offices care for a significant percentage of the HHA’s patients. For example, as of October 1996, one Texas HHA cared for 49 patients at its parent office and 160 patients at a total of 10 branch offices; two of the branches each cared for more patients than the parent office. While HCFA’s regulations recognize that surveyors should visit patients served by a branch office when recertifying an HHA, they do not actually require it or establish criteria for defining which branches and their patients should be included in the survey. As a practical matter, surveyors told us that they sometimes do not have time to conduct home visits with branch office patients and still finish the survey within their allotted time and resources. According to HCFA officials, visiting patients treated by some or all HHA branch offices is a resource issue and conducting home visits with patients treated by each branch office would be impractical when recertifying HHAs. However, now that the time frame for recertification has been relaxed, HCFA should have greater flexibility to have surveyors conduct more home visits with branch office patients. Moreover, developing targeting criteria for surveyors to follow in selecting which branch offices or patients to visit would allow a more efficient use of HCFA’s survey and certification budget. By not surveying branch operations, significant problems can go undetected. This became evident when branch offices were surveyed because the HHAs wanted to convert them into independent HHAs. Examples follow. In California, surveyors found that one branch of an HHA cared for 581 patients over the 12 months ending September 1996—more than the average number of patients cared for by an entire HHA in the state during that time. The branch was not complying with one condition of participation, and the surveyors recommended the branch office be denied certification as an independent HHA. Among its problems was the fact that the branch office had no system in place to ensure that its contractor staff had the appropriate qualifications and licenses. Similarly, a branch office of a Massachusetts HHA had cared for 69 patients since the HHA’s last survey. The branch was denied initial certification as an independent HHA because it failed to meet nine standards associated with several conditions of participation. For example, the surveyors found that the branch office, in 10 of 12 cases examined, did not follow the plan of care and provide services as frequently as ordered by a physician. At the time of our review, the HHA had not yet submitted its correction plan, and the branch office had not been certified as an independent HHA. We also found that it is common for HHAs to have branch offices located hundreds of miles from the parent office, which may result in branch office staff receiving less direct supervision from their parent office than is required by Medicare. For example, one Texas HHA has branch offices located over 300 miles from the parent office. A California HHA located near Sacramento operates four branch offices in other parts of the state as far as 200 miles away. HCFA does not define how far a branch office can be located from the parent office because, according to HCFA officials, a fair definition that applies on a national basis would be difficult to develop because of variations in geography and population throughout the country. However, some states have set limits. For example, one state requires that a branch office be located no more than 100 miles from its parent office, while another restricts a branch to being no more than 1 hour’s drive from the parent office. In 1996, an administrative law judge addressed the issue in a California case about whether an entity should be designated as a branch or an independent HHA. The judge ruled that parent offices must be capable of sharing required functions on a daily basis with their branches and that a branch office located approximately 50 miles from the parent office, which could, in heavy traffic, be up to 2-1/2 hours’ driving time away, did not meet this criterion. Under HCFA’s recertification criteria, HHAs are to be resurveyed every 12 to 36 months, depending upon such factors as how long they have been certified, results of prior surveys, and changes in ownership. Excluded from consideration are factors such as whether an HHA is quickly increasing its patient population, receiving large increases in Medicare payments, or experiencing high utilization rates—factors that can affect an HHA’s compliance with Medicare’s conditions of participation. Our work in California and Texas, in fact, suggests that HHAs that have grown rapidly often have difficulty complying with Medicare’s participation requirements. Nearly one-fourth of the HHAs initially certified in 1993 in California and Texas received Medicare payments exceeding $1 million in 1994—their first full year of Medicare certification. By their second year of operation, these HHAs averaged about $3 million in Medicare payments, and the average number of patients they treated more than tripled between 1993 and 1995. Accompanying that growth, however, was noncompliance with the conditions of participation. Forty percent of the high-growth HHAs in California did not meet one or more conditions of participation in their latest survey—almost double the percentage of the other HHAs certified that same year. In Texas, about 11 percent of the high-growth HHAs failed to comply with one or more conditions in their latest survey, compared with about 6 percent of the other HHAs certified in 1993. Without input from Medicare contractors, state surveyors must generally wait until they survey the HHAs to obtain information about the number of patients HHAs have and how much they are receiving in Medicare payments. In 1989, we recommended that HCFA establish a procedure for its contractors to use in providing state surveyors with information that could be useful in their assessments of HHA compliance with the conditions of participation. Until the advent in 1995 of ORT activities, this information, which would help surveyors better target their efforts toward problem HHAs, had not been routinely shared by the contractors. The HHS Office of the Inspector General (OIG) recently reported that HHAs that have abused or defrauded Medicare or misappropriated Medicare funds tend to exceed national and state averages for the number of visits and reimbursements per patient. We found that HHAs that exceed such state averages are also likely to experience problems complying with Medicare’s conditions of participation. In California, HCFA targeted 44 HHAs for inclusion in its ORT project, largely on the basis of information supplied by the two contractors processing home health claims for HHAs in the state. Specifically, the contractors developed a rank-order list of HHAs that had the highest average number of visits per patient and Medicare payments per patient. In 1995, California HHAs averaged 45 visits per patient and received approximately $4,000 per patient from Medicare. In contrast, one of the 44 targeted HHAs provided an average of 174 visits per patient that year and received an average Medicare payment per patient of $15,700. Another targeted HHA provided an average of 148 visits per patient and received an average of $12,700 per patient from Medicare. With this targeted approach, surveyors found most of the 44 targeted HHAs out of compliance with multiple conditions of participation, and almost half are no longer in the program. Had the HHAs in the following examples not been targeted for the ORT survey, they would likely have continued providing substandard care for as long as 3 years before they were resurveyed under HCFA’s survey frequency criteria. A California HHA initially certified in 1988 more than doubled its Medicare payments between 1993 and 1994 to $7 million while increasing the number of patients it treated from 715 to 1,034. This HHA’s average Medicare reimbursement per patient in 1995 was $7,613. When surveyed under the ORT project, this HHA terminated its participation after being found out of compliance with six conditions of participation. Another California HHA, initially certified in 1990, approximately doubled its Medicare payments to $6 million and increased its patient population almost 20 percent from 1993 to 1994. Its average Medicare reimbursement per patient in 1995 was $5,867. ORT surveyors initially found this HHA out of compliance with three conditions, but after a third follow-up survey, it was found to be in compliance with all conditions and therefore its certification was not terminated. Once an HHA has been certified as a Medicare provider, it is virtually assured of remaining in the program, with no penalty, even if found to be repeatedly deficient in complying with Medicare’s conditions of participation. An HHA’s participation in the Medicare program is not terminated on the basis of volume of deficiencies or repeat deficiencies, but rather on the basis of surveyors’ finding lack of compliance with at least one condition of participation that the HHA does not subsequently correct. Even when an HHA is cited for serious deficiencies and threatened with termination, termination rarely occurs. As explained by HCFA central office officials, once the HHA takes corrective action to remove any immediate threat and is thereby moved from the accelerated termination track to the 90-day termination track, the HHA is virtually assured of remaining in the Medicare program. Until the advent of ORT, a project that in 1995 began targeting “high-risk” HHAs in several states on the basis of suspected aberrant billing practices, the likelihood that an HHA’s Medicare participation would be terminated by HCFA was remote. In fiscal years 1994, 1995, and 1996, about 3 percent of all certified HHAs nationwide discontinued Medicare participation—most of them voluntarily, as a result of either mergers or closures. Terminations initiated by HCFA as a result of uncorrected deficiencies identified during the survey process were even more rare—ranging from about 0.1 percent of HHAs nationwide in 1994 to 0.3 percent in 1996. In 1996, however, as a result of its participation in ORT, California accounted for almost one-half of the 32 HCFA-initiated terminations nationwide, with 8 of its 15 terminations that year stemming from the ORT project. For HCFA to terminate an HHA’s Medicare certification, the surveyors must find that it did not comply with one or more of the conditions of participation and remained out of compliance 90 days after a survey first identified the noncompliance. If an HHA threatened with termination takes corrective action and state surveyors verify through site visits that this action has brought the HHA back into compliance, HCFA will cancel the termination process. An HHA, however, can subvert the termination process by taking corrective action for a short time, reverting to noncompliance by the next survey, taking corrective action again, and so on and still remain certified almost indefinitely—or at least until a patient is seriously harmed. While surveyors return to an HHA to verify that noncompliance with conditions has been corrected, this is not always the case when the noncompliance is limited to standards. For standard-level deficiencies, just submitting an acceptable plan of correction may be enough. For example, Illinois surveyors did not revisit 13 of 21 HHAs included in its ORT project because they had submitted plans to correct their violations of Medicare’s standards. Moreover, surveyors do not always review prior survey reports to better focus on problematic areas before beginning a new survey. In one state, for example, we found one group of surveyors that always prepared for a survey by reviewing previous survey reports in order to identify the types of deficiencies previously found and the extent of complaints received involving the HHA or its branch operations. In that same state, however, another group of surveyors intentionally did not review prior reports in order to avoid biasing the current survey. Even when surveyors visit HHAs and verify that corrective actions have been taken, HHAs may not sustain their corrective efforts over time. For example, after a Massachusetts HHA was initially certified in 1989, surveyors found it out of compliance with one or more conditions in 1991, 1993, 1994, and 1996. To some extent, HCFA has relied on HHAs to police themselves between surveys, with questionable results. For example, one condition of participation requires a group of professional personnel to establish and annually review HHA policies and operations. This group is to meet frequently to advise the HHA on professional issues, program evaluation, and liaison with other health care providers. Another condition requires an overall evaluation of the HHA’s program at least once a year by the group of professional personnel, HHA staff, and consumers. This evaluation must assess the extent to which the HHA’s program is appropriate, adequate, effective, and efficient. Also, health professionals must review a sample of active and closed clinical records at least quarterly to determine whether established policies are followed. Neither of these conditions, however, is reviewed as part of the standard survey process. In fact, when HHAs were actually surveyed against these conditions in the California ORT project, most were found not in compliance with these two conditions. Given multiple opportunities to correct their deficiencies, it is not unusual for HHAs to have conditions and standards out of compliance from one survey to another and remain in the program, as the following examples illustrate: A California HHA’s second recertification survey revealed that the HHA had deficiencies in meeting five standards and that three of the deficiencies had been identified in the previous year’s survey and supposedly corrected. Several months later, at this same HHA, an ORT survey team found eight conditions and numerous standards not met. When the HHA was resurveyed 5 months later, it was found to be back in compliance with all conditions, but it had yet to meet seven standards. Most of these deficiencies in meeting standards had been cited in the preceding surveys, and some had existed for a long time. For example, for the three most recent surveys, this HHA had been cited for not following physicians’ orders in the written plan of care. The HHA was still certified at the time of our work. On a Texas HHA’s first recertification survey, 1 year after initial certification, the state surveyor found four standards not met and referred several cases of possible fraud to the Medicare contractor. Within 10 months of that survey, state surveyors resurveyed the HHA and found it was not in compliance with seven conditions of participation and the previously cited deficiencies in meeting standards had not been corrected. HCFA issued a termination letter, but within 2 months of the last survey, the HHA had corrected its deficiencies, and the termination process was halted. On a complaint investigation 6 months after the deficiencies had been corrected, the surveyors found the HHA was again out of compliance with three of the same seven conditions. On this most recent survey, the surveyors attributed the death of one patient directly to this HHA. At the time her attorney advised her to surrender her state license and Medicare certification, the owner/operator of this HHA had already hired a nurse consultant to bring the HHA back into compliance so that it could remain certified. State surveyors found deficiencies in 12 standards when conducting a California HHA’s first recertification survey in 1993. At its next survey in 1995, the surveyors found nine standards out of compliance, three of which had been identified in the preceding survey. In 1996, the ORT survey team found 10 conditions and multiple standards out of compliance, including most of the standards cited in previous surveys. The surveyor’s report documented a case in which the HHA accepted a patient who had a surgical wound on the knee that had not healed properly. Over a 5-week period, the HHA never reported the deteriorating condition of the patient’s wound to the attending physician. The patient was ultimately admitted to an acute-care hospital, where his leg was amputated. As a result of this latest survey, HCFA notified the HHA that it would be terminated. Before the effective date of termination, the HHA voluntarily surrendered its state license and Medicare provider number. Because of circumstances such as these, the threat of termination has little, if any, deterrent value, and problem HHAs seem to operate with impunity. The Congress, recognizing that HCFA should have more enforcement options than that of terminating an HHA, enacted provisions in the Omnibus Budget Reconciliation Act of 1987 to address this issue. The act authorized the Secretary of HHS to impose intermediate sanctions for a period not to exceed 6 months on those HHAs found deficient, in lieu of terminating their certification. If the HHA was still found deficient after that 6-month period, it was to be terminated from the program. The act required the Secretary of HHS to develop and implement, not later than April 1, 1989, a range of intermediate sanctions that was to include civil monetary penalties for each day of noncompliance, suspension of Medicare payments, and assumption of management of the HHA. The act also required that these regulations provide for progressively more severe sanctions for repeated or uncorrected deficiencies. HCFA proposed alternative sanctions for HHAs in August 1991 but never finalized its implementing regulations. HCFA officials told us that they wanted experience with the SNF intermediate sanctions, which became effective in July 1995, before implementing intermediate sanctions against HHAs. HHAs provide important needed services to an increasing number of beneficiaries where they most desire to receive their care—in their homes. However, HCFA grants certification to HHAs without adequate assurance that they provide quality care or meet Medicare’s conditions of participation. There are few barriers to certification once an HHA has been licensed by the state; and not all states license their HHAs. As a result, few HHAs are denied entry to the program. While most HHAs seek entry to Medicare with the intent of providing quality care, some are drawn to Medicare because of the relative ease with which they can become certified and partake in this lucrative, fast-growing industry. There has been little use of targeting to focus surveys on potential problem HHAs or those more likely to have difficulty meeting Medicare’s conditions of participation. Targeting would lend itself to identifying branch offices for survey, particularly when those branches are serving more patients than the parent office. By considering such factors as growth, high costs per patient, and high numbers of visits per patient, specific HHAs could be targeted for more frequent or more comprehensive surveys. HCFA contractors develop information during their claims processing efforts that could be used to flag potential quality-of-care problems at HHAs, but this information is not routinely shared with state survey agencies. Once certified, there is little likelihood that an HHA will be terminated from the program for not meeting Medicare’s conditions of participation. Furthermore, because surveys do not always consider an HHA’s survey history, HHAs can have the same problems over and over again and still remain in the program, provided they take temporary corrective action. HCFA has not implemented intermediate sanctions and thus has no way to penalize deficient HHAs other than threatening termination, a threat that can be defused through corrective action plans. We recommend that the Administrator of HCFA take the following actions: Establish minimal requirements for how long an HHA must be operational and how many patients it must have treated before it is eligible to be surveyed and certified. HCFA could grant exceptions to such a national policy for those situations in which HHAs treat few patients and access to home care is an issue. Require that HHAs be certified to provide only those services for which they have been surveyed; the addition of a new service should prompt a recertification survey. Establish targeting criteria to select HHAs for survey against all conditions of participation. These criteria should ensure that all HHAs are periodically assessed against all conditions of participation. Require that branch offices be periodically surveyed to ensure that they meet Medicare’s definition of a branch office and provide quality care in accordance with the conditions of participation. HCFA should develop criteria, such as the number of patients served by a branch office relative to the number served by the parent office, that would help surveyors select which branch offices should be surveyed as part of an HHA’s recertification. Monitor state surveyors to ensure that they conduct home visits with patients treated by HHA branch offices. Additionally, HCFA should develop criteria defining how surveyors are to select branch office patients to visit. Revise the survey frequency criteria to include consideration of other factors that may indicate problem HHAs, such as rapid growth and high utilization patterns. As part of this effort, HCFA should establish procedures for contractors to routinely provide state survey agencies with information that would help them assess compliance with the conditions of participation. Issue implementing regulations regarding the intermediate sanctions authorized by the Congress that allow for penalizing and terminating HHAs that are repeatedly out of compliance with Medicare’s conditions of participation. We provided the Administrator of HCFA a draft of this report for comment. With one exception, HCFA concurred with our recommendations but also noted that implementing some of the recommendations could require additional funding for certification surveys. We recognize that requiring more surveys is a resource issue, but options do exist to provide additional funding for such activities. Both the HHS OIG and HCFA have supported charging fees for certification surveys. We also recently suggested that the Congress may wish to consider enacting legislation directing HCFA to carry out a pilot demonstration to address the issue of abusive billing practices by HHAs. Under such a demonstration, once improper billing that identified an HHA as an abusive biller had been detected, follow-up audit work would be conducted, the cost of which could be assessed against the HHA. Under a similar approach, HCFA could charge HHAs for all surveys, except for those HHAs on the 36-month survey frequency cycle. Being placed on such a survey cycle would mean that the HHA had been in compliance with the Medicare conditions of participation for at least the past 3 years. HCFA did not agree with our recommendation that the addition of a new service by an HHA should prompt a recertification survey. HCFA believes that if an HHA is in compliance with the conditions of participation, it is responsible for ensuring that all services provided to the patients are monitored and appropriately supervised. HCFA stated that our recommendation would place an unnecessary burden on the survey process and budget and could result in patients’ having to wait for needed services. We disagree, for several reasons. First, when state surveyors conduct standard surveys of HHAs, they select a case-mix stratified sample of records to review and patients to visit. Using this sample, the surveyors assess compliance with conditions of participation for the services the agency actually provides—not services the HHA may provide in the future. Second, Medicare law already provides that a change in HHA ownership, management, or administration is sufficient reason to conduct a new survey to determine whether such changes have resulted in any decline in the quality of care furnished by the HHA, thereby potentially affecting the HHA’s compliance with Medicare’s conditions of participation. Similarly, adding a new type of service should raise questions about whether the HHA has the structure, resources, and qualified staff needed to deliver that service. Finally, although the large number of HHAs already certified makes it unlikely that a patient would have to wait for needed services, HCFA could allow agencies in areas in which the needed services are not otherwise available to provide new services until a recertification survey could be arranged. HCFA concurred with our recommendation that regulations on interim sanctions be issued and stated that a final regulation was being developed. HCFA has had the authority to establish interim sanctions for nearly 10 years, and it still has not indicated when it expects to finalize this regulation. HCFA also made several technical comments, which we have addressed. HCFA’s comments are included in their entirety as appendix III. As arranged with your office, unless you release its contents earlier, we plan no further distribution of this letter for 30 days. At that time, we will make copies available to other congressional committees and Members of Congress with an interest in these matters, and the Secretary of Health and Human Services. This report was prepared by Robert Dee and Donald Hunter, under the direction of William Reis, Assistant Director. Please call me at (202) 512-7114 or Mr. Reis at (617) 565-7488 if you or your staffs have any questions about this information. In developing information for this report, we interviewed officials at the Health Care Financing Administration’s (HCFA) central office in Baltimore as well as at its regional offices in Boston, Chicago, Dallas, and San Francisco; the Department of Health and Human Services’ (HHS) Office of the Inspector General (OIG); five contractors that process and pay home health claims for HCFA: Blue Cross of California, the Associated Hospital Service of Maine, the Health Care Service Corporation, Palmetto Government Benefits Administrators, and IASD Health Services Corporation; state survey agencies in California, Illinois, Maine, Massachusetts, and Texas; and the National Association for Home Care, the California Association of Health Services at Home, and the Home and Hospice Association of California, which are home health agency (HHA) trade associations. We concentrated our work in California, Illinois, and Texas—three states that have been actively involved in conducting Operation Restore Trust (ORT) studies directly related to the HHA survey and certification process. Additionally, these states are among the 10 states with the highest numbers of certified HHAs. We also performed limited work in Maine and Massachusetts—two states that use the traditional survey and certification process and were not part of the original ORT effort. To determine how HCFA controls the entry of HHAs into Medicare, we met with HCFA central office and regional officials to determine HCFA’s roles and responsibilities, reviewed legislation and pertinent regulations, reviewed and analyzed Medicare’s conditions of participation, interviewed state survey agency officials, determined the roles and responsibilities of HCFA’s contractors, interviewed HHS OIG officials, interviewed trade association representatives, reviewed related reports and the literature, and kept abreast of pending changes to the conditions of participation and provider enrollment processes. To determine how HCFA ensures that certified HHAs continue to comply with Medicare’s conditions of participation and provide quality care, we reviewed HCFA’s On-line Survey, Certification and Reporting (OSCAR) database to determine the extent to which HHAs (1) do not meet Medicare’s conditions of participation during surveys, (2) have repeated violations of Medicare’s conditions and associated standards over time, and (3) create branch offices. Through meetings with HCFA and state survey agency officials and a review of survey reports, we determined the type of problems that the survey and certification process identifies. Further, we reviewed survey reports and other documents prepared for the ORT studies in California, Illinois, and Texas and determined HCFA’s process for targeting HHAs during these studies. We met with HCFA contractor officials to discuss their involvement in the ORT studies and the processes they have in place to identify HHAs suspected of fraud and abuse. To examine HCFA’s process for decertifying HHAs, we analyzed HCFA information related to the number of HHA terminations and the reasons for them. We also met with a representative of the HHS Office of the General Counsel to determine Medicare’s termination process and reviewed Medicare’s termination regulations. We also discussed issues related to this objective with trade association representatives and obtained related reports. HHA provides patient written notice of rights. HHA maintains documentation of compliance with patient rights. Patient has right to exercise rights as a patient of HHA. Patient has right to have property treated with respect. Patient has right to voice grievances regarding treatment or care without reprisal. HHA must investigate complaints regarding treatment or care. Patient has right to be informed in advance about care and changes in care. Patient has right to participate in planning care. HHA maintains policies and procedures regarding advance directives. Patient has right to confidentiality of clinical records. HHA must advise patient of record disclosure policies and procedures. Patient has right to be advised of cost of care before care is initiated. HHA must inform patient orally and in writing of who will pay for services. Patient has right to be informed of changes in the cost of care or in who pays for the care no later than 30 days after the change. Patient has right to be advised of availability of toll-free HHA hot line. HHA and staff must comply with federal, state, and local laws and regulations. HHA must comply with disclosure of ownership and management information requirements. HHA must disclose ownership and management information for each survey and whenever changes are made. (continued) HHA and staff must comply with accepted professional standards and principles. Delegation of responsibility is clearly set forth in writing. Administrative and supervisory functions are not delegated to another HHA. All services not provided directly are monitored and controlled by the parent HHA. Administrative records for each subunit are maintained by the parent HHA. HHA must provide skilled nursing services and at least one other therapeutic service, one of which the HHA must provide with its own staff. Governing body assumes full legal authority and responsibility for the HHA. Governing body appoints qualified administrator. Governing body arranges for professional advice. Governing body adopts and periodically reviews written by-laws. Governing body oversees management and fiscal affairs of HHA. Administrator organizes and directs HHA functions. Administrator employs qualified personnel and ensures adequate staff education and evaluation. Administrator ensures accuracy of public information materials and activities. Administrator implements an effective budgeting and accounting system. Qualified person is authorized in writing to act in absence of administrator. Supervising physician or registered nurse (RN) Services furnished are under the supervision of a physician or RN. Supervisor or alternate is available during operating hours. Supervisor participates in activities relevant to furnished services. (continued) HHA has written personnel policies, and personnel records include staff’s current licenses and qualifications. Hourly and per-visit personnel have written contracts. Personnel providing services coordinate effectively. Coordination of patient services is documented in the clinical records or minutes of case conferences. Written summary report for each patient is sent to attending physician every 62 days. Services for which the HHA contracts are subject to a written contract. Annual operating budget and capital expenditure plan are prepared. Plan and budget are prepared under direction of governing body. Plan and budget are reviewed and updated at least annually. If HHA provides laboratory testing or refers specimens elsewhere, it must comply with the requirements of the Clinical Laboratory Improvement Amendments of 1988. Group includes physician, RN, and professionals from other appropriate disciplines. Group establishes and annually reviews HHA policies. Group meets frequently to advise agency on professional issues. Meetings are documented by dated minutes. Patients are accepted on basis of reasonable expectation that needs can be met at home. Written plan of care is established and periodically reviewed by physician. (continued) Plan of care covers all diagnoses, required services, visits, and so on. Physician is consulted to approve modifications to plan. Orders for therapy services specify procedures and modalities to be used and their amount, frequency, and duration. Therapist and other personnel participate in developing plan. Plan is reviewed by attending physician and HHA personnel as necessary, but at least every 62 days. HHA staff promptly alert physician to changes that suggest need to alter plan. Drugs and treatment are administered only as ordered by physician. RN or therapist records and signs oral orders and obtains physician countersignature. Staff check all medicines to identify ineffective drug therapy, adverse reactions, drug allergies, and so on and report problems to physician. Skilled nursing services are furnished by or under supervision of an RN. Skilled nursing services are furnished in accordance with plan of care. (continued) RN makes initial evaluation visit. RN regularly reevaluates patient nursing needs. RN initiates plan of care and necessary revisions. RN furnishes services requiring substantial or specialized nursing care. RN initiates appropriate preventive or rehabilitative procedures. RN prepares notes, coordinates with physician and other staff, and informs physician and other staff of changes. RN counsels patient and family in meeting nursing and related needs. RN participates in in-service program and supervises and teaches staff. Duties of the licensed practical nurse (LPN) LPN furnishes services in accordance with HHA policy. LPN prepares clinical and progress notes. LPN assists physician and RN in performing specialized procedures. LPN prepares equipment and materials observing aseptic techniques. LPN assists patient in learning self-care techniques. Therapy services are given by a qualified therapist, or qualified therapist assistant under supervision of qualified therapist, in accordance with the plan of care. Therapist helps physician evaluate functional level and helps develop plan of care. Therapist prepares clinical and progress notes. Therapist advises and consults with family and other HHA personnel. Therapist participates in in-service programs. (continued) Services provided by a PT or OT assistant must be supervised by a qualified PT or OT. PT and OT assistants help prepare clinical notes and progress reports. PT and OT assistants participate in educating patient and family and in in-service programs. Speech therapy is furnished only by, or under the supervision of, a speech pathologist or audiologist. Services are provided by a qualified social worker or social worker assistant. Social worker participates in developing the plan of care. Social worker prepares clinical and progress notes. Social worker works with family. Social worker uses appropriate community resources. Social worker participates in discharge planning and in-service programs. Social worker consults with other HHA personnel. Home health aides are selected according to personnel qualifications specified in regulations. (continued) Aides must have at least 75 hours of training in specific subject areas; 16 hours must be supervised practical training. Aides must have at least 16 hours of classroom training before beginning practical training. Aides must have good communication skills; ability to observe, report, and document care; and ability to recognize emergency situations and needs of patients. Any organization may conduct training except an HHA that, within the past 2 years, has not complied with Medicare requirements, has been penalized by Medicare, or has had Medicare payments suspended. The practical portion of training must be supervised by, or carried out under the supervision of, an RN with at least 2 years’ experience, 1 of which is in home health. Other individuals may provide instruction under the supervision of a qualified RN. Aide training must be documented. Aides may furnish services only after successfully completing a competency evaluation program. HHA is responsible for ensuring its aides meet the competency evaluation requirements. Competency evaluations must meet specific requirements specified in the regulations. HHA must complete a competency evaluation of each aide at least every 12 months. Aides must receive at least 12 hours of in-service training each year. Competency evaluations may be provided by any organization except an HHA that, within the past 2 years, has not complied with Medicare requirements, has been penalized by Medicare, or has had Medicare payments suspended. Competency evaluation must be performed by an RN, and in-services must be supervised by an RN. (continued) Performance in specified subject areas must be evaluated by observation; for others, evaluation may be by observation or oral or written examination. Aides may not continue to perform tasks evaluated as unsatisfactorily carried out. An aide has not passed the competency evaluation if performance in more than one required area is considered unsatisfactory. Competency evaluation must be documented. HHA may use only aides who meet competency requirements. Aides are assigned to a specific patient by an RN. Written instructions for patient care are prepared by an RN or a therapist. Duties of an aide include performing simple procedures as an extension of therapy, providing personal care, assisting in exercise, carrying out household services, and assisting with self-administered medications. Aides report changes in patient care and needs. Aides complete appropriate records. Aides must be supervised. When only aide services are being provided, an RN must make a supervisory visit to patient’s home at least once every 60 days. Supervisory visit must occur when aide is furnishing care. When skilled nursing or therapy services are also being provided, an RN must make a supervisory visit to patient’s home at least every 2 weeks whether the aide is present or not. When therapy services are being provided—without aide or skilled nursing services—a skilled therapist may make the supervisory visits. Individuals hired only to provide personal care services under Medicaid must be found competent by the state. (continued) HHA providing outpatient therapy services on its own premises must meet all pertinent conditions for an HHA as well as additional specified health and safety requirements. Clinical records containing past and current findings must be maintained for each patient in accordance with accepted professional standards. Clinical records must be retained for at least 5 years after the applicable cost report is filed with the contractor. A copy of the clinical record or abstract is sent with patient when transferred to another health facility. Clinical records are safeguarded against loss or unauthorized use. Written procedures govern the use and removal of records and conditions for release of information. Patient’s written consent is required for release of information not authorized by law. Written policies require an annual evaluation of the HHA’s total program. Evaluation consists of an overall policy and administrative review and a clinical record review. Evaluation assesses the appropriateness, adequacy, effectiveness, and efficiency of the HHA’s program. Results of the evaluation are reported to and acted upon by those responsible for operating the HHA. Results of the evaluation are maintained separately as administrative records. Evaluation includes a review of policies and administrative practices of the HHA. Mechanisms are established in writing to collect data for the evaluation. (continued) Appropriate health professionals must review a sample of active and closed clinical records quarterly to ensure policies are being followed. Active clinical records must be reviewed every 62 days to assess adequacy of plan of care and appropriateness of continuing care. No standard was specified for these requirements. Medicare Home Health Agencies: Certification Process Is Ineffective in Excluding Problem Agencies (GAO/T-HEHS-97-180, July 28, 1997). Medicare: Home Health Utilization Expands While Program Controls Deteriorate (GAO/HEHS-96-16, Mar. 27, 1996). Medicare: Allegations Against ABC Home Health Care (GAO/OSI-95-17, July 19, 1995). Home Health Care: HCFA Properly Evaluated JCAHO’s Ability to Survey Home Health Agencies (GAO/HRD-93-33, Oct. 26, 1992). Home Health Care: HCFA Evaluation of Community Health Accreditation Program Inadequate (GAO/HRD-92-93, Apr. 20, 1992). Medicare: Increased Denials of Home Health Claims During 1986 and 1987 (GAO/HRD-90-14BR, Jan. 24, 1990). Medicare: Assuring the Quality of Home Health Services (GAO/HRD-90-7, Oct. 10, 1989). Medicare: Need to Strengthen Home Health Care Payment Controls and Address Unmet Needs (GAO/HRD-87-9, Dec. 2, 1986). Savings Possible by Modifying Medicare’s Waiver of Liability Rules (GAO/HRD-83-38, Mar. 4, 1983). The Elderly Should Benefit From Expanded Home Health Care But Increasing These Services Will Not Insure Cost Reductions (GAO/IPE-83-1, Dec. 7, 1982). Medicare Home Health Services: A Difficult Program to Control (GAO/HRD-81-155, Sept. 25, 1981). Response to the Senate Permanent Subcommittee on Investigations’ Queries on Abuses in the Home Health Care Industry (GAO/HRD-81-84, Apr. 24, 1981). Home Health Care Services—Tighter Fiscal Controls Needed (GAO/HRD-79-17, May 15, 1979). The first copy of each GAO report and testimony is free. Additional copies are $2 each. Orders should be sent to the following address, accompanied by a check or money order made out to the Superintendent of Documents, when necessary. VISA and MasterCard credit cards are accepted, also. Orders for 100 or more copies to be mailed to a single address are discounted 25 percent. U.S. General Accounting Office P.O. Box 37050 Washington, DC 20013 Room 1100 700 4th St. NW (corner of 4th and G Sts. NW) U.S. General Accounting Office Washington, DC Orders may also be placed by calling (202) 512-6000 or by using fax number (202) 512-6061, or TDD (202) 512-2537. Each day, GAO issues a list of newly available reports and testimony. To receive facsimile copies of the daily list or any list from the past 30 days, please call (202) 512-6000 using a touchtone phone. A recorded menu will provide information on how to obtain these lists. | Pursuant to a congressional request, GAO reviewed how the Health Care Financing Administration (HCFA): (1) controls the entry of home health agencies (HHA) into the Medicare program; (2) ensures that certified HHAs continue to comply with Medicare's conditions of participation and associated standards; and (3) decertifies HHAs that are not complying with Medicare's requirements. GAO noted that: (1) becoming a Medicare-certified HHA is relatively easy-- probably too easy, given the large number of problem agencies identified in various studies over the past few years; (2) if HHA owners have not been previously barred from Medicare, they can obtain certification without having any health care experience; (3) although such entrepreneurs can hire qualified health care professionals, Medicare's initial certification survey is so limited that it does not provide a sound basis for judging an HHA's ability to provide quality care; (4) although certified HHAs must be periodically recertified, serious deficiencies in the process allow problems to go undetected; (5) HCFA recertifies HHAs by screening them against a subset of the conditions of participation, but when surveyors assessed 44 targeted HHAs against all applicable conditions of participation, almost half had problems serious enough to warrant decertification; (6) many HHAs operate branch offices, but these offices are not subject to the same oversight afforded the parent offices; (7) HHAs are resurveyed every 12 to 36 months, depending on a variety of factors, but rapid growth and high utilization rates, which may indicate potential problem HHAs, are not included among those factors; (8) once certified, HHAs have little reason to fear that they will suffer serious consequences from failing to comply with Medicare's conditions of participation and associated standards; (9) few problem HHAs are terminated from the program; instead they are provided repeated opportunities to correct their deficiencies, even if the same deficiencies recur from one survey to the next; and (10) moreover, HCFA has not implemented a range of penalties to sanction problem HHAs, even though the Congress provided it the authority to do so over 10 years ago. |
The 340B Program was created following the enactment of the Medicaid Drug Rebate Program and gives 340B covered entities discounts on outpatient drugs comparable to those made available to state Medicaid agencies. HRSA is responsible for administering and overseeing the 340B Program, which, according to federal internal control standards, includes designing and implementing necessary policies and procedures to enforce agency objectives and assess program risk. These policies and procedures should include internal controls that provide reasonable assurance that an agency has effective and efficient operations, and that program participants are in compliance with applicable laws and regulations. Eligibility for the 340B Program is defined in the PHSA. Entities generally become eligible by receiving certain federal grants or by being one of six hospital types. Eligible grantees include clinics that offer primary and preventive care services, such as Federally Qualified Health Centers, clinics that target specific conditions or diseases that raise public health concerns or are expensive to treat, and state operated AIDS Drug Assistance Programs, which serve as a “payer of last resort” to cover the cost of providing HIV-related medications to certain low-income individuals. Eligible hospitals include certain children’s hospitals, free standing cancer hospitals, rural referral centers, sole community hospitals, critical access hospitals, and general acute care hospitals that serve a disproportionate number of low-income patients, referred to as disproportionate share hospitals (DSH). To become a covered entity and participate in the program, eligible entities must register with HRSA and be approved. Hospital eligibility for the 340B Program has more requirements compared to the requirements for federal grantees. Specifically, hospitals must meet certain requirements intended to ensure that they perform a government function to provide care to the medically underserved. First, hospitals generally must meet specified DSH adjustment percentages to qualify. local government, (2) a public or private nonprofit corporation that is formally delegated governmental powers by a unit of state or local government, or (3) a private, nonprofit hospital under contract with a state or local government to provide health care services to low-income individuals who are not eligible for Medicaid or Medicare. Additionally, they must be (1) owned or operated by a state or All drug manufacturers that supply outpatient drugs are eligible to participate in the 340B Program and must participate in order to have their drugs covered by Medicaid. To participate, manufacturers are required to sign a pharmaceutical pricing agreement with HHS in which both parties agree to certain terms and conditions. Critical access hospitals are exempt from this requirement. were allowed to contract with a single outside pharmacy to dispense drugs on their behalf. In 2010, however, HRSA issued guidance allowing all covered entities to contract with multiple outside pharmacies. See Notice Regarding Section 602 of the Veterans Health Care Act of 1992 Patient and Entity Eligibility, 61 Fed. Reg. 55156 (Oct. 24, 1996). In our September 2011 report, we found that HRSA’s oversight of the 340B Program was inadequate because it relied primarily on self-policing by program participants and because HRSA’s guidance on key program requirements lacked the necessary level of specificity to provide clear We also found that changes in the settings direction for participants.where the 340B Program was used resulted in heightened concerns about HRSA’s inadequate oversight. We made four recommendations to address these oversight inadequacies and to ensure appropriate use of the program. In its oversight of the 340B Program, we found in 2011 that HRSA primarily relied on covered entities and manufacturers to police themselves and ensure their own compliance with program requirements. Upon enrollment into the program, HRSA required participants to self- certify that they would comply with applicable 340B Program requirements and any accompanying agency guidance. HRSA also expected participants to develop the procedures necessary to ensure compliance, maintain auditable records that demonstrated compliance, and inform HRSA if violations occurred. For example, covered entities had to develop adequate safeguards to prevent drugs purchased at 340B prices from being diverted to non-eligible patients, such as by using inventory tracking systems that separately processed the purchase and logged the dispensation of 340B drugs. Similarly, manufacturers had to ensure that they properly calculated the 340B price of their drugs. HRSA officials told us that covered entities and manufacturers could also monitor each other’s compliance with program requirements, but we found that, in practice, participants could face limitations to doing so. Beyond relying on participants’ self-policing, we found that HRSA engaged in few activities to oversee the 340B Program and ensure its integrity, which agency officials said was primarily due to funding constraints. For example, officials told us that they did not require a review of the procedures participants put in place to ensure program compliance. Further, although HRSA had the authority to conduct audits of program participants to determine whether program violations had occurred, at the time of our report, the agency had never conducted an audit. We found that HRSA’s guidance on key program requirements lacked the necessary level of specificity to provide clear direction, making it difficult for participants to self-police or monitor others’ compliance and raising concerns that the guidance could be interpreted in ways that were inconsistent with its intent. Specifically, we found that HRSA’s guidance on the definition of an eligible patient lacked the necessary specificity to clearly define the various situations under which an individual was considered eligible for discounted drugs through the 340B Program. As a result, covered entities could interpret the definition either too broadly or too narrowly. At the time of our report, agency officials told us that they recognized the need to provide additional clarity around the definition of an eligible patient, in part because of concerns that some covered entities may have interpreted the definition too broadly to include non-eligible individuals, such as those seen by providers who were only loosely affiliated with a covered entity. HRSA had not issued guidance specifying the criteria under which hospitals that were not publicly owned or operated could qualify for the 340B Program. For example, one way hospitals can qualify for the program is by executing a contract with a state or local government to provide services to low-income individuals who are not eligible for Medicaid or Medicare. We found that HRSA did not outline any criteria that must be included in such contracts, such as the amount of care a hospital must provide to these low-income individuals, and did not require the hospitals to submit their contracts for review by HRSA. As a result, hospitals with contracts that provided a small amount of care to low-income individuals not eligible for Medicaid or Medicare could claim 340B discounts, which may not have been what the agency intended. HRSA’s nondiscrimination guidance was not specific in the practices that manufacturers should follow to ensure that drugs were equitably distributed to covered entities and non-340B providers when distribution was restricted. Some stakeholders we interviewed for the report, such as covered entities, raised concerns about the way certain manufacturers interpreted and complied with the guidance in these cases. In 2011, we also concluded that changes in the settings where the 340B Program was used may have heightened the concerns about the inadequate oversight we identified. In the years leading up to our report, the settings where the 340B Program was used had shifted to more contract pharmacies and hospitals than in the past. We concluded that increased use of the 340B Program by contract pharmacies and hospitals may have resulted in a greater risk of drug diversion to ineligible patients, in part because these facilities were more likely to serve patients that did not meet the definition of a patient of the program. According to HRSA officials, the number of covered entities using contract pharmacies had grown rapidly after it issued its guidance allowing all covered entities to use multiple contract pharmacies; as of July 2011 there were more than 7,000 contract pharmacy arrangements in the program. In addition, based on our own analysis, we found that hospitals’ participation in the 340B Program had grown from 591 in 2005 to 1,673 in 2011. Further, although participation in the 340B Program also had increased among other covered entity types, we found that hospitals’ participation had grown faster than that of federal grantees. For example, in 2005, hospitals represented 10 percent of program participants, and as of July 2011, they represented 27 percent. To address these oversight inadequacies and to ensure appropriate use of the program, we recommended that the Secretary of HHS instruct the administrator of HRSA to take the following four actions: (1) conduct selective audits of covered entities to deter potential diversion; (2) further specify its nondiscrimination guidance for cases in which distribution of drugs is restricted and require reviews of manufacturers’ plans to restrict distribution of drugs at 340B prices; (3) finalize new, more specific guidance on the definition of an eligible patient; and, (4) issue guidance to further specify the criteria that hospitals that are not publicly owned or operated must meet to be eligible for the 340B Program. In fiscal year (FY) 2012, HRSA implemented two of the four recommendations from our 2011 report. Specifically, in response to our recommendation that HRSA conduct selective audits of 340B covered entities to deter potential diversion (that is, diversion of 340B drugs to non-eligible patients), the agency implemented a systematic approach to conducting audits of covered entities that is outlined on its website. The FY 2012 audits included 45 covered entities that were randomly selected and 6 selections targeted based on information from stakeholders, for a total of 51 audits that encompassed more than 410 outpatient facilities and 860 contract pharmacy locations.conducted annual audits of covered entities with plans to continue these annual audits going forward. As a result of the audits already conducted, HRSA has identified instances of non-compliance with program requirements, including violations related to drug diversion. The agency has developed a process to address non-compliance through corrective action plans. The results of each year’s audits are available on HRSA’s website. Since 2012, HRSA has In response to our recommendation that HRSA further specify its nondiscrimination guidance for cases in which distribution of drugs is restricted and require reviews of manufacturers’ plans to restrict distribution of 340B discounted drugs, HRSA issued updated nondiscrimination guidance in May of 2012. This guidance outlined HRSA’s policy for manufacturers who intend to restrict distribution of a drug and provided additional detail on the type of information manufacturers should include in their restricted distribution plans. Additionally, HRSA officials told us that they may require manufacturers to submit their restricted distribution plans for review if, after implementation, they receive complaints from covered entities that they are not able to access the drug at the 340B price. HRSA had planned to address our remaining two recommendations in a comprehensive 340B program regulation. Specifically, we had recommended that HRSA (1) finalize new, more specific guidance on the definition of a patient and (2) issue guidance to further specify the criteria that hospitals that are not publicly owned or operated must meet to be eligible for the 340B Program. HRSA had planned to address both of these issues in a comprehensive 340B Program regulation that it submitted to the Office of Management and Budget for review in April 2014. However, HRSA withdrew this proposed comprehensive regulation in November 2014 following a May 2014 federal district court ruling that addressed whether HRSA had statutory authority to issue a regulation After the concerning the ineligibility of certain drugs for 340B pricing.district court ruled that HRSA lacked statutory rulemaking authority under the 340B statute except in three specified areas, HRSA officials reported that they had to assess the impact of the ruling on the proposed comprehensive regulation. The outcome of this assessment is that HRSA plans to issue guidelines to address 340B program areas where it does not have explicit rulemaking authority. HRSA officials said they expect to publish proposed guidelines later this year and that they will address areas such as the definition of a patient and hospital eligibility under the 340B program. Chairman Pitts, Ranking Member Green, and Members of the Committee, this concludes my statement. I would be pleased to respond to any questions you may have. For further information about this statement, please contact Debra A. Draper at (202) 512-7114 or [email protected]. Contact points for our Offices of Congressional Relations and Public Affairs may be found on the last page of this testimony. Key contributors to this statement were Gerardine Brennan, Assistant Director; Jennie Apter; Kelli Jones; Rachel Svoboda; and Jennifer Whitworth. This is a work of the U.S. government and is not subject to copyright protection in the United States. The published product may be reproduced and distributed in its entirety without further permission from GAO. However, because this work may contain copyrighted images or other material, permission from the copyright holder may be necessary if you wish to reproduce this material separately. | The 340B Drug Pricing Program requires drug manufacturers to sell outpatient drugs at discounted prices to eligible hospitals, clinics, and other entities—commonly referred to as covered entities—in order to have their drugs covered by Medicaid. HRSA, an agency within the Department of Health and Human Services, is responsible for administering and overseeing the 340B Program. In recent years, questions have been raised regarding HRSA's oversight of the program, particularly given growth in the program since its inception in 1992. According to HRSA officials, as of 2015, more than 11,000 covered entities were participating in the 340B Program—an increase of approximately 30 percent since 2008. In September 2011, GAO identified inadequacies in HRSA's oversight of the 340B Program and made recommendations to improve program oversight and ensure appropriate use of the program. This testimony describes (1) inadequacies in 340B Program oversight that GAO previously identified, and (2) progress HRSA has made implementing GAO's recommendations to improve program oversight. This testimony is based largely on GAO's September 2011 report. For this testimony, GAO also obtained information and documentation from HRSA officials about any significant program updates and steps they have taken to implement GAO's 2011 recommendations. In its September 2011 report, GAO found that the Health Resources and Services Administration's (HRSA) oversight of the 340B Program was inadequate to provide reasonable assurance that program participants—covered entities and drug manufacturers—were in compliance with program requirements. Specifically, GAO found the program lacked guidance on key requirements with the level of specificity necessary to provide clear direction, making self-policing difficult, and raising concerns that the guidance could be interpreted in ways that were inconsistent with its intent. In particular, GAO found HRSA's guidance lacked needed specificity on the definition of a patient eligible for drugs discounted under the program, criteria hospitals not publicly owned or operated needed to meet to qualify for the program, and nondiscrimination guidance manufacturers needed to follow to ensure drugs were distributed equitably to both covered entities and non-340B providers. had increasingly been used in settings, such as hospitals, where the risk of diverting 340B drugs to ineligible patients was greater, because these settings were more likely to serve such patients. To address these oversight inadequacies and to ensure appropriate use of the program, GAO recommended HRSA (1) conduct selective audits of covered entities to deter potential diversion; (2) further specify its nondiscrimination guidance for cases in which distribution of drugs is restricted and require reviews of manufacturers' plans to restrict distribution of drugs at 340B prices; (3) finalize new, more specific guidance on the definition of a patient eligible to receive discounted drugs; and (4) issue guidance to further specify the criteria that hospitals not publicly owned or operated must meet to be eligible for the 340B Program. In fiscal year 2012, HRSA implemented two of GAO's four 2011 recommendations. Specifically, the agency implemented a systematic approach to conducting audits of covered entities and issued updated nondiscrimination guidance. With regard to the other two recommendations, HRSA planned to address the definition of a patient and hospital eligibility criteria in a comprehensive 340B Program regulation it submitted to the Office of Management and Budget in April 2014. However, HRSA withdrew this proposal following a May 2014 federal district court ruling addressing HRSA's statutory authority to issue a separate 340B regulation, which found that HRSA's rulemaking authority for the 340B Program is limited to specified areas. HRSA reported that after assessing this ruling, it plans to issue proposed guidelines later this year to address 340B Program areas where it does not have explicit rulemaking authority, including the definition of a patient and hospital eligibility. |
Prior to retiring the program, NASA will need to first return the space shuttle to flight and execute the remaining missions needed to complete assembly of and provide support for the ISS. At the same time, NASA will need to begin the process of closing out or transitioning to other NASA programs the space shuttle’s assets, such as its workforce, hardware, and facilities, which are no longer needed to support the program. The process of closing out or transitioning the program’s assets will extend well beyond the space shuttle’s final flight (see fig. 1). Retiring the space shuttle and, in the larger context, implementing the Vision, will require that the Space Shuttle Program rely on its most important asset—its workforce. The space shuttle workforce consists of approximately 2,000 civil service and 15,600 prime contractor personnel, including a large number of engineers and scientists. In addition to these personnel, there are a large number of critical, lower level subcontractors and suppliers throughout the United States who support the program. The program’s workforce is responsible for conducting such things as space shuttle payload processing, mission planning and control, ground operations, and for managing the space shuttle’s propulsions systems. While each of the NASA centers support the Space Shuttle Program to some degree, the vast majority of this workforce is located at three of NASA’s Space Operations Centers—Johnson Space Center, Kennedy Space Center (KSC), and Marshall Space Flight Center (MSFC) (see fig. 2). The space shuttle workforce and NASA’s human capital management has been the subject of many GAO and other reviews in the past. These reviews showed that the space shuttle workforce had suffered from agency downsizing in the mid 1990s and that NASA faced challenges recruiting and training new employees, sufficiently staffing its workforce with qualified workers, and dealing with an aging workforce and signs of overwork and fatigue in its remaining workforce. In the past, NASA officials said that these challenges posed significant flight safety risks for the program. While the Space Shuttle Program had taken some steps to address these issues, sustaining critical skills in many key areas such as subsystems engineering remained a problem. In addition, in 2003 the Columbia Accident Investigation Board noted that years of workforce reductions and outsourcing negatively impacted NASA’s experience and systems knowledge base. Further, the Columbia Accident Investigation Board noted that safety and mission assurance personnel were eliminated and careers in safety lost organizational prestige. Additional studies highlighted recent trends affecting the science and engineering labor pool from which employers like NASA draw from. For example, the National Science Board reported in 2004 that worldwide competition for individuals with science and engineering skills was increasing, while the potential pool of individuals with these skills was decreasing. NASA’s former Administrator has testified that this situation poses a significant challenge to the agency’s ability to maintain a world-class workforce, because it relies on a highly educated and broad science and engineering workforce to accomplish its mission. Over the past few years, GAO and others in the federal government have underscored the importance of human capital management and strategic workforce planning. For example, we designated strategic human capital management as a governmentwide, high-risk area in 2001, 2003, and 2005, and continue to highlight it as a major management challenge specifically for NASA. Strategic Management of Human Capital was also placed at the top of the President’s Management Agenda, and the Office of Management and Budget and Office of Personnel Management have made efforts to improve governmentwide human capital management and strategic workforce planning. Recognizing the need for guidance related to strategic human capital management, GAO has issued various reports that outline a strategic human capital approach and provided tools, such as a Model of Strategic Human Capital Management and Human Capital Self Assessment Checklist for Agency Leaders, that agencies can use to aid in addressing this challenge. In response to an increased focus governmentwide on strategic human capital management, NASA has taken several steps to improve its human capital management. These include steps such as devising an agencywide strategic human capital plan, developing workforce analysis tools to assist in identifying critical skills needs, and requesting and receiving additional human capital flexibilities to help the agency compete successfully with the private sector in attracting and retaining employees and to reshape and redeploy its workforce to support its mission. GAO’s prior work on strategic human capital management has shown that workforce planning is needed to ensure that the right people with the right skills are in the right place at the right time. Workforce planning addresses two critical needs: (1) aligning an organization’s human capital program with its current and emerging mission and programmatic goals and (2) developing long-term strategies for acquiring, developing, and retaining staff to achieve programmatic goals. Although approaches to such planning may vary according to an organization’s specific needs and mission, our work suggests that, irrespective of the context in which workforce planning is done, such a process should address five key elements. These include (1) involving top management, employees, and other stakeholders in developing, communicating, and implementing the strategic workforce plan; (2) determining the critical skills and competencies that will be needed to achieve the future programmatic results; (3) developing strategies tailored to address critical skills and competency gaps that need attention; (4) building the capability needed to address administrative, educational, and other requirements important to supporting workforce strategies; and (5) monitoring and evaluating the agency’s progress toward its human capital goals and the contribution that human capital results have made toward achieving programmatic goals. The Space Shuttle Program has made limited progress toward developing a detailed long-term strategy for sustaining its workforce through the space shuttle’s retirement. While NASA recognizes the importance of having in place a strategy for sustaining a critically skilled workforce to support the space shuttle’s operations, it has only taken preliminary steps, such as identifying lessons learned from the retirement of programs comparable to the space shuttle, to do so. Other efforts have been initiated or are planned, such as enlisting the help of human capital experts and revising the acquisition strategy to update the space shuttle’s propulsion system prime contracts; however, actions taken thus far have been limited. NASA’s prime contractor for space shuttle operations has also taken some preliminary steps, but its ability to progress with these efforts is reliant on NASA making decisions that impact contractor requirements through the remainder of the program. Making progress toward developing a detailed strategy, however, will be important given the potential impact that workforce problems would have on NASA-wide goals. To begin its planning efforts for the space shuttle’s retirement, the program identified the lessons learned from the retirement of programs comparable to the space shuttle, such as the Air Force Titan IV Rocket Program, the Navy Base Realignment and Closure activity, and the NASA Industrial Facility closure. Among other things, the lessons learned reports highlight the practices used by other programs when making personnel decisions, such as the importance of developing transition strategies and early retention planning to the success of the space shuttle’s retirement. (See app. II for a summary of NASA’s reports to date on the lessons learned that are applicable to the retirement of the space shuttle.) Program officials said that this preliminary effort is the first step in an approach they expect to take to plan for retiring the space shuttle. According to these officials, they plan to use the information collected from this preliminary effort to guide in the development of a management plan for retiring the space shuttle. This management plan is expected to include such things as the overall plan, processes, schedule, and roles and responsibilities related to retiring the space shuttle. To inform this management plan, the program expects sometime around mid-2005 to assess its hardware and facility needs through retirement to determine whether to maintain, closeout, or transition assets to other NASA programs—such as space exploration activities. Once these hardware and facility assessments have been completed, the program plans to conduct an assessment of its workforce needs. Officials said that they must understand the program’s hardware and facility needs before they can conduct an assessment of its workforce needs through retirement. In addition to the Space Shuttle Program’s preliminary work to prepare for sustaining its workforce through retirement, the program has contracted with the National Academy of Public Administration (NAPA) to assist it in planning for the space shuttle’s retirement and transitioning to future programs. Specifically, NAPA is to (1) benchmark the best practices of public and private sector organizations that have dealt with workforce issues resulting from the retirement, transition, or elimination of programs comparable to the space shuttle, such as in number of employees affected; (2) assess and review the workforce aspects of the program’s retirement strategy throughout the course of its development to ensure that it is addressing the problem adequately; and (3) to the extent possible, assist the program in devising innovative strategies for mitigating the impact of the space shuttle’s retirement on the workforce. According to NAPA officials, it has conducted preliminary benchmarking efforts and is awaiting further direction from NASA for its next steps with regard to this task. Although the additional tasks NAPA is to undertake have been identified, it has yet to undertake efforts associated with these tasks. Because NAPA will be reviewing NASA’s management plan for retiring the space shuttle as it is developed, the majority of its efforts will not be undertaken until NASA begins to plan more earnestly for sustaining its critically skilled workforce through the program’s retirement, which, according to NASA, will likely occur after the space shuttle’s return to flight. In addition, because the Space Shuttle Program is heavily reliant on its contractor workforce to support the space shuttle’s operations, NASA officials said that they could include provisions in future Space Shuttle Program contracts that require contractors to take steps to prepare for sustaining their workforces through the space shuttle’s retirement. However, the program has yet to do so. For example, in September 2004 the Space Shuttle Program exercised the final 2-year option of its Space Flight Operations Contract (SFOC). At this point, NASA did not require that United Space Alliance take any steps to prepare for sustaining its workforce, such as by submitting a critical skills retention plan. A senior NASA official recognized the need for United Space Alliance to devise such a plan, and said that this type of requirement would likely be included as part of the new contract NASA intends to award to United Space Alliance in 2006, once workforce requirements for the remainder of the program have been determined. Separate from the SFOC, the Space Shuttle Propulsion Office at MSFC has begun devising an acquisition strategy for updating its propulsion system prime contracts to take into account the Vision’s goal of retiring the space shuttle following completion of the ISS. Although at the time of our review this acquisition strategy was not yet complete, officials said that the updated contracts will likely include a requirement for the contractor to submit a critical skills retention plan. This plan would outline the strategies the contractor plans to implement to sustain the critical skills necessary to support the program through retirement. In addition, officials said that they could take advantage of the award fee provisions available in the space shuttle’s propulsion prime contracts to incentivize contractors to put in place strategies for sustaining a critically skilled workforce through retirement and monitor their success in doing so. United Space Alliance has taken preliminary steps to begin to prepare for the space shuttle’s retirement and its impact on the company’s workforce. For example, the company has begun to define its critical skills needs to continue to support the Space Shuttle Program; has devised a communication plan; contracted with a human capital consulting firm to conduct a comprehensive study of its workforce; and continues to monitor indicators of employee morale and workforce stability. While these efforts are underway, contractor officials said that further efforts to prepare for the space shuttle’s retirement and its impact on their workforce are on hold until NASA first makes decisions that impact the space shuttle’s remaining flight schedule and thus the time frames for retiring the program and transitioning its assets. Once these decisions have been made and United Space Alliance’s contract requirements have been defined, these officials said that they would then be able to proceed with their workforce planning efforts for the space shuttle’s retirement, a process that will likely take 6 months to complete. Making progress toward developing a detailed strategy for sustaining a critically skilled space shuttle workforce through the program’s retirement will be important given the potential impact that workforce problems could have on NASA-wide goals. According to NASA officials, if the Space Shuttle Program faces difficulties in sustaining the necessary workforce, NASA-wide goals, such as implementing the Vision and proceeding with space exploration activities, could be impacted. For example, workforce problems could lead to a delay in flight certification for the space shuttle, which could potentially result in a delay to the program’s overall flight schedule, thus compromising the goal of completing assembly of the ISS by 2010. In addition, officials said that space exploration activities could slip as much as 1 year for each year that the space shuttle’s operations are extended because NASA’s ability to progress with these activities is reliant on funding and assets that are expected to be transferred from the Space Shuttle Program to other NASA programs. One workforce issue that has already been identified that could impact the program’s ability to support space shuttle operations through retirement is an inadequate safety workforce. For example, Safety and Mission Assurance Directorate officials at KSC indicated that they already face difficulties in maintaining a sufficient number of safety personnel to support the Space Shuttle Program. An analysis done by the Safety and Mission Assurance Directorate at KSC shows that it lacks an adequate number of employees to fully perform all of its required functions for the Space Shuttle Program, which increased due to additional safety requirements put in place following the Space Shuttle Columbia accident. Due to this analysis, some additional workforce was added to provide support in this area. Although the Safety and Mission Assurance Directorate now believes that it can meet its inspection schedule, officials said that should the Directorate be unable to complete all of its required inspections, they would deny the space shuttle’s certification for flight readiness. This would delay the program’s flight schedule. NASA officials told us they expect to face various challenges in sustaining the critically skilled workforce necessary to support the space shuttle’s operations through its retirement, including retaining the current workforce, many of whom may want to participate in or will be needed to support future phases of implementing the Vision, and providing a transition path to other programs for the workforce that is needed to support the Space Shuttle Program through retirement. Additional challenges that could affect the program’s ability to support space shuttle operations include: Impact on the prime contractor for space shuttle operations. United Space Alliance may not be able to offer a long-term career path to its employees beyond the space shuttle’s final flight. This problem results from the company having been established specifically to perform ground and flight operations for the Space Shuttle Program. As such, its future following the space shuttle’s retirement remains uncertain. Given this uncertainty, contractor officials stated that they will likely face difficulty recruiting and retaining employees to continue supporting the space shuttle as it nears retirement because of the perceived lack of long-term job security. In addition, they said that the lack of job security may be reflected in poor morale, inattention to details, errors, accidents, absences, and attrition. In addressing problems that may result from this challenge, United Space Alliance has the ability to outplace some employees who work with the Space Shuttle Program to its parent companies. However, contractor officials said that other steps it may have to take to address workforce issues, such as paying retention bonuses, are likely to require funding above normal levels. Governmentwide budgetary constraints. Throughout the process of retiring the space shuttle, NASA, like other federal agencies, will have to contend with urgent challenges facing the federal budget that will put pressure on discretionary spending—such as investments in space programs—and require it to do more with fewer resources. As a result, the Space Shuttle Program’s ability to make use of tools that require additional funding—such as certain aspects of NASA’s new workforce flexibilities like recruitment or retention bonuses—may be limited. Further, GAO has reported that NASA has had difficulties in accurately estimating the costs of its programs. Given this, the agency may not be able to provide a sound and accurate business case to support the use of such tools. Workforce planning efforts that identify gaps in critical skills based upon expected future needs and support the use of strategies to address these gaps could provide the information needed to support a sound business case. While the Space Shuttle Program is still in the early stages of planning for the program’s retirement, its development of a detailed long-term strategy to sustain its future workforce is being hampered by several factors. These include (1) the program’s primary near-term focus on returning the space shuttle to flight and (2) uncertainties with respect to implementing the Vision. Space Shuttle Program officials assert that these factors limit the steps they are able to take at this time to plan for the program’s future workforce needs. However, our prior work on strategic workforce planning has shown that there are steps that successful organizations take to better position themselves to address future workforce needs, even when faced with uncertainties. Since the Space Shuttle Columbia accident, the program has focused on its near-term goal of returning the space shuttle to flight. While this focus is understandable given the importance of the space shuttle’s role in completing assembly of the ISS, it has led to the program delaying efforts to determine future workforce needs. For example, in developing the management plan for retiring the space shuttle, program officials said that the majority of the assessments the program is to complete to support decisions regarding whether to maintain, closeout, or transition the program’s assets will not be undertaken until after the space shuttle has returned to flight. According to these officials, one reason for this delay is that personnel needed to conduct the assessments are currently focused on supporting return to flight activities. Because the workforce assessment will not be conducted until after the program determines its hardware and facility requirements, its future workforce needs will likely remain unidentified until well after the space shuttle has returned to flight. While the Vision has provided the Space Shuttle Program with the goal of retiring the space shuttle by 2010 upon completion of the ISS, the program lacks well-defined objectives or goals on which to base its workforce planning efforts. For example, NASA has not yet determined the final configuration of the ISS or the type of vehicle that will replace the space shuttle and be used for space exploration. These decisions are important because they affect the time frames for retiring the space shuttle. Once made, these decisions will also provide important information that officials have said will be used to guide Space Shuttle Program retirement planning efforts, including efforts to determine whether to maintain, closeout, or transition the program’s facilities, hardware, and workforce as they are no longer needed to support the program. Lacking this information, officials have said that their ability to progress with detailed long-term workforce planning is limited. Studies by several organizations, including GAO, have shown that successful organizations in both the public and private sectors follow a strategic human capital management approach, even when faced with an uncertain future environment. For example, following a strategic human capital management approach can help an organization to (1) prepare its workforce to meet present and future mission requirements, (2) plan for future human capital needs in an uncertain environment, and (3) address future human capital issues that could jeopardize the accomplishment of goals. As part of this approach, strategic workforce planning begins with establishing a strategic direction and setting goals to guide planning efforts for the organization early on in the planning process. When this is not possible due to an uncertain future environment, scenario planning is one approach that can be used as part of a strategic workforce planning process. Scenario planning is used to describe different future environments that an organization may face and can provide a basis for developing and planning strategies to meet the challenges posed by those scenarios rather than planning to meet the needs of a single view of the future. For example, following the terrorists attacks of September 11, 2001, and during the creation of the Department of Homeland Security, the U.S. Coast Guard undertook scenario planning to guide its short-term operational and human capital planning efforts due to uncertainties. For the Space Shuttle Program, scenario planning could guide workforce planning efforts because it can be undertaken despite uncertainties the program faces and without having definitive requirements for program hardware and facility needs through retirement. Scenario planning could also provide the space shuttle program with flexibility in its workforce planning efforts because it does not rely on information provided by hardware and facility assessments and could be undertaken by NASA personnel not currently focused on returning the space shuttle to flight. The information provided by scenario planning could then be used by program officials to support workforce assessments once decisions about the programs hardware and facility needs have been made. This is one of the most challenging periods in the history of the Space Shuttle Program. Not only must NASA demonstrate that the space shuttle can safely fly again, it must begin the process of retiring its largest program while preparing for the uncertain future of space exploration. The necessity to plan for sustaining a critically skilled space shuttle workforce at this time is critical given the impact that expected workforce problems would have on the program and other larger NASA goals. While the Space Shuttle Program acknowledges that sustaining its critically skilled workforce through the program’s retirement is important, the absence of a detailed long-term strategy for doing so makes it unclear how the program will actually accomplish this. By delaying steps to address future workforce needs until other decisions have been made, the program is not taking advantage of valuable time that it could use to better position itself to implement workforce strategies to address expected future challenges and sustain a critically skilled workforce through retirement. Approaches to workforce planning that take in to account uncertainties and provide the program with flexibility in determining future workforce requirements would be particularly relevant to the Space Shuttle Program given the issues that must be resolved before the program can proceed with more detailed workforce planning efforts. To better position the agency to sustain a critically skilled space shuttle workforce through retirement, we recommend that the Acting Administrator direct the Associate Administrator for the Office of Space Operations to implement an approach, as part of its preliminary planning efforts, for identifying the program’s future workforce needs that takes into account various future scenarios the program could face. The program should then use this information to develop strategies for meeting the needs of its potential future scenarios. The information collected and strategies devised during scenario planning will then be readily available to be incorporated into the program’s detailed workforce planning efforts once any uncertainties have been resolved. In written and oral comments on a draft of this report, NASA indicated that it concurred with our findings, conclusions, and recommendation. NASA reiterated that its primary near-term focus is on safely returning the space shuttle to flight, but stated that the agency is laying the foundation needed to move forward with a comprehensive approach for transitioning the Space Shuttle Program through its Integrated Space Operations Summit process. NASA plans to use this process to provide the agency with an independent view of the respective issues surrounding the mission execution and transition of the Space Shuttle Program and its assets. According to NASA, the information provided by this process will allow the agency to review the risks and opportunities related to a number of alternate scenarios that the Space Shuttle Program might support within the Vision. We are encouraged that NASA is laying the foundation needed for transitioning the Space Shuttle Program. NASA has the opportunity to use the Integrated Space Operations Summit process, specifically the alternate future scenarios for the Space Shuttle Program that it will provide, to proceed with identifying the program’s future workforce needs based upon such scenarios. As our recommendation stated, this information could then be readily available to support the program’s detailed workforce planning efforts once any uncertainties have been resolved. NASA’s comments are reprinted in appendix III. NASA also provided technical comments, which we addressed throughout the report as appropriate. As agreed with your offices, unless you announce its contents earlier, we will not distribute this report further until 30 days from its date. At that time, we will send copies to NASA’s Acting Administrator and interested congressional committees. We will make copies available to others upon request. In addition, the report will be available at no charge on the GAO Web site at http://www.gao.gov. If you or your staff have any questions concerning this report, please contact me at (202) 512-4841 or [email protected]. Key contributors to this report are acknowledged in appendix IV. To identify the progress that the National Aeronautics and Space Administration (NASA) and United Space Alliance have made toward developing a strategy for sustaining their critically skilled workforces through the space shuttle’s retirement, we: Obtained and analyzed NASA documents and briefing slides related to human capital management, including NASA’s Strategic Human Capital Plan and Implementation Plan, NASA center Strategic Human Capital Implementation Plans, NASA’s Workforce Plan for Use of the NASA Flexibility Act of 2004 Authorities, policies and procedures for workforce planning, and information on NASA’s integrated human capital management tools—such as its Competency Management System, Workforce Integrated Management System, and workforce analysis tools. Obtained and reviewed NASA documents and briefing slides related to the space shuttle’s operations and retirement, including reports identifying the “lessons learned” from the Air Force Titan IV Rocket Program, Navy Base Realignment and Closure activity, NASA Industrial Facility closure, and the Boeing A/V-8B and F/A-18 production line transition, and plans and projected schedules for future space shuttle flights and manifests. Interviewed United Space Alliance officials regarding their support of space shuttle operations and involvement with space shuttle retirement planning efforts. We also obtained and analyzed documents related to United Space Alliance’s workforce, including demographic data, workforce strategies, and critical skills identification. Reviewed previous GAO reports on NASA, the Space Shuttle Program, and on human capital and workforce planning best practices. We also reviewed human capital reports and guidance from the Office of Personnel Management and the Office of Management and Budget, and interviewed officials from the National Academy of Public Administration regarding human capital management. In addition, we reviewed a report issued by the National Science Board on issues facing the U.S. science and engineering workforce. Interviewed NASA and United Space Alliance officials and received written and oral responses to questions regarding the space shuttle workforce, its demographics, space shuttle operations, and space shuttle retirement planning efforts; NASA operations and management; NASA and United Space Alliance human capital and workforce planning practices; the NASA Flexibility Act of 2004; NASA Safety and Mission Assurance activities; and space shuttle contracts, including the Space Flight Operations Contract. To identify any factors that may have impeded efforts to develop a strategy for sustaining a critically skilled workforce through retirement, we: Interviewed NASA and United Space Alliance officials to obtain an understanding of the challenges they face in planning for the space shuttle’s retirement and in addressing workforce issues that may arise as a result of the decision to retire the space shuttle. Obtained and analyzed NASA and United Space Alliance responses to questions that asked for information regarding their goals and strategies for retiring the space shuttle, the processes they expect to follow to achieve these goals, and the tools and strategies they might use to address workforce issues through the space shuttle’s retirement. To accomplish our work, we visited and interviewed officials responsible for space shuttle operations at NASA Headquarters, Washington, D.C.; and at three NASA centers designated as Space Operations Centers, including Johnson Space Center (JSC), Texas; Kennedy Space Center (KSC), Florida; and Marshall Space Flight Center (MSFC), Alabama. These centers were chosen because they maintain primary responsibility for conducting space shuttle operations and are the centers at which the vast majority of the space shuttle workforce is located. The offices we met with at each of these centers included Safety and Mission Assurance and Human Resources. Additional information was attained from the Space Shuttle Program Office at JSC; the Space Shuttle Processing Directorate and Space Shuttle Strategic Planning Office at KSC; the Space Shuttle Propulsion Office, Customer and Employees Relations Directorate, and Space Transportation Directorate at MSFC; and the Offices of Space Operations, Exploration Systems, and Procurement at NASA Headquarters. We conducted our review from April 2004 to March 2005 in accordance with generally accepted government auditing standards. To prepare for the space shuttle’s retirement, NASA identified the lessons learned from the closeout or retirement of programs comparable to the space shuttle, including the Air Force Titan IV Rocket Program, the Navy Base Realignment and Closure activity, and the NASA Industrial Facility closure. NASA’s reports capture lessons learned that might be applicable to the Space Shuttle Program’s retirement planning. NASA’s highlights from these studies are shown in table 1. In addition to the individual named above, Wesley A. Johnson, Robert Lilly, James Morrison, Shelby S. Oakley, and T.J. Thomson made key contributions to this report. | The President's vision for space exploration (Vision) directs the National Aeronautics and Space Administration (NASA) to retire the space shuttle following completion of the International Space Station, planned for the end of the decade. The retirement process will last several years and impact thousands of critically skilled NASA civil service and contractor employees that support the program. Key to implementing the Vision is NASA's ability to sustain this workforce to support safe space shuttle operations through retirement. Because of the potential workforce issues that could affect the safety and effectiveness of operations through the space shuttle's retirement, GAO was asked to identify (1) the progress of efforts to develop a strategy for sustaining the space shuttle workforce through retirement and (2) factors that may have impeded these efforts. The Space Shuttle Program has made limited progress toward developing a detailed long-term strategy for sustaining its workforce through the space shuttle's retirement. The program has taken preliminary steps, including identifying the lessons learned from the retirement of programs comparable to the space shuttle, such as the Air Force Titan IV Rocket Program, to assist in its workforce planning efforts. Other efforts have been initiated or are planned, such as enlisting the help of human capital experts and revising the acquisition strategy for updating the space shuttle's propulsion system prime contracts; however, actions taken thus far have been limited. NASA's prime contractor for space shuttle operations has also taken some preliminary steps to begin to prepare for the impact of the space shuttle's retirement on its workforce, such as working with a consulting firm to conduct a comprehensive study of its workforce. However, its ability to progress with these efforts is reliant on NASA making decisions that impact contractor requirements through the remainder of the program. Making progress toward developing a detailed strategy, however, will be important given the potential impact that workforce problems would have on NASA-wide goals. For example, a delay to the space shuttle's schedule due to workforce problems would delay the agency's ability to proceed with space exploration activities. NASA and its prime contractor for space shuttle operations have already indicated that they could face challenges sustaining their critically skilled workforces if a career path beyond the space shuttle's retirement is not apparent. In addition, governmentwide fiscal realities call into question whether funding will be available to support the use of incentives, such as retention bonuses, that could help NASA sustain its space shuttle workforce. Several factors hamper the Space Shuttle Program's ability to develop a detailed long-term strategy to sustain the critically skilled workforce necessary to support safe space shuttle operations through retirement. For example, because of the program's near-term focus on returning the space shuttle to flight, other efforts, such as assessing hardware and facility needs that will ultimately aid the program in determining workforce requirements, are being delayed. In addition, program officials indicated that they are faced with uncertainties regarding the implementation of future aspects of the Vision and lack the requirements needed on which to base their workforce planning efforts. Despite these factors, our prior work on strategic workforce planning has shown that there are steps, such as scenario planning, that successful organizations take to better position themselves to address future workforce needs. |
Subject to the authority, direction, and control of the Secretary of Defense, it is the responsibility of the services to recruit and train their forces. The service components depend on military recruiters to meet their annual recruiting missions. In fiscal year 2009, the service components utilized 30,936 military recruiters. Of those, 26,381 were frontline recruiters assigned a monthly recruiting goal. The remaining recruiters held supervisory and staff positions throughout the services’ recruiting commands. (See table 1 for the number of recruiters for fiscal year 2006 through fiscal year 2009.) Each of the military services has its own recruiting command, which is responsible for the service’s recruiting mission and functions. The role of the recruiting command is to provide support to the recruiting force and guidance for the recruitment and enlistment process. In addition, the recruiting command plays a role in developing the recruiting goals. The commands are structured similarly across the services with some variation in organizational structure, as noted in figure 1. The recruiting command is the recruiting headquarters for each service, with subordinate commands between the headquarters level and recruiting stations or substations where frontline recruiters work to reach out to prospective applicants and communicate to them the benefits of joining the military. Since 2006, most of the service components have been able to achieve their recruiting goals, and all service components met their recruiting goals in fiscal years 2008 and 2009. (See table 2 for accession goals and achievements from fiscal year 2006 through fiscal year 2009.) Service component officials and recruiters alike have attributed the high rate of recruiting success to the conditions of the economy and the services’ competitive advantage over the civilian job market, particularly given the rising unemployment rate. DOD found that more youth are willing to consider military service during periods of high unemployment. Recruiters reported, however, that while they have seen an increase in the number of individuals interested in military service, many of them do not meet the military’s qualification requirements. DOD estimated that approximately 7 out of 10 youth ages 17 to 24 do not meet the military’s entrance standards for reasons including medical conditions, prior criminal records, and existence of young dependents. Even in this favorable recruiting environment, irregularities can occur and checks have been built into the enlistment process that may help minimize recruiter irregularities. These checks begin with the initial prescreening of the applicant conducted by the recruiter and involve a background review, an initial determination of physical eligibility, and a review of education credentials. After the initial prescreening, the military pays the applicant to travel to 1 of the 65 military entrance processing stations (MEPS) located throughout the country. Each MEPS station is staffed with military and civilian personnel, including liaisons representing each service component and MEPS staff who are responsible for quality control checks that are designed to prevent anyone not qualified for their service component from entering. Upon arrival at the MEPS, applicants meet with their service component’s liaison who reviews their qualifications. Applicants are also administered the Armed Services Vocational Aptitude Battery (ASVAB) that determines the applicant’s qualifications for enlistment and for a specific military job. In addition, a MEPS doctor conducts a medical examination to determine whether the applicant meets the physical entrance standards. When the applicant has met the qualifications for military enlistment, the applicant signs an enlistment contract and is sworn into the service before entering into the delayed entry program. In this program, applicants become members of the Individual Ready Reserve in an unpaid status until they receive orders to report for basic training. Prior to shipping to basic training, the applicant must return to the MEPS to undergo a brief physical examination that ascertains that the applicant continues to meet the physical fitness standards for entering the military. Upon successful completion of this final exam, the applicant is sworn into the military and shipped to basic training. Figure 2 illustrates the steps in the enlistment process. From fiscal year 2006 through fiscal year 2008, the total number of substantiated cases of recruiter irregularities across the service components comprised a small percentage of overall accessions. As table 3 shows, the total number of substantiated cases of recruiter irregularities comprised less than 0.4 percent of accessions in every service component during this period. For example, there were 321 substantiated recruiter irregularity cases in the Army in fiscal year 2006, comprising 0.28 percent of the Army’s accessions. From fiscal year 2006 through fiscal year 2008, less than 25 percent of the total reported cases of recruiter irregularities were found to be substantiated, as shown in table 4. However, the proportion of recruiter irregularities reported during that period that were found to be substantiated varied—both among the service components and within individual service components. For example, of the cases of recruiter irregularities reported in the Army during fiscal year 2008, 15 percent were found to be substantiated by commanders based on a review of the facts of an investigation; during the same period, 71 percent of the Air Force’s reported cases were substantiated. From fiscal year 2006 through fiscal year 2008, recruiter irregularities involving concealment or falsification, such as when a recruiter omitted information concerning prior criminal violations in an applicant’s application packet, constituted the most commonly reported type of recruiter irregularity by all service components except the Air Force Reserve. For the Air Force Reserve, quality control measures, such as a recruiter failing to obtain parental signatures on an applicant’s application form, were the most common type of recruiter irregularity reported. The second most commonly reported type of recruiter irregularity varied among the service components. For example, in fiscal year 2008, it involved quality control measures in the Army, while during the same fiscal year, it involved sexual misconduct in the Marine Corps. (See table 5 for the types of recruiter irregularities most commonly reported by the service components in fiscal year 2008.) Our review of the service components’ case files of recruiter irregularities reported in fiscal year 2008 identified examples of recruiter irregularities illustrating each of the eight recruiter irregularity categories established in OSD’s memorandum. As the examples in table 6 show, recruiters across the service components committed a range of recruiter irregularities, from administrative or paperwork errors to inappropriate relationships with applicants or recruits. (Additional examples can be found in appendix II.) From fiscal year 2006 through fiscal year 2008, all service components took actions against recruiters who committed irregularities, but the service components varied in the types of actions that they most commonly took against these recruiters during these fiscal years. For example, as can be seen in table 7, in fiscal year 2008, the most common type of action taken by the Army involved adverse administrative action, such as placing a letter of reprimand in the recruiter’s permanent personnel file, while the most common type of action taken in the Marine Corps involved removal from recruiting. The OSD memorandum provides the service components with specific categories to use when reporting on the status of cases, including categories for cases in which action has been taken, cases that are still ongoing, and cases that were determined to be unsubstantiated. Our review of the service components’ case files of recruiter irregularities reported in fiscal year 2008 identified examples illustrating each of OSD’s reporting categories. As can be seen in table 8, the service components sometimes take different actions against recruiters who committed similar types of recruiter irregularities. For instance, an Air Force recruiter was court-martialed for fraternizing with an applicant, while a Navy recruiter received an Article 15 Non-Judicial Punishment for a similar type of offense. (Additional examples can be found in appendix III.) For all service components, the determination of the action to apply in cases of recruiter irregularities is vested with the recruiting unit, and the commanders of the responsible recruiting units take a variety of factors into consideration when deciding on the actions to take against recruiters who commit irregularities. Several service component officials we interviewed reported that these commanders generally decide on the appropriate action to take against a recruiter on a case-by-case basis. For example, a Marine Corps Recruiting Command official told us that the commanders who are ultimately responsible for taking action against a recruiter can take into account how a particular action will affect a recruiter’s family before deciding upon the appropriate level of action. This can lead to different actions taken in cases that fall into similar recruiter irregularity categories. While the Army National Guard States and Territories follow states’ and territories’ laws and guidance that govern how actions are applied, our review of selected recruiter irregularity case files from the Army National Guard also showed that the actions taken against recruiters who committed irregularities varied among States. For example, we found that different actions were taken against the recruiters from different States who engaged in irregularities falling into the sexual misconduct category, ranging from non-adverse administrative action to removal from service. A recruiter in one State who admitted to a sexual relationship with an applicant received non-adverse administrative action, which included counseling, a 12-month suspended reduction in rank, and a 12-month suspension from favorable personnel actions, such as the ability to be promoted, be reassigned, or receive awards or bonuses. However, a recruiter in another State who provided alcohol to and engaged in a sexual relationship with an applicant was removed from service. In the view of the recruiting command officials and recruiters with whom we spoke, the actions taken against recruiters who committed irregularities have generally been fair and sufficiently strict to act as deterrents against future recruiter irregularities. Further, they said that the ongoing training that recruiters receive includes examples of the actions taken against other recruiters who committed irregularities, thereby reinforcing the seriousness of committing a recruiter irregularity. For example, an Air Force recruiter told us that he realizes that he stands to receive strict punishment, such as a reduction in rank or removal from the Air Force, if he commits a recruiter irregularity. All of the service components have developed guidance on recruiter irregularities and have instituted procedures for reporting allegations of recruiter irregularities, conducting an investigation, and adjudicating cases. Some service components have guidance specifically focused on recruiter irregularities. For example, the U.S. Army Recruiting Command developed a regulation that specifically focuses on recruiter irregularities—Regulation 601-45, Recruiting Improprieties Policies and Procedures—which covers the definitions of recruiter irregularities, the process of reporting irregularities up the chain of command, and the investigation and adjudication of recruiter irregularity cases. Other service components, such as the Marine Corps, address recruiter irregularities within their existing framework of recruiting guidance. For example, the Marine Corps uses Marine Corps Order 1130.65A, Total Force Recruiting Quality Control, which covers recruiting in general, but includes provisions that apply to the reporting of recruiter irregularities and the actions that should be taken against recruiters who commit irregularities. The Army National Guard Strength Maintenance Division and the Air National Guard Recruiting and Retention Service within the National Guard Bureau have also issued guidance providing the Army and Air National Guards of the 54 States and Territories with a broad framework for addressing recruiter irregularities. This guidance supplements laws and guidance that the Army National Guard and Air National Guard from each State and Territory follow. However, the implementation of National Guard Bureau guidance is at the discretion of the individual States and Territories. State National Guard recruiters typically operate under Title 32 of the U.S. Code through which they are federally funded but under state control. Therefore, State National Guard recruiters are subject to state laws and guidance unlike active duty recruiters operating under Title 10 of the U.S. Code who are subject to the Uniform Code of Military Justice and service component guidance in the event they commit a recruiter irregularity. The Secretary of Defense issued a model code of military justice to recommend to the states for use with respect to the National Guard when not in federal service. According to an official within the Office of the Chief Counsel within the National Guard Bureau, many states have partially adopted this model military code while others have not adopted it at all. The service components have similar procedures for identifying, investigating, and adjudicating recruiter irregularities. As figure 3 shows, recruiter irregularity allegations can be brought to light through a variety of sources, such as complaints submitted through congressional representatives, service component hotlines, and recruiting staff reporting on the suspicious behavior of a fellow recruiter. Once an allegation is brought to the attention of the service component, all service components follow several steps, including the appointment of the investigating officer, the investigation process, and the review of the report produced by the investigating officer. The investigation report and the recommendations therein are used by the appropriate unit commander to determine whether the allegation can be substantiated. When it is determined that an allegation is substantiated, the commander also determines the appropriate action and provides the recruiter with the opportunity to present additional information and appeal the decision. The service components’ recruiting command headquarters are notified of all final decisions in recruiter irregularity cases. Although the procedures for investigating and adjudicating cases of recruiter irregularities are generally similar across the service components, some differences exist. For example, the Army and the Air Force require that all recruiter irregularity investigations undergo a legal review—a review of the investigation report findings by the service component’s Judge Advocate’s office—while the Navy, Marine Corps, and Air Force Reserve do not have such a requirement. Service component officials we interviewed generally agreed that the existing service component guidance on recruiter irregularities is sufficient and informs those involved on how to handle recruiter irregularities that come to light. Further, recruiters we interviewed generally agreed that service component guidance they receive on recruiter irregularities is sufficient and that they know how to report any cases of recruiter irregularities that they may come across. The service components have instituted a number of quality control checks to help identify recruiter irregularities, including the use of a hotline for individuals to report recruiter irregularities, periodic inspections of recruiting stations, and opportunities for recruits to reveal any potential recruiter irregularities committed by their recruiter during the enlistment process. The service components use the following mechanisms to ensure that recruiters are abiding by recruiting standards and verify the accuracy of information in applicant packets: Hotline. Most service components make telephone numbers available to applicants and parents for reporting any suspected cases of recruiter irregularities by posting a notice in recruiting stations with a hotline listed or providing a card to applicants with the service component’s hotline number listed. For example, Navy recruiters provide applicants with hotline cards that list recruiter and applicant rights, activities that recruiters are prohibited from doing, and a hotline number that applicants can call to report any alleged recruiter irregularities to the Navy Recruiting Command Inspector General’s office. Periodic inspections. All of the service components conduct periodic inspections and command visits to recruiting stations. For example, the Marine Corps Recruiting Command’s inspection program includes monthly visits and annual inspections by recruiting station commanders of the recruiting substations for which they are responsible. While these inspections do not focus specifically on identifying recruiter irregularities, recruiting command officials told us that some recruiter irregularities are identified in the course of the inspections process. Opportunities to reveal irregularities. All of the service components provide recruits with an opportunity to disclose any information about themselves that could disqualify them from enlistment, such as medical issues or criminal history, and also allow applicants to bring up any inappropriate behavior displayed by their recruiter, such as a recruiter telling an applicant to conceal a medical problem in order to facilitate the enlistment process. Officials we interviewed generally agreed that such opportunities for disclosure, commonly known as a “moment of truth,” provide a powerful tool for identifying recruiter irregularities. All of the service components have programs in place to help prevent recruiter irregularities, including recruiter screening programs and recruiter training. In addition, the Army and Army National Guard have established policies requiring more than one person to be present when a recruiter interacts with an applicant of the opposite gender. Screening programs. All service components have recruiter screening programs to screen their recruiter candidates. For example, the Air Force Recruiting Service’s screening program includes face-to-face interviews with recruiter candidates, reviews of the candidates’ history of meeting physical standards, reviews of performance reports from the previous 3 years, and a credit check. Recruiting command officials acknowledged that recruiting is a stressful job and said that the rigorous screening of individuals interested in becoming recruiters helps ensure that only those individuals who are most qualified; are sufficiently motivated; have a high level of integrity; and are not burdened by additional external stressors, such as financial debt or ongoing divorce proceedings, are selected to receive training at the recruiter schools. Recruiting command officials also stated that these programs help screen out individuals who may be more susceptible to committing recruiter irregularities. Recruiter training. Once individuals are selected to become recruiters, they are required to attend the service component’s or the National Guard’s recruiter school, as appropriate, for initial recruiter training. The service components’ recruiting school officials and recruiters interviewed said that topics on ethical behavior, prohibited practices, fraternization, and sexual harassment are covered during the initial training. Additionally, they said that instructors share examples of actual recruiter irregularities with the new recruiters in order to inform them of situations to avoid. After graduating from the service component’s recruiter school, recruiters receive ongoing training, covering topics such as sexual harassment and the reporting of suspected recruiter irregularities. For example, the Marine Corps Recruiting Command developed a new course that all recruiters are required to take annually, covering ethical and unethical behavior and case studies of actual recruiter irregularity cases. Officials stated that the course, once implemented, will help recruiters identify situations that can lead to recruiter irregularities and ways they can avoid those situations. Service component officials and recruiters we interviewed generally agreed that existing training on recruiter irregularities is sufficient to help prevent future recruiter irregularities. “Buddy” or “no one alone” policies. The Army has implemented a policy requiring that whenever a recruiter comes in contact with a prospect, applicant, or future soldier of the opposite gender, at least one other qualifying person of any gender be present. Also, according to the Chief of the Army National Guard Strength Maintenance Division, the Army National Guard in 26 states have implemented the same policy. Since we reported in our prior work that the service components’ recruiting commands did not have oversight over recruiter irregularities, the service components have improved oversight. In our prior work, we reported that the service components had limited oversight over recruiter irregularities because multiple data systems for collecting and tracking recruiter irregularity data were being used. Because these systems were not integrated, the service components did not have oversight over all recruiter irregularities. Since then, the service components have made progress in establishing systems that have allowed for more consistent tracking and reporting of the recruiter irregularity data. We found that local recruiting units responsible for gathering and tracking recruiter irregularity data have systems and processes in place for passing the data up the chain of command to the service components’ recruiting command headquarters on a regular basis. Each service component’s recruiting command has an office at the headquarters level that is responsible for entering the data received from the local recruiting units into the service components’ database or spreadsheet and consolidating and reporting these data to OSD on a semiannual basis. Although the reporting process is generally similar across the service components, some differences exist, as shown in figure 4. For example, most of the service components have only one recruiting command office in place that is responsible for gathering and tracking recruiter irregularity data; however, the U.S. Army Recruiting Command has two offices that are responsible for gathering and tracking recruiter irregularities—the Recruiting Standards Division and the Staff Judge Advocate’s office. The Recruiting Standards Division provides its consolidated recruiter irregularity data to the Staff Judge Advocate’s office, which then consolidates the data from both offices for the purpose of reporting to OSD. In addition, while the local recruiting units provide recruiter irregularity updates to the recruiting command on a daily basis in the Army and on a weekly basis in the Air Force, they do so on a monthly basis in the other service components. Some of the service components are continuing to refine their systems for tracking and reporting recruiter irregularity data. For example, the Navy is in the process of procuring a new data system that will allow for functions such as trend analysis and advanced querying of recruiter irregularity data. In addition, the Air Force Reserve has recently updated its instruction to require recruiting personnel to report all actual or suspected recruiter irregularities to their senior recruiter and to inform the Air Force Reserve Command Recruiting Service Inspector General of all allegations. While all service components regularly provide recruiter irregularity data to the recruiting command headquarters, with the exception of the Air Force, they do not regularly make recruiter irregularity data available to all levels of command. This is because most of the service components do not have procedures in place to disseminate recruiter irregularity data to the commanders at levels below the recruiting headquarters. In contrast, the Air Force Recruiting Service shares recruiter irregularity data with leadership at all levels of command within the Air Force Recruiting Service and all recruiting staff through monthly and quarterly reports and newsletters. These reports contain information on the circumstances of the recruiter irregularity committed and the actions taken against the recruiter. Air Force officials we interviewed explained that making this information available to personnel at all levels within the Air Force Recruiting Service provides commanders with examples of how others are addressing recruiter irregularities, promotes consistent application of actions in substantiated cases of recruiter irregularities across the Air Force, and serves as a deterrent to committing recruiter irregularities. Air Force recruiters we interviewed also generally agreed that the recruiter irregularity reports shared by the recruiting command have a strong deterring effect because everyone knows what will happen if they commit an irregularity. In order to make improvements and promote knowledge sharing, leaders at all levels of an organization need to receive information on a regular basis about the problems that may be occurring across the organization. Although the other service components have some efforts in place to communicate and share limited information on recruiter irregularities that occur within their service component, information on the range of recruiter irregularities occurring is not included or consistently shared with all levels within the recruiting command. For example, according to recruiting command officials, the U.S. Army Recruiting Command holds a quarterly meeting for headquarters officials, including the Commanding General and representatives from the Staff Judge Advocate’s office, the Recruiting Standards Division, and the Inspector General’s office to review and discuss trends in recruiter irregularities across the recruiting command and determine if there is a need for additional training or changes in policies to address any issues found. We also found that all service components, at a minimum, occasionally share examples of serious recruiter irregularities that have occurred or have been showcased by the media as part of the continuous training provided to recruiters on recruiter irregularity issues. However, without processes that allow for the regular flow of recruiter irregularity data from the headquarters to all command levels, commanders may not be able to take full advantage of servicewide recruiter irregularity data that would enable them to improve their operations. Further, commanders may not be able to seize opportunities to learn from their peers about shared experiences on handling recruiter irregularities. In December 2006, OSD issued the memorandum regarding the tracking and reporting of recruiter irregularities by the service components. The issuance of the memorandum constituted OSD’s response to our 2006 recommendation for OSD to establish an oversight framework to assess recruiter irregularities, including criteria and common definitions across the service components. Such oversight is needed for OSD to have the tools for assessing and evaluating recruiting programs to assure itself that program objectives are being met—consistent with good management practices outlined in federal internal control standards. The memorandum defined recruiter irregularities, established specific categories for classifying irregularities and dispositions, and included a reporting template for the service components to use when providing recruiter irregularity data to OSD on a semiannual basis—in January and July of each year. OSD involved the service components in the development of the memorandum by convening a meeting of representatives from each of the service components to obtain their input on this guidance, including input on the proposed terminology and the reporting categories. OSD officials said that the issuance of the memorandum was important to their oversight over recruiter irregularities because it enabled them to monitor recruiter irregularities across the service components over time. Recruiting command officials we contacted reported familiarity with the memorandum, and the service components have been providing recruiter irregularity data to OSD semiannually, as required. Recruiting command officials we interviewed reported using the definitions in the memorandum when submitting their recruiter irregularity data to OSD. In our review of the service components’ data compiled by OSD, we found that since the memorandum was issued, all of the service components have been submitting semiannual reports following the memorandum’s reporting format. Recruiting command officials we interviewed also reported updating data submitted to OSD to reflect recently closed cases in accordance with the requirements set forth in the memorandum. In addition to obtaining and reviewing the recruiter irregularity data submitted by the service components, OSD contracted with RAND to conduct an analysis of recruiter irregularities across the service components. Among the issues that RAND is examining are the effects of recruiter irregularities on military readiness, public perceptions of the military, and the effect that factors, such as deployment history and recruiter incentives, have on the occurrence of recruiter irregularities. RAND is expected to produce its report in February 2010. OSD officials said that once they obtain the results of both RAND’s and GAO’s reviews, they will convene another meeting of stakeholders from each of the service components to discuss recruiter irregularity issues, including the service components’ experiences with reporting data on recruiter irregularities. Following this meeting, OSD officials stated that a DOD instruction for the reporting of recruiter irregularity data will be issued. OSD also provides several opportunities for the sharing of information on recruiter irregularities. For example, MEPCOM holds an annual Commanders’ Conference for representatives from the service components to discuss a variety of issues, including recruiter irregularity issues. Another example is the annual Leadership Conference, which brings together recruiting command officials to discuss various recruiting- related issues. Although OSD officials explained that recruiter irregularities is not the only topic addressed at these events and not every conference or meeting will have recruiter irregularities on the agenda, these events provide opportunities for officials from the service components to share their experiences in addressing recruiter irregularities. Some recruiting command officials said that they would like additional information on what others are doing with respect to recruiter irregularities. For example, Navy officials said that they would like OSD to share lessons learned in addressing recruiter irregularities among the service components, and Air Force officials also said that it would help if OSD regularly provided the service components with DOD-wide recruiter irregularity data to enable them to see if the other service components are experiencing similar problems. Although issuing the memorandum was an important first step in providing effective oversight over recruiter irregularities and establishing the means for assessing OSD’s programs related to recruiter irregularities, OSD still lacks complete oversight over the recruiter irregularities that are occurring because of inconsistencies in what is reported to OSD and how reports are prepared. We found that the inconsistencies in reporting were the result of differences in how the service components interpreted the requirements in the memorandum, interpreted the reporting categories in the memorandum, and reported cases involving more than one type of irregularity or disposition. Without more clarity, the service components may not be reporting the recruiter irregularity data in the same manner, precluding meaningful comparisons among them. We found that the service components and the National Guard states do not all interpret the requirements of the memorandum in the same manner; specifically, some recruiting officials were uncertain about the types of issues involving recruiters to include in the reporting. For example, while the majority of the service components reported only on irregularities committed by a recruiter when dealing with an applicant or a recruit, the Air Force Reserve, the Air National Guard States, and five out of seven Army National Guard States whose files we reviewed reported on all cases of recruiter irregularities, including cases in which no applicant or recruit was involved. Examples of these cases included recruiters committing offenses such as adultery with a non-applicant, inappropriate relationship with other military personnel, use of a government vehicle for personal benefit, or submission of fraudulent receipts for travel. OSD officials said that the memorandum is clear on the need to report only those recruiter irregularities in which an applicant is involved and the memorandum defines recruiter irregularities as those willful and unwillful acts of omission and improprieties that are perpetrated or alleged to be perpetrated by a recruiter to facilitate the recruiting process for an applicant. However, in some of our interviews with recruiting command officials, we found that they were not clear about the need to report only irregularities in which an applicant or a new recruit was involved. Some officials explained that they included all cases of recruiter irregularities because they wanted to be as transparent as possible in reporting every case of a recruiter irregularity to OSD. In addition, we identified at least one instance in which a state Air National Guard unit was not reporting any recruiter irregularity cases that were unsubstantiated, even though the memorandum specifically includes a category for unsubstantiated cases. In our discussions with officials in that location, they explained that they did not believe that those cases should be reported to anyone at the National Guard Bureau, and that it would help if OSD, through the National Guard Bureau, provided clear guidance to the States and Territories on the reporting of unsubstantiated cases. We also found that the reporting categories in the memorandum were seen as too broad and that the service components did not interpret these categories in the same manner. First, some recruiting officials said that the reporting categories in the memorandum are too broad to provide them with a clear picture of the types of recruiter irregularities that are occurring. For example, officials at the Recruiting Standards Division of the U.S. Army Recruiting Command and officials at the Navy Recruiting Command said that while they use the memorandum’s categories for reporting to OSD, they continue to rely on their own internal reporting categories. The Recruiting Standards Division has 12 categories and the Navy has more than 20 categories that are used internally to provide a picture of the recruiter irregularities that are occurring within their service components. For example, while the memorandum has a single category for all types of concealment or falsification, the Recruiting Standards Division distinguishes among the specific types of information concealed, such as medical information, prior police records, information on dependents, or history of prior service. Likewise, while the memorandum’s categories do not specifically address cases where the recruiter did not obtain appropriate parental consent for applicants under the age of 18, the Navy has a specific category for parental consent issues. Second, officials associated with the service components that continue to use their internal reporting categories acknowledged that decisions on how to place cases into one of the eight reporting categories as required by the memorandum can be subjective. For example, Navy officials told us that it is generally up to the individual who compiles the service component’s data for OSD to decide how cases should be transferred from the Navy categories into the broader categories outlined in the memorandum. Furthermore, an official with the Inspector General’s office of the Navy Recruiting Command told us that the office’s staff found the definitions and the reporting categories in the memorandum confusing and that the Navy’s interpretation of these categories would likely differ from that of the other service components. Some recruiting officials said that the memorandum also lacks clarity on how to report cases involving more than one type of irregularity or more than one type of disposition. OSD officials said that they expect the service components to report the more serious recruiter irregularity category when more than one category applies, and although we found that the service components generally did that, this was not clearly communicated in the memorandum. For example, Army and Air Force officials said that while they would handle such situations by reporting the most egregious type in cases involving more than one type of recruiter irregularity committed by the same recruiter, they have not received guidance from OSD on this. Additionally, such determinations will likely be made subjectively. For example, reasonable officials may differ in their opinion on whether falsification of documents is a more or less egregious case of a recruiter irregularity than a false promise made to an applicant. Similarly, some recruiting officials reported lack of clarity on how to report cases involving more than one type of disposition. OSD officials told us they expect the service components to report the final disposition of a case. However, several recruiting officials said that this has not been clearly communicated to them. For example, officials from one of the Marine Corps recruiting districts that we visited said that the memorandum is not clear on the reporting of cases where more then one type of disposition applies, such as a recruiter first receiving punishment under Article 15 of the Uniform Code of Military Justice and then being removed from recruiting. Several recruiting officials responsible for reporting said that they are reporting preliminary actions against the recruiter even if the data would later need to be changed once the final action in the case is determined. For example, a Marine Corps recruiting official and an official with the U.S. Army Recruiting Command’s Staff Judge Advocate Office explained that they would report the preliminary actions at the time of required reporting. In fact, two Army case files that we reviewed showed that while the cases were ultimately found to be unsubstantiated, they were initially reported to OSD as having resulted in non-adverse administrative action because recruiters were temporarily suspended from recruiting while charges of inappropriate sexual relationship and sexual assault against them were investigated. on However, other service components may not be approaching this situati in the same manner. For example, Air Force recruiting officials told us thatthey only report the final disposition to OSD and not the preliminary actions. The memorandum does not explicitly address how such situations should be hand led in reporting. OSD officials acknowledged that the service components may have questions related to reporting, particularly given the relative newness of the memorandum. OSD officials told us that after the memorandum was issued in December 2006, their plan was to monitor the service components’ experiences with reporting and issue a DOD instruction that would incorporate the guidance in the memorandum and clarify any reporting issues that the service components might be experiencing. However, 3 years after its issuance, the memorandum has not been turned into a DOD instruction for the service components to follow when reporting to OSD. At the time of this reporting, OSD officials told us that they plan to wait for the issuance of this report and the RAND study before issuing the instruction. However, the continuing absence of definitive guidance may result in poor data quality that would prevent OSD from having complete and consistent information on recruiter irregularities across the service components and the National Guard and compromise its ability to maintain appropriate oversight over this important issue. OSD does not receive complete information from the National Guard. The memorandum applies to all service components, including the Army and Air National Guards. Officials with the Army National Guard Strength Maintenance Division and Air National Guard Recruiting and Retention Service told us that following the issuance of the memorandum, they began to request recruiter irregularity data from all States and Territories, and provided them with the definitions and the reporting template from the memorandum. The data from individual States and Territories are then aggregated by the Army and Air National Guard officials and forwarded to OSD. However, not all States and Territories in the Army National Guard report their recruiter irregularity data. As seen in figure 5, our review of the recruiter irregularity data that the Army National Guard States and Territories provided to the Army National Guard Strength Maintenance Division in January 2009 showed that 18 of the 54 States and Territories did not provide the data for fiscal year 2008. During the July 2009 reporting cycle, 16 of the 54 States and Territories did not report their recruiter irregularity data. Of the 38 that reported data, the reporting period identified by the States and Territories on their reports varied from State to State. For example, some reports submitted in August 2009 covered the first 3 quarters of fiscal year 2009, others covered only the 2nd and 3rd quarter of fiscal year 2009, and others only covered the 3rd quarter of fiscal year 2009. Moreover, two reports were not labeled, making it unclear what reporting period they covered. Army National Guard officials acknowledged problems with State reporting, but said that although they provide guidance based on the memorandum to the States and Territories, they rely on them to submit their data in accordance with that guidance. OSD also lacks a complete picture of the total number of recruiter irregularities occurring in the Air National Guard because of concerns regarding the quality of the data. Although, according to the Air National Guard, all States and Territories report their recruiter irregularity data, OSD has raised questions about the quality of the Air National Guard data. For example, when the Air National Guard initially reported zero irregularities for both fiscal years 2007 and 2008, OSD officials expr doubts about the absence of even a single allegation of a recruiter irregularity in the Air National Guard, particularly given that the rep should include not only substantiated cases but also those tha ultimately found to be unsubstantiated. Following electronic communication from OSD regarding this issue, the Air National G reported two cases of recruiter irregularities for fiscal year 2008. Moreover, Air National Guard officials have not maintained supporting documentation for the information reported by each State and Territo For example, one Territory did not submit a report (either by mail or electronically) during the January 2009 reporting cycle. An Air National Guard official at the Air National Guard Recruiting and Retention Service told us that this Territory reported having no recruiter irregularitie telephone conversation with his office, but documentation of this conversation does not exist. The absence of such documentation raises questions about the accuracy and completeness of the data t hat the Air National Guard Recruiting and Retention Service receives. ry. Both Army and Air National Guard officials told us that although they follow up with the States and Territories, they cannot force them to comply. Officials said that they follow up with States and Territories via e- mail or telephone if the reports appear to contain obvious mistakes, su ch as the totals not adding up to the numbers reported in each individual reporting category. They also follow up if no reports have been sub However, they said that it is ultimately up to individual States and Territories to submit their reports because the National Guard Bureau no command and control authority over them. Specifically, while the National Guard Bureau personnel operate under Title 10 of the U.S. Cod the National Guard personnel at the state level typically operate under Title 32. Consequently, even though the National Guard Bureau ca States and Territories to submit their recruiter irregularity data in accordance with the memorandum, officials told us tha mechanism to force States and Territories to comply. mitted. While the National Guard Bureau cannot force States and Territories to comply with the reporting requirements in the memorandum, it has not been transparent with respect to the total numbers reported to OSD, thus ities preventing OSD from having a complete picture of recruiter irregular that occur in the National Guard. The Army and Air National Guar officials aggregate the data that they receive from the States and Territories and report the total numbers to OSD. However, no infor is provided on how many States or Territories did not submit their recruiter irregularity reports or whether any of these reports failed to mation cover the full reporting period. OSD officials acknowledged that the Army National Guard Strength Maintenance Division and the Air National Guard Recruiting and Retention Service within the National Guard Bureau obta in recruiter irregularity data from the States and Territories and that each State and Territory maintains its own processes for collecting these da However, while aware of this, OSD does not request that the National Guard officials provide caveats or any other explanatory notes on the limitations of the recruiter irregularity data when submitting these OSD. Consequently, OSD’s own reports summarizing the recruiter irregularity data received from the service components and the National Guard do not disclose any limitations of the data on which they are based. ta. Recruiters work in a challenging environment and play a critical role in providing the military services with qualified men and women prepared to serve their country. Although instances of recruiter wrongdoing are infrequent, even a single case can undermine the trust that the American public has in its military. The service components recognize this realit and all have made substantial progress since 2006 in increasing their oversight over recruiter irregularities. In particular, all service components have established procedures for reporting cases of recruiter irregularities up the chain of command. While these systems assure that their recruiting command headquarters receive regular reports on recruiter irregularities, the Air Force is unique in sharing recruiter irregularity data regular ly with all of the different levels of command to provide opportunities for commanders at all levels to compare their progress in addressing re irregularities with the other recruiting units and to learn from their experiences. The Army, Navy, and Marine Corps could benefit from doing likewise. OSD has also taken steps to increase its oversight over recruiterirregularities occurring across the service components by implementing semiannual reporting requirements and establishing common definitions for the service components to use. While these are important first step order for the reporting requirements to have a meaningful effect, it is critical that the services fully understand them and uniformly report accurate data. Without OSD monitoring and promptly addressing proble that the service components may experience with respect to reporting their recruiter irregularity data, the quality of the data received by OSD from the service components could be compromised. Furthermore, OSD’s ability to rely on the data provided will be significantly diminished if OSD does not receive complete information on which National Guard States and Territories submit the data and how complete their data are. While the National Guard Bureau cannot force States and Territories to comply withthe reporting requirements, at the very least it must be transparent a the completeness of the data that it provides to OSD. Without such bout transparency from the National Guard Bureau, OSD will not be able t meaningfully analyze recruiter irregularity trends across the service components and identify areas where corrective action may be needed. mend that the Secretary of Defense take the following four 1. direct the Secretaries of the Army and Navy to identify mechanisms the regular sharing of the levels of command, and recruiter irregularity data throughout all irect the Under Secretary of Defense for Personnel and Readiness to: complete and issue the instruction on tracking and reporting data recruiter irregularities to clarify the requirements for the types of recruiter irregularities to be reported and the placement of rec irregularity cases and actions taken into reporting categories; direct the relevant offices within the National Guard Bureau to adjust their reporting procedures in ways that will provide transpa data reported to OSD and any limitations on the data; and include the appropriate disclosures concerning data limitations in th recruiter irregularity reports that OSD produces on the basis of the National Guard data for the Congress and others. In written comments on a draft of the report, DOD concurred with each o our four recommendations. Specifically, DOD stated that it will address these recommendations through a DOD instruction that it plans to publis Regarding our recommendation that the Secretary of Defense direct the Secretaries of the Army and the Navy to identify mechanisms for the regular sharing of recruiter irregularity data throughout all levels of command, DOD stated that the sharing of these data already occurs, and that the Army and the Navy have clarified their reporting processes. We h. agree that the service components have made progress in establishing systems that have allowed for more consistent tracking and reporting of the recruiter irregularity data, and our report highlighted instances of such data being shared within the service components. However, we cont to believe that in order for commanders to continually evaluate and improve their recruiting operations, processes must be in place for the regular flow of such information. DOD said that its soon-to-be-pub instruction will require the service components to formalize their processes for disseminating the recruiter irregularity data to the appropriate levels of command. We believe that these formal processes will constitute an important step in ensuring that recruiter irregularity information is shared in a consistent and timely manner. DOD also agreed lished with our recommendations that the Secretary of Defense direct the Und Secretary of Defense for Personnel and Readiness to (1) complete and issue the instruction on tracking and reporting recruiter irregularity dat that clarifies the reporting requirements, (2) direct the relevant offices within the National Guard Bureau to adjust their reporting procedures in order to provide greater transparency in the data reported, and (3) in the appropriate disclosures concerning any limitations in the data it receives. DOD said that it decided to wait to issue the instruction until this GAO study is complete, in order to incorporate our recommendatio ns, and that it plans to publish the instruction during fiscal year 2010 after reconvening representatives from the service components to discuss t reporting processes and procedures for the tracking and reporting of recruiter irreg appendix IV. ularity data. DOD’s comments in their entirety appear in We are sending copies of this report to interested congressional committees; the Secretaries of Defense, the Army, the Navy, and the A Force; and the Commandant of the Marine Corps. This report will be available at no charge on GAO’s Web site at http://www.gao.gov. If you or your staff have any questions about this report, please contact m at (202) 512-3604 or by e-mail at [email protected]. Contact points for our Offices of Congressional Relations and Public Affairs may be found on th last page of this report. GAO staff who made major contributions to the report are listed in appendix V. For this review, we analyzed recruiter irregularities across all of the service components: the Army and Army Reserve, the Navy and Navy Reserve, the Marine Corps and Marine Corps Reserve, and the Air Force and Air Force Reserve. In addition, we analyzed recruiter irregularities in the Army National Guard and the Air National Guard. For the purposes of this review, the term recruiter irregularity is defined according to the memorandum issued by the Office of the Secretary of Defense (OSD) as those willful and unwillful acts of omission and improprieties that are perpetrated by a recruiter or alleged to be perpetrated by a recruiter to facilitate the recruiting process for an applicant. To conduct our work, we examined relevant guidance issued by OSD, the service components, the Army National Guard, and the Air National Guard; reviewed and analyzed data on recruiter irregularities reported by the service components to OSD from fiscal year 2006 through fiscal year 2009; and reviewed reports issued by GAO and the Department of Defense (DOD) related to recruiting and recruiter irregularities, including surveys conducted by DOD on recruiters’ quality of life across the service components. In addition, we conducted a case file review of all substantiated cases of recruiter irregularities reported by the service components for fiscal year 2008, and a case file review of all substantiated cases of recruiter irregularities reported by seven States on recruiter irregularities committed by recruiters in the Army National Guard for fiscal year 2008. We interviewed OSD officials in the Washington, D.C. metropolitan area and conducted site visits to service components’ recruiting commands and the Military Entrance Processing Command (MEPCOM) to interview recruiting command officials and recruiters from all the service components. We selected our interviews with 24 recruiters using a nonprobability convenience sample to accommodate our 10 site visits. In the course of our work, we contacted or visited the organizations and offices listed in table 9. To assess the number and types of recruiter irregularities occurring in the service components, we obtained and reviewed recruiter irregularity data reported by the service components to OSD from fiscal year 2006 through fiscal year 2009, and the service components’ accessions data for the same time period. We were unable to present trends in recruiter irregularities from fiscal year 2006 through fiscal year 2009 and decided not to present data for fiscal year 2009 because (1) the memorandum issued by OSD in December 2006 required the service components to retroactively collect recruiter irregularity data for fiscal year 2006 to report to OSD, which may have resulted in the fiscal year 2006 data being less complete than the data in subsequent fiscal years and (2) recruiter irregularity data reported by the service components for fiscal year 2009 do not include data from the fourth quarter of the fiscal year, which will not be reported until January 2010. We interviewed officials within the Army National Guard Strength Maintenance Division and the Air National Guard Recruiting and Retention Service about their data system for tracking and maintaining recruiter irregularity data and determined that these data were not reliable. Specifically, we were unable to present data on recruiter irregularities reported by the National Guard because recruiter irregularity data are maintained at the state level of command and we did not review each state’s processes and procedures for collecting and maintaining these data. Furthermore, while some States and Territories reported their recruiter irregularity data to the Army National Guard Strength Maintenance Division and the Air National Guard Recruiting and Retention Service within the National Guard Bureau in accordance with the memorandum, others did not consistently report their data or did not report them at all. In addition, we assessed the reliability of each service component’s recruiter irregularity data system, including the systems’ ability to track and maintain recruiter irregularities. For each service component, we also interviewed personnel responsible for maintaining and overseeing these data systems. Additionally, we assessed the quality control measures in place to ensure that the data are reliable for reporting purposes. We found the recruiter irregularity data reported by the service components to be sufficiently reliable for the purposes of this review. To provide illustrative examples of the types of recruiter irregularities that occur across the service components and the actions taken against recruiters involved in recruiter irregularities, we conducted a case file review of all substantiated cases of recruiter irregularities reported by each of the service components and closed in fiscal year 2008. We reviewed a total of 346 case files for all the service components: Air Force (16), Air Force Reserve (7), Army (138), Army National Guard (53), Marine Corps (69), and Navy (63). The number of case files that we reviewed for fiscal year 2008 did not always reflect the total number of cases reported to OSD for the same year because some cases may have been closed and reported to OSD following our review of the case files. Although we included the Army National Guard in our case file review, we selected a nongeneralizeable sample of States for our case file review because the National Guard Bureau does not maintain centralized data on cases of recruiter irregularities. We selected States that reported more than four substantiated recruiter irregularities for fiscal year 2008. These States and their corresponding number of substantiated cases of recruiter irregularities as reported for fiscal year 2008 are: Alabama (10), California (20), Indiana (7), Minnesota (6), Oklahoma (8), Pennsylvania (5), and Wisconsin (7). To assess the extent to which the service components have guidance in place to identify and address recruiter irregularities, we reviewed the guidance issued by the service components on recruiter irregularities and their procedures for reporting allegations, conducting investigations, and adjudicating cases of recruiter irregularities within the recruiting commands. We interviewed recruiting command officials and recruiters from the service components to gain their perspective on the causes of recruiter irregularities, the guidance in place to address them, and training and prevention programs aimed at reducing them. We also obtained their views on the fairness of the actions taken against recruiters as a result of their involvement in recruiter irregularity incidents, the deterring effect of those actions taken, and the consistency with which actions are applied. To determine the extent to which the relevant offices within the National Guard Bureau maintain oversight over recruiter irregularities occurring in the Army and Air National Guards, we examined the guidance issued by the Army National Guard Strength Maintenance Division and the Air National Guard Recruiting and Retention Service. However, we did not review National Guard guidance issued by the 54 individual National Guard States and Territories due to time and staffing limitations. To assess the extent to which OSD maintains oversight of recruiter irregularities occurring across the service components, we reviewed the December 2006 memorandum issued by OSD that requires each service component to submit a semiannual report to OSD on recruiter irregularities. We conducted interviews with officials from OSD’s Office of the Under Secretary of Defense for Personnel and Readiness, as well as officials from MEPCOM and 4 military entrance processing stations. We also interviewed service component officials to obtain their perspective on the memorandum and their experiences in addressing the reporting requirements it sets forth. We also interviewed OSD and National Guard officials on reporting issues within the National Guard. We conducted this performance audit from February 2009 through January 2010 in accordance with generally accepted government auditing standards. Those standards require that we plan and perform the audit to obtain sufficient, appropriate evidence to provide a reasonable basis for our findings and conclusions based on our audit objectives. We believe that the evidence obtained provides a reasonable basis for our findings and conclusions based on our audit objectives. Table 10 provides examples that we identified in the course of our review of the service components’ files of recruiter irregularities for fiscal year 2008—in addition to those provided in table 6 of this report—illustrating each recruiter irregularity category in the Office of the Secretary of Defense’s memorandum. A recruiter became aggressive with a recruit and engaged in a verbal altercation with the recruit’s boyfriend (Navy). A recruiter committed multiple irregularities, which included sexually harassing a recruit and high school students, meeting with female recruits without adequate supervision, influencing a recruit to lie to recruiter irregularity investigators, and failing to safely transport applicants in a government vehicle (Army). A recruiter consumed alcohol with applicants and engaged in inappropriate sexual conduct (Air Force). A recruiter engaged in a sexual relationship with a 16 year-old applicant (Marine Corps). A recruiter inappropriately touched a recruit while taking an unsupervised body fat measurement of the recruit (Navy). A recruiter made sexually suggestive comments to an applicant (Marine Corps). A recruiter visited an applicant’s home twice without supervision and kissed the applicant (Army National Guard). A recruiter purchased alcohol for an underage recruit and consumed it with him (Marine Corps). A recruiter falsified the results of a required physical fitness test for two recruits (Army). A recruiter withheld medical documents from an applicant’s application packet; the applicant had been previously temporarily disqualified from service for a hairline fracture (Air Force). A recruiter employed a false document and an individual who impersonated a Navy officer to falsely assure a recruit that the recruit would be able to change her military occupation upon her arrival at basic training (Navy). A recruiter conducted himself inappropriately with a recruit who expressed a reluctance to ship to basic training before he had cleared up a family issue (Army). A recruiter arranged for another individual to take the ASVAB for a recruit (Army National Guard). A recruiter provided a recruit with an unauthorized ASVAB study guide (Marine Corps). A recruiter was found to have in his possession a template of a child custody form, despite this being a violation of Army regulations (Army). A recruiter authorized the enlistment of a recruit who was subsequently disqualified at the MEPS for testing positive on a drug test (Air Force Reserve). Table 11 provides examples that we identified in the course of our review of the service components’ files of recruiter irregularities for fiscal year 2008—in addition to those provided in table 8 of this report— illustrating the violation disposition categories set out in the Office of the Secretary of Defense’s memorandum. Brenda S. Farrell, (202) 512-3604 or [email protected]. In addition to the contact above, Elizabeth McNally, Assistant Director; Natalya Barden; Seth Carlson; K. Nicole Harms; Joanne Landesman; Katherine Lenane; Amber Lopez; Steven Putansu; Terry Richardson; and Daniel Webb made key contributions to this report. | To sustain a viable military force, the Department of Defense (DOD) depends on recruiting several hundred thousand qualified individuals into the military each year. The service components rely on their recruiters to act with the utmost integrity because even a single incident of wrongdoing on the part of a recruiter--a recruiter irregularity--can adversely affect the service components' ability to recruit qualified individuals. GAO was asked to (1) analyze data on reported cases of recruiter irregularities across the service components, (2) review the extent to which the service components have guidance and procedures to address recruiter irregularities, and (3) review the extent to which the Office of the Secretary of Defense (OSD) has oversight over recruiter irregularities. GAO analyzed the data on recruiter irregularities reported to OSD by the service components; reviewed the service components' recruiter irregularity case files; examined relevant guidance and procedures from the service components; and interviewed service components' recruiting command personnel, recruiters, and OSD officials. From fiscal year 2006 through 2008, the total number of substantiated cases of recruiter irregularities across the service components represented a small percentage of overall accessions (i.e., number of individuals entering military service), and the service components have taken various actions against the recruiters responsible for these irregularities. Specifically, the number of substantiated cases of recruiter irregularities as a percentage of overall accessions was 0.26 percent in fiscal year 2006, 0.22 percent in fiscal year 2007, and 0.18 percent in fiscal year 2008. The most common types of recruiter irregularity reported involved concealment or falsification of documents or information, sexual misconduct, and quality control measures (e.g., valid parental signatures). The action most commonly applied against recruiters who committed irregularities varied by service component. Removal from recruiting was the most commonly applied action in the Marine Corps while adverse administrative action (e.g., a letter of reprimand in the recruiter's personnel file) was most commonly applied in the Army. All service components have guidance and procedures on addressing recruiter irregularities and have improved oversight over them, but the manner in which data on recruiter irregularities are shared within the service components varied. Although some differences exist, the service components are similar in how they identify, investigate, and adjudicate recruiter irregularities. In addition, the service components have taken steps to identify and prevent recruiter irregularities, including establishing quality control checks to help identify recruiter irregularities and providing training for recruiters to help prevent recruiter irregularities. However, in most service components, not all levels of command have regular access to information on recruiter irregularities that occur. Without regular access to information, commanders may not be able to take full advantage of servicewide recruiter irregularity data and opportunities to learn from their peers. Although OSD has implemented requirements for the service components to regularly report on recruiter irregularities, it does not have complete oversight over the recruiter irregularities that occur. In December 2006, OSD issued a memorandum for the service components on tracking and reporting recruiter irregularities, and the service components have been providing recruiter irregularity data to OSD. However, because some of the reporting requirements lack clarity, the service components do not interpret the reporting requirements in the same way. Further, the data provided to OSD by the National Guard are incomplete and the relevant offices within the National Guard Bureau do not provide appropriate caveats regarding these data, such as including information on the States and Territories that did not submit recruiter irregularity data. Unless OSD clarifies the reporting requirements in its memorandum and directs the service components to provide transparency in the data they report, it will be unable to maintain complete oversight over the extent to which recruiter irregularities are occurring and make determinations on whether corrective action is needed. |
Each state, and the District of Columbia, imposes an excise tax on the sale of cigarettes, which vary from state to state. As of January 1, 2003, the state excise tax rates for a pack of 20 cigarettes ranged from 2.5 cents in Virginia to $1.51 in Massachusetts (see fig.1). The liability for these taxes generally arises once the cigarettes enter the jurisdiction of the state. Many states have increased their cigarette excise taxes in recent years with the intention of increasing tax revenue and discouraging people from smoking. As a result, many smokers are seeking less costly alternatives for purchasing cigarettes, including buying cigarettes while traveling to a neighboring state with a lower cigarette excise tax. The Internet is an alternative that offers consumers the option and convenience of buying cigarettes from vendors in low-tax states without having to physically travel there. Consumers who use the Internet to buy cigarettes from vendors in other states are liable for their own state’s cigarette excise tax and, in some cases, sales and/or use taxes. States can learn of such purchases and the taxes due when vendors comply with the Jenkins Act. Under the act, cigarette vendors who sell and ship cigarettes into another state to anyone other than a licensed distributor must report (1) the name and address of the person(s) to whom cigarette shipments were made, (2) the brands of cigarettes shipped, and (3) the quantities of cigarettes shipped. Reports must be filed with a state’s tobacco tax administrator no later than the 10th day of each calendar month covering each and every cigarette shipment made to the state during the previous calendar month. The sellers must also file a statement with the state’s tobacco tax administrator listing the seller’s name, trade name (if any), and address of all business locations. Failure to comply with the Jenkins Act’s reporting requirements is a misdemeanor offense, and violators are to be fined not more than $1,000, or imprisoned not more than 6 months, or both. Although the Jenkins Act, enacted in 1949, clearly predates and did not anticipate cigarette sales on the Internet, vendors’ compliance with the act could result in states collecting taxes due on such sales. According to DOJ, the Jenkins Act itself does not forbid Internet sales nor does it impose any taxes. The federal government has had limited involvement with the Jenkins Act concerning Internet cigarette sales. We identified three federal investigations involving such potential violations, and none of these had resulted in prosecution (one investigation was still ongoing at the time of our work). No Internet cigarette vendors had been penalized for violating the act, nor had any penalties been sought for violators. The Attorney General of the United States is responsible for supervising the enforcement of federal criminal laws, including the investigation and prosecution of Jenkins Act violations. The FBI has primary jurisdiction to investigate suspected violations of the Jenkins Act. However, DOJ and FBI officials were unable to identify any investigations of Internet cigarette vendors or other actions taken to enforce the act’s provisions regarding Internet cigarette sales. According to DOJ, the FBI could not provide information on actions to investigate Jenkins Act violations, either by itself or in connection with other charges, because the FBI does not have a section or office with responsibility for investigating Jenkins Act violations and does not track such investigations. Also, DOJ said it does not maintain statistical information on resources used to investigate and prosecute Jenkins Act offenses. In describing factors affecting the level and extent of FBI and DOJ enforcement actions with respect to the Jenkins Act and Internet cigarette sales, DOJ noted that the act creates misdemeanor penalties for failures to report information to state authorities, and appropriate referrals for suspected violations must be considered with reference to existing enforcement priorities. Since September 11, 2001, it is understood that the FBI’s priorities have changed, as unprecedented levels of FBI resources have been devoted to counterterrorism and intelligence initiatives. ATF, which enforces federal excise tax and criminal laws and regulations related to tobacco products, has ancillary authority to enforce the Jenkins Act. ATF special agents investigate trafficking of contraband tobacco products in violation of federal law and sections of the Internal Revenue Code. For example, ATF enforces the Contraband Cigarette Trafficking Act (CCTA), which makes it unlawful for any person to ship, transport, receive, possess, sell, distribute, or purchase more than 60,000 cigarettes that bear no evidence of state cigarette tax payment in the state in which the cigarettes are found, if such state requires a stamp or other indicia to be placed on cigarette packages to demonstrate payment of taxes (18 U.S.C. 2342). ATF is also responsible for the collection of federal excise taxes on tobacco products and the qualification of applicants for permits to manufacture tobacco products, operate export warehouses, or import tobacco products. ATF inspections verify an applicant’s qualification information, check the security of the premise, and ensure tax compliance. To enforce the CCTA, ATF investigates cigarette smuggling across state borders to evade state cigarette taxes, a felony offense. Internet cigarette vendors that violate the CCTA, either directly or by aiding and abetting others, can also be charged with violating the Jenkins Act if they failed to comply with the act’s reporting requirements. ATF can refer Jenkins Act matters uncovered while investigating CCTA violations to DOJ or the appropriate U.S. Attorney’s Office for charges to be filed. ATF officials identified three investigations since 1997 of Internet vendors for cigarette smuggling in violation of the CCTA and violating the Jenkins Act. In 1997, a special agent in ATF’s Anchorage, Alaska, field office noticed an advertisement by a Native American tribe in Washington that sold cigarettes on the Internet. ATF determined from the Alaska Department of Revenue that the vendor was not reporting cigarette sales as required by the Jenkins Act, and its investigation with another ATF office showed that the vendor was shipping cigarettes into Alaska. After ATF discussed potential cigarette smuggling and Jenkins Act violations with the U.S. Attorney’s Office for the District of Alaska, it was determined there was no violation of the CCTA. The U.S. Attorney’s Office did not want to pursue only a Jenkins Act violation, a misdemeanor offense, and asked ATF to determine whether there was evidence that other felony offenses had been committed. Subsequently, ATF formed a temporary task force with Postal Service inspectors and state of Alaska revenue agents, which demonstrated to the satisfaction of the U.S. Attorney’s Office that the Internet cigarette vendor had committed mail fraud. The U.S. Attorney’s Office agreed to prosecute the case and sought a grand jury indictment for mail fraud, but not for violating the Jenkins Act. The grand jury denied the indictment. In a letter dated September 1998, the U.S. Attorney’s Office requested that the vendor either cease selling cigarettes in Alaska and file the required Jenkins Act reports for previous sales, or come into compliance with the act by filing all past and future Jenkins Act reports. In another letter dated December 1998, the U.S. Attorney’s Office instructed the vendor to immediately comply with all requirements of the Jenkins Act. However, an official at the Alaska Department of Revenue told us that the vendor never complied. No further action has been taken. Another investigation, carried out in 1999, involved a Native American tribe selling cigarettes on the Internet directly to consumers and other tribes. The tribe was not paying state tobacco excise taxes or notifying states of cigarette sales to other than wholesalers, as required by the Jenkins Act. ATF referred the case to the state of Arizona, where it was resolved with no criminal charges filed by obtaining the tribe’s agreement to comply with Jenkins Act requirements. A third ATF investigation of an Internet vendor for cigarette smuggling and Jenkins Act violations was ongoing at the time of our work. ATF officials said that because ATF does not have primary Jenkins Act jurisdiction, it has not committed resources to investigating violations of the act. However, the officials said strong consideration should be given to transferring primary jurisdiction for investigating Jenkins Act violations from the FBI to ATF. According to ATF, it is responsible for, and has committed resources to, regulating the distribution of tobacco products and investigating trafficking in contraband tobacco products. A change in Jenkins Act jurisdiction would give ATF comprehensive authority at the federal level to assist states in preventing the interstate distribution of cigarettes resulting in lost state cigarette taxes since ATF already has investigative authority over the CCTA, according to the officials. The officials also told us ATF has special agents and inspectors that obtain specialized training in enforcing tax and criminal laws related to tobacco products, and, with primary jurisdiction, ATF would have the investigative authority and would use resources to specifically conduct investigations to enforce the Jenkins Act, which should result in greater enforcement of the act than in the past. Officials in nine states that provided us information all expressed concern about Internet cigarette vendors’ noncompliance with the Jenkins Act and the resulting loss of state tax revenues. For example, California officials estimated that the state lost approximately $13 million in tax revenue from May 1999 through September 2001, due to Internet cigarette vendors’ noncompliance with the Jenkins Act. Overall, the states’ efforts to promote compliance with the act by Internet vendors produced few results. Officials in the nine states said that they lack the legal authority to successfully address this problem on their own. They believe greater federal action is needed, particularly because of their concern that Internet cigarette sales will continue to increase with a growing and substantial negative effect on tax revenues. Starting in 1997, seven of the nine states had made some effort to promote Jenkins Act compliance by Internet cigarette vendors. These efforts involved contacting Internet vendors and U.S. Attorneys’ Offices. Two states had not made any such efforts. Six of the seven states tried to promote Jenkins Act compliance by identifying and notifying Internet cigarette vendors that they are required to report the sale of cigarettes shipped into those states. Generally, officials in the six states learned of Internet vendors by searching the Internet, noticing or being told of vendors’ advertisements, and by state residents or others notifying them. Five states sent letters to the identified vendors concerning their Jenkins Act reporting responsibilities, and one state made telephone calls to the vendors. After contacting the Internet vendors, the states generally received reports of cigarette sales from a small portion of the vendors notified. The states then contacted the state residents identified in the reports, and they collected taxes from most of the residents contacted. When residents did not respond and pay the taxes due, the states carried out various follow-up efforts, including sending additional notices and bills, assessing penalties and interest, and deducting amounts due from income tax refunds. Generally, the efforts by the six states to promote Jenkins Act compliance were carried out periodically and required few resources. For example, a Massachusetts official said the state notified Internet cigarette vendors on five occasions starting in July 2000, with one employee working a total of about 3 months on the various activities involved in the effort. Table 1 summarizes the six states’ efforts to identify and notify Internet cigarette vendors about the Jenkins Act reporting requirements and shows the results that were achieved. There was little response by the Internet vendors notified. Some of the officials told us that they encountered Internet vendors that refused to comply and report cigarette sales after being contacted. For example, several officials noted that Native Americans often refused to report cigarette sales, with some Native American vendors citing their sovereign nation status as exempting them from the Jenkins Act, and others refusing to accept a state’s certified notification letters. Also, an attorney for one vendor informed the state of Washington that the vendor would not report sales because the Internet Tax Freedom Act relieved the vendor of Jenkins Act reporting requirements. Apart from the states’ efforts to identify and notify Internet cigarette vendors, state officials noted that some Internet vendors voluntarily complied with the Jenkins Act and reported cigarette sales on their own. The states subsequently contacted the residents identified in the reports to collect taxes. For example, a Rhode Island official told us there were three or four Internet vendors that voluntarily reported cigarette sales to the state. On the basis of these reports, Rhode Island notified about 400 residents they must pay state taxes on their cigarette purchases and billed these residents over $76,000 (the Rhode Island official who provided this information did not know the total amount collected). Similarly, Massachusetts billed 21 residents for cigarette taxes and collected $2,150 based on reports of cigarette sales voluntarily sent to the state. Three of the seven states that made an effort to promote Jenkins Act compliance by Internet cigarette vendors contacted U.S. Attorneys and requested assistance. The U.S. Attorneys, however, did not provide the assistance requested. The states’ requests and responses by the U.S. Attorneys’ Offices are summarized below. In March 2000, Iowa and Wisconsin officials wrote letters to three U.S. Attorneys in their states requesting assistance. The state officials asked the U.S. Attorneys to send letters to Internet vendors the states had identified, informing the vendors of the Jenkins Act and directing them to comply by reporting cigarette sales to the states. The state officials provided a draft letter and offered to handle all aspects of the mailings. The officials noted they were asking the U.S. Attorneys to send the letters over their signatures because the Jenkins Act is a federal law and a statement from a U.S. Attorney would have more impact than from a state official. However, the U.S. Attorneys did not provide the assistance requested. According to Iowa and Wisconsin officials, two U.S. Attorneys’ Offices said they were not interested in helping, and one did not respond to the state’s request. After contacting the FBI regarding an Internet vendor that refused to report cigarette sales, saying that the Internet Tax Freedom Act relieved the vendor of Jenkins Act reporting requirements, the state of Washington acted on the FBI’s recommendation and wrote a letter in April 2001 requesting that the U.S. Attorney initiate an investigation. According to a Washington official, the U.S. Attorney’s Office did not pursue this matter and noted that a civil remedy (i.e., lawsuit) should be sought by the state before seeking a criminal action. At the time of our work, the state was planning to seek a civil remedy. In July 2001, the state of Wisconsin wrote a letter referring a potential Jenkins Act violation to the U.S. Attorney for prosecution. According to a Wisconsin official, this case had strong evidence of Jenkins Act noncompliance—there were controlled and supervised purchases made on the Internet of a small number of cartons of cigarettes, and the vendor had not reported the sales to Wisconsin. The U.S. Attorney’s Office declined to initiate an investigation, saying that it appeared this issue would be best handled by the state “administratively.” The Wisconsin official told us, however, that Wisconsin does not have administrative remedies for Jenkins Act violations, and, in any case, the state cannot reach out across state lines to deal with a vendor in another state. Officials in each of the nine states expressed concern about the impact that Internet cigarette vendors’ noncompliance with the Jenkins Act has on state tax revenues. The officials said that Internet cigarette sales will continue to grow in the future and are concerned that a much greater and more substantial impact on tax revenues will result. One state, California, estimated that its lost tax revenue due to noncompliance with the Jenkins Act by Internet cigarette vendors was approximately $13 million from May 1999 through September 2001. Officials in all nine states said that they are limited in what they can accomplish on their own to address this situation and successfully promote Jenkins Act compliance by Internet cigarette vendors. All of the officials pointed out that their states lack the legal authority necessary to enforce the act and penalize the vendors who violate it, particularly with the vendors residing in other states. Officials in three states told us that efforts to promote Jenkins Act compliance are not worthwhile because of such limitations, or are not a priority because of limited resources. Officials in all nine states said that they believe greater federal action is needed to enforce the Jenkins Act and promote compliance by Internet cigarette vendors. Four state officials also said they believe ATF should have primary jurisdiction to enforce the act. One official pointed out that his organization sometimes dealt with ATF on tobacco matters, but has never interacted with the FBI. Officials in the other five states did not express an opinion regarding which federal agency should have primary jurisdiction to enforce the act. Through our Internet search efforts, we identified 147 Web site addresses for Internet cigarette vendors based in the United States and reviewed each website linked to these addresses. Our review of the Web sites found no information suggesting that the vendors comply with the Jenkins Act. Some vendors cited reasons for not complying that we could not substantiate. A few Web sites specifically mentioned the vendors’ Jenkins Act reporting responsibilities, but these Web sites also indicated that the vendors do not comply with the act. Some Web sites provided notice to consumers of their potential state tax liability for Internet cigarette purchases. None of the 147 Web sites we reviewed stated that the vendor complies with the Jenkins Act and reports cigarette sales to state tobacco tax administrators. Conversely, as shown in table 2, information posted on 114 (78 percent) of the Web sites indicated the vendors’ noncompliance with the act through a variety of statements posted on the sites. Thirty- three Web sites (22 percent) provided no indication about whether or not the vendors comply with the act. Some Internet vendors cited specific reasons on their Web sites for not reporting cigarette sales to state tax authorities as required by the Jenkins Act. Seven of the Web sites reviewed (5 percent) posted statements asserting that customer information is protected from release to anyone, including state authorities, under privacy laws. Seventeen Web sites (12 percent) state that they are not required to report information to state tax authorities and/or are not subject to the Jenkins Act reporting requirements. Fifteen of these 17 sites are Native American, with 7 of the sites specifically indicating that they are exempt from reporting to states either because they are Native American businesses or because of their sovereign nation status. In addition, 35 Native American Web sites (40 percent of all the Native American sites we reviewed) indicate that their tobacco products are available tax-free because they are Native American businesses. To supplement our review of the Web sites, we also attempted to contact representatives of 30 Internet cigarette vendors, and we successfully interviewed representatives of 5. One of the 5 representatives said that the vendor recently started to file Jenkins Act sales reports with one state. However, the other 4 said that they do not comply with the act and provided us with additional arguments for noncompliance. Their arguments included an opinion that the act was not directed at personal use. An additional argument was that the Internet Tax Freedom Act supercedes the obligations laid out in the Jenkins Act. Our review of the applicable statutes indicates that neither the Internet Tax Freedom Act nor any privacy laws exempt Internet cigarette vendors from Jenkins Act compliance. The Jenkins Act has not been amended since minor additions and clarifications were made to its provisions in 1953 and 1955; and neither the Internet Tax Freedom Act nor any privacy laws amended the Jenkins Act’s provisions to expressly exempt Internet cigarette vendors from compliance. With regard to the Internet Tax Freedom Act, the temporary ban that the act imposed on certain types of taxes on e-commerce did not include the collection of existing taxes, such as state excise, sales, and use taxes. Additionally, nothing in the Jenkins Act or its legislative history implies that cigarette sales for personal use, or Native American cigarette sales, are exempt. In examining a statute, such as the Jenkins Act, that is silent on its applicability to Native American Indian tribes, courts have consistently applied a three-part analysis. Under this analysis, if the act uses general terms that are broad enough to include tribes, the statute will ordinarily apply unless (1) the law touches “exclusive rights of self- governance in purely intramural matters;” (2) the application of the law to the tribe would abrogate rights guaranteed by Indian treaties; or (3) there is proof by legislative history or some other means that Congress intended the law not to apply to Indians on their reservations. Our review of the case law did not locate any case law applying this analysis to the Jenkins Act. DOJ said that it also could not locate any case law applying the analysis to the Jenkins Act, and DOJ generally concluded that an Indian tribe may be subject to the act’s requirements. DOJ noted, however, that considering the lack of case law on this issue, this conclusion is somewhat speculative. ATF has stated that sales or shipments of cigarettes from Native American reservations are not exempt from the requirements of the Jenkins Act. Only 8 (5 percent) of the 147 Web sites we reviewed notified customers that the Jenkins Act requires the vendor to report cigarette sales to state tax authorities, which could result in potential customer tax liability. However, in each of these cases, the Web sites that provided notices of Jenkins Act responsibilities also followed the notice with a statement challenging the applicability of the act and indicating that the vendor does not comply. Twenty-eight Web sites (19 percent) either provided notice of potential customer tax liability for Internet cigarette purchases or recommended that customers contact their state tax authorities to determine if they are liable for taxes on such purchases. Three other sites (2 percent) notified customers that they are responsible for complying with cigarette laws in their state, but did not specifically mention taxes. Of the 147 Web sites we reviewed, 108 (73 percent) did not provide notice of either the vendors’ Jenkins Act reporting responsibilities or the customers’ responsibilities, including potential tax liability, with regard to their states. Our report concluded that states are hampered in attempting to promote Jenkins Act compliance because they lack authority to enforce the act. In addition, violation of the act is a misdemeanor, and U.S. Attorneys’ reluctance to pursue misdemeanor violations could be contributing to limited enforcement. Transferring primary investigative jurisdiction from the FBI to ATF would give ATF comprehensive authority at the federal level to enforce the Jenkins Act and should result in more enforcement. ATF’s ability to couple Jenkins Act and CCTA enforcement may increase the likelihood it will detect and investigate violators and that U.S. Attorneys will prosecute them. This could lead to improved reporting of interstate cigarette sales, thereby helping to prevent the loss of state cigarette tax revenues. Transferring primary investigative jurisdiction is also appropriate at this time because of the FBI’s new challenges and priorities related to the threat of terrorism and the FBI’s increased counterterrorism efforts. To improve the federal government’s efforts in enforcing the Jenkins Act and promoting compliance with the act by Internet cigarette vendors, which may lead to increased state tax revenues from cigarette sales, our report suggested that the Congress should consider providing ATF with primary jurisdiction to investigate violations of the Jenkins Act (15 U.S.C. §375-378). In view of the fact that ATF was recently transferred from the Treasury Department to DOJ, it may now be possible for the Attorney General to administratively transfer primary Jenkins Act enforcement authority from the FBI to ATF without involving the Congress in the matter. We believe that this possibility deserves further investigation on the part of DOJ. Mr. Chairman, this completes my prepared statement. I would be happy to respond to any questions you or other Members of the Subcommittee may have at this time. For further information, please call me at (202) 512-8777. Other key contributors to this testimony were Darryl W. Dutton, Ronald G. Viereck, Katherine M. Davis, and Shirley Jones. | The Jenkins Act requires any person who sells and ships cigarettes across a state line to a buyer, other than a licensed distributor, to report the sale to the buyer's state tobacco tax administrator. The act establishes misdemeanor penalties for violating the act. Compliance with this federal law by cigarette sellers enables states to collect cigarette excise taxes from consumers. However, some state and federal officials are concerned that as Internet cigarette sales continue to grow, particularly as states' cigarette taxes increase, so will the amount of lost state tax revenue due to noncompliance with the Jenkins Act. One research firm estimated that Internet tobacco sales in the United States will exceed $5 billion in 2005 and that the states will lose about $1.4 billion in tax revenue from these sales. Overall, we found that the federal government has had limited involvement with the Jenkins Act concerning Internet cigarette sales. We also noted that states have taken action to promote Jenkins Act compliance by Internet cigarette vendors, but results were limited. We determined that most Internet cigarette vendors do not comply with the Jenkins Act or notify their customers of their responsibilities under the act. Vendors cited the Internet Tax Freedom Act, privacy laws, and other reasons for noncompliance. A number of Native Americans cited sovereign nation status. GAO's review indicated that these claims are not valid and vendors are not exempt from the Jenkins Act. We concluded that states are hampered in attempting to promote Jenkins Act compliance because they lack authority to enforce the act. We suggested that to improve the federal government's efforts in enforcing the Jenkins Act and promoting compliance with the act by Internet cigarette vendors, which may lead to increased state tax revenues from cigarette sales, the Bureau of Alcohol, Tobacco and Firearms (ATF), instead of the Federal Bureau of Investigation (FBI), should be provided with primary jurisdiction to investigate violations of the act. We noted that transferring primary investigative jurisdiction was particularly appropriate because of the FBI's new challenges and priorities related to the threat of terrorism and the FBI's increased counterterrorism efforts. |
Greenhouse gases—including carbon dioxide, methane, and nitrous oxide, among other gases—trap some of the sun’s heat in the Earth’s atmosphere and prevent the heat from returning to space. This insulating effect, known as the greenhouse effect, moderates atmospheric temperatures, keeping the Earth warm enough to support life. However, according to the IPCC, global atmospheric concentrations of these greenhouse gases have increased markedly as a result of human activities over the past 200 years and now far exceed preindustrial levels. The IPCC further reports that these increases have contributed to a warming of the Earth’s climate. Table 1 shows the shares of greenhouse gas emissions and their global warming potentials from U.S. sources. The IPCC attributes increases in average global air and ocean temperatures, widespread melting of snow and ice, and rising mean global sea levels to a warming of the Earth’s climate system. The IPCC reports that 11 of the 12 years between 1995 and 2006 rank among the 12 warmest years since 1850 (the first year that global temperatures were recorded) and are indicative of a strong upward warming trend over the last 50 years. Furthermore, according to the IPCC, since 1961, average global ocean temperatures have increased, because the oceans have absorbed more than 80 percent of the heat added to the Earth’s climate system. Such warming causes seawater to expand, contributing to sea level rise. The IPCC also reports that mountain glaciers and snow cover have declined, on average, in both hemispheres, and that widespread decreases in the sizes of glaciers and polar ice caps, combined with losses in the ice sheets of Greenland and Antarctica, have very likely contributed to a sea level rise of 0.17 meters during the 20th century. The federal government manages nearly 30 percent of the land in the United States. Three federal agencies within Interior—BLM, FWS, and NPS—and Agriculture’s FS administer over 90 percent of these lands. NOAA, within Commerce, administers 14 Marine Protected Areas. These agencies manage their resources for a variety of purposes related to preservation; recreation; and in some cases, resource use, yet each agency has distinct responsibilities for the resources it administers. The statutes governing these agencies’ resource management activities generally do not require the agencies to manage for specific outcomes, such as a certain number of visitors, or to provide a specific response to changes in ecological conditions, such as insect outbreaks. Instead, these laws give the agencies discretion to decide how best to carry out their responsibilities in light of their respective statutory missions as well as the need to comply with or implement specific substantive and procedural laws, such as the Clean Air Act, the ESA, or NEPA. The agencies are generally authorized to plan and manage for changes in resource conditions, regardless of the cause that brings about the change. As such, federal resource management agencies are generally authorized, but are not specifically required to address in their actions and planning efforts changes in resource conditions resulting from climate change. BLM, FS, FWS, NOAA, and NPS have unique management missions, as follows: BLM’s mission is to sustain the health, diversity, and productivity of public lands for the use and enjoyment of present and future generations under the principles of multiple use and sustained yield as provided in the Federal Land Policy Management Act. BLM manages more than 260 million acres located primarily in 12 western states. The agency manages and issues permits for activities such as recreation, livestock grazing, timber harvesting, and mining. FS’s mission is to sustain the health, diversity, and productivity of the nation’s forests and grasslands to meet the needs of present and future generations under the Multiple Use and Sustained Yield Act and the National Forest Policy Management Act. FS manages more than 190 million acres throughout the country. The agency manages and issues permits for activities such as skiing, livestock grazing, recreation, timber harvesting, and mining and for rights-of-way for road construction. FWS’s mission is to work with others to conserve, protect, and enhance fish, wildlife, and plants and their habitats for the continuing benefit of the American people. FWS also has a regulatory function, in that it enforces laws, including the ESA and others. FWS manages 547 national wildlife refuges and 37 large, multiple-unit Wetland Management Districts on more than 96 million acres of land throughout the nation; 69 national fish hatcheries; and 46 administrative sites. The National Wildlife Refuge System, which performs FWS’s land management functions, administers a national network of lands and waters for the conservation; management; and, where appropriate, restoration of the fish, wildlife, and plant resources and their habitats within the United States. In addition to these 4 agencies, NOAA seeks to preserve the biological and ecological integrity of U.S. marine systems, which include its National Marine Sanctuary System, consisting of 14 Marine Protected Areas that encompass more than 150,000 square miles of marine and Great Lakes waters. (See fig. 1.) NOAA also manages the waters of the Exclusive Economic Zone, the outer boundary of which is 200 nautical miles from the U.S. coastline. NPS’s mission is to conserve the scenery, the natural and historic objects, and the wildlife of the national park system so that they will remain unimpaired for the enjoyment of current and future generations. NPS manages 391 national park units covering more than 84 million acres throughout the United States and its territories. The agency manages many of the nation’s most precious natural and cultural resources. Other federal entities that manage various federal land and water resources include the Bureau of Indian Affairs, the Bureau of Reclamation, the Department of Defense, and the Tennessee Valley Authority, among others. Figure 2 shows federal resources according to the entity responsible for their management. The resource units managed by the federal government encompass four principal ecosystem types, as shown in table 2. Experts at our workshop told us that climate change is likely to affect federal resources in a number of ways. For example, the experts said that climate change has already caused—and will likely continue to cause— physical changes, including drought, floods, glacial melting, sea level rise, and ocean acidification. Climate change will also cause biological changes, such as increases in insect and disease infestations, shifts in species distribution and abundance, and changes in the timing of natural events (referred to as phenological changes), among others. The experts further said that climate change is likely to adversely affect economic and social goods and services supported by federal resources, including recreation, tourism, infrastructure, water supplies, fishing, ranching, and other resource uses. Officials at our four case study sites provided us with additional examples of some of these climate-related effects already occurring on federal resources. As we have previously mentioned, these four sites are the Florida Keys National Marine Sanctuary in southern Florida (coasts and oceans ecosystem); the Chugach National Forest in south-central Alaska (forests ecosystem); Glacier National Park in northwestern Montana (fresh waters ecosystem); and the BLM Kingman Field Office in northwestern Arizona (grasslands and shrublands ecosystem). Experts at our workshop and officials at our four case study sites stated that climate change can result in physical changes, and that many such changes have already occurred and are likely to continue in the future. Physical effects of climate change include warmer temperatures, drought, glacial melting, floods, sea level rise, and ocean acidification, among others. Experts from the workshop identified increased temperatures as one of the key physical effects of climate change. According to these experts, effects of increasing temperatures that have already been observed include the declining duration of lake and river ice cover throughout the northern hemisphere and increased temperatures of 7 to 10 degrees Fahrenheit in eastern water bodies after storm events. A scientist at Glacier National Park told us that, while the estimated global average temperature has risen 0.6 degree Celsius (about 1 degree Fahrenheit) since about 1897, the estimated average temperatures of the highest elevations in the park have risen 1.6 degrees Celsius (about 3 degrees Fahrenheit) over the same period. This scientist expects this trend to continue. Winter and summer temperatures within the park also are increasing. The data suggest that the number of frost days below 0 degree Celsius (32 degrees Fahrenheit) in Montana from 1900 to 2005 declined by 3 weeks. Furthermore, in 1900, the estimated number of extreme heat days—defined as days with temperatures above 90 degrees Fahrenheit—was about 5 days per year in Glacier National Park (and western Montana); in 2005, this estimated number was about 20 days per year. A record was set in 2003, with 31 days above 90 degrees Fahrenheit. Experts consider 90 degrees to be a major threshold beyond which there are negative impacts on human health and plants in the region. Increased moisture stress due to increased temperatures makes plants more vulnerable to fire, and fire activity in the region has increased in recent years. In 2003, 74,000 hectares in Glacier National Park—about 13 percent of the park’s total area—burned, in what was the largest fire year since 1910, when the park was founded. Other major fires occurred in 1988 and 2001, according to NPS and U.S. Geological Survey (USGS) officials. According to experts at the workshop, warmer spring seasons—due at least partly to climate change—have already resulted in earlier snowmelt, longer summer dry periods, and increased wildland fire activity in western U.S. forest ecosystems, where the experts stated that fires are linked more to climatic conditions than to land management techniques. Both the frequency of large fires (greater than 400 hectares) and the area burned increased significantly in the western United States during the period of 1987 through 2003 compared with 1970 through 1986, and wildland fire size and severity are likely to further increase with climate change, according to these experts. Furthermore, workshop participants noted that, in general, climate change will likely increase droughts in the future. Drought conditions that are potentially caused by climate change are already affecting trees, shrubs, and water resources in some areas. For example, according to officials from the BLM Kingman Field Office, about 30 percent of old growth pinyon pine trees in the Cerbat Mountains of Arizona; extensive stands of black brush near Dolan Springs in Arizona; and shrubs, such as cliffrose and juniper on shallow soils on the Colorado Plateau, have died due to severe drought conditions. Similarly, officials from the Chugach National Forest told us that closed-basin lake levels in the Kenai Lowlands in south-central Alaska have declined by as much as 1 meter as a result of drought, and many ponds that appeared on 1950 maps and aerial photographs are now grassy basins with spruce and hardwood trees. Experts participating in all of our workshop discussions also identified ice and glacial melting as physical effects resulting from climate change. Experts said that there is evidence that sea ice retreat, accelerating glacier melt, and measurable coastal erosion in the Arctic—due, at least in part, to climate change—are now greater than they were just 5 years ago. These experts noted that there also has been a major loss of glaciers in the western United States, such as in Montana and Alaska. According to a scientist at Glacier National Park, the estimated number of glaciers in the park has dropped from 150 to 26 since 1850, and some projections suggest that if current trends in the rate of melting continue, the remaining glaciers will be gone in the next 25 to 30 years. Figure 3 shows the melting of Grinnell Glacier between 1938 and 2005. Furthermore, according to officials at the Chugach, many Kenai Peninsula glaciers in south-central Alaska began retreating in the 1850s. For example, the Harding Icefield lost 70 vertical feet and 5 percent in surface area in the last 50 years, according to these officials. In addition, an official at the Chugach said that glaciers in the forest have generally been declining very quickly in surface area and volume, with a few exceptions due to local topography. Furthermore, according to our workshop participants, increasing air, ocean, and coastal water temperatures will likely lead to a continuing loss of sea ice, a reduction in permafrost, decreased snowpack, and increased glacial melting. According to experts discussing the fresh waters ecosystem at our workshop, flooding is another physical effect potentially caused by climate change. For example, they noted that rain-on-snow events (i.e., rain following snow) increase the potential for flooding, because rainwater and melted snow cause very high runoff rates in winter and early spring. Officials at Glacier National Park who have observed such changes told us that regional precipitation patterns are changing, such that more precipitation falls as rain and less as snow. (They said that snowpack has declined by up to 30 percent since the mid-20th century.) With less snow and warmer winters, the timing of spring runoff can be up to 20 days earlier than normal. This is causing winter streamflow to increase and summer streamflow to decrease. Scientists expect to continue to receive less snow in winter with more rain, rain-on-snow conditions, and midwinter melting of snowpack. These warmer winters may lead to more winter flooding in the park—as well as more avalanches. The experts further noted that high runoff in winter and early spring is likely to increase soil erosion, enlarge stream channels, increase sediment loads in streams, and increase stream turbidity. Because of the higher volume of runoff in the spring, combined with less snowpack, streams could shrink or dry up completely every summer. Not only would this affect riparian vegetation growth and aquatic animals, the associated drying of adjacent soils and vegetation would also increase the risk of forest fires. Experts discussing the coasts and oceans ecosystem at our workshop also identified sea level rise as one of the key physical effects of climate change. Global ocean and coastal trend analyses that are based on satellite measurements of sea level change suggest that sea levels are rising faster to higher levels at different rates in different places. According to these experts, sea level rise may lead to flooding and the permanent loss of coastal wetlands and barrier shorelines; degradation of fresh waters, brackish coastal waters, and low-lying ecosystems, which could impact the drinking water supply; the loss of storm buffers for low-lying areas; increased vulnerability to storm surge and flooding; and increased erosion and retreat of shorelines around barrier islands and estuaries. For example, these experts said that the Alligator River National Wildlife Refuge in North Carolina, the Blackwater National Wildlife Refuge in Maryland, as well as various southeast and southwest Louisiana national wildlife refuges, are among the federal resources particularly vulnerable to sea level rise. Also, according to experts discussing the grasslands and shrublands ecosystem, as sea levels rise, saltwater will encroach on coastal prairies, turning them into coastal wetlands. Rising sea levels that are attributable to climate change already have affected low-lying areas, such as Big Pine Key in the Florida Keys. According to an FWS official in this area, saltwater intrusion on land, amplified by increased hurricane activity, has overwhelmed sources of fresh waters and habitat that support resident plants and animals, such as the Key deer and the Lower Key marsh rabbit that live on the Keys refuges. This official further stated that these effects will pose a threat in the future, not only to wildlife, but also to humans who live on the islands. Finally, experts discussing the coasts and oceans ecosystem at our workshop also identified ocean acidification as one of the physical effects of climate change. Acidification occurs when increased carbon dioxide levels decrease the concentration of carbonate ion in seawater. Because carbonate ion is a substance that coral reefs need to build their skeletons, ocean acidification may reduce the calcification rate in corals (and other calcium carbonate-based species) and cause other changes in the oceanic food chain, plankton communities, and the distribution of certain species. This could affect the coral reefs comprising the Florida Keys National Marine Sanctuary and corals in any other marine protected area, state, or territory. A University of Miami scientist who has been studying coral reefs and climate change for a number of years, and with whom we spoke while conducting our Florida Keys case study, told us that by 2050, carbonate ion could be 34 percent less abundant than today. Experts participating in our workshop and officials at our four case study sites stated that climate change can result in biological changes, and that many such changes have already occurred and are likely to continue in the future. The biological effects of climate change include increases in insect and disease infestations, shifts in species distribution, and changes in the timing of natural events (referred to as phenological changes), among others. Experts discussing the forests and the grasslands and shrublands ecosystems noted that the infestation of pests—especially those that emerge under warmer or drier conditions—is a key biological effect attributable, at least in part, to climate change. Examples of such pests include bark beetles, grasshoppers, and various fungi as well as diseases caused by bacteria, parasites, and viruses. According to experts at the workshop plenary session, the spruce bark beetle, the mountain pine beetle, and the southern pine beetle have already infested some U.S. forests, thriving in areas where the cold winters would have previously prevented them from colonizing. These experts noted, for example, that the southern pine beetle has migrated into red spruce areas in the southeastern United States, and that pests have also damaged New England sugar maples. The experts further noted that increased temperatures will increase the range and effects of insects and disease infestation. In particular, experts stated that there have been shifts in the intensity and extent of the spruce bark beetle in the Pacific Northwest and Alaska caused by an acceleration of the beetle’s life cycle due to warmer and drier climatic conditions. A spruce bark beetle infestation has already occurred at the Chugach National Forest, according to an FS official at the forest. Warmer temperatures and reduced precipitation associated with climate change have contributed to a spruce bark beetle outbreak that has led to high mortality rates for certain types of spruce trees on over 400,000 acres of the forest (see fig. 4). About 20 percent of the forest’s land and the adjacent Kenai National Wildlife Refuge are located on the Kenai Peninsula. According to FS experts, about 1 million acres of the peninsula have been affected by the beetles, including 400,000 acres within the forest itself. Officials at the Chugach indicated that continued increases in temperature and decreases in precipitation could further change vegetation composition and structure and increase the incidence and severity of future insect outbreaks. The officials stated that spruce bark beetle populations increase greatly when warm weather climate events combine with forest stresses. (Officials at the Kenai National Wildlife Refuge noted, however, that not all spruce bark beetle damage is attributable to climate change. Another scientist explained that the key link to climate change is that outbreaks are now persistent and not episodic.) Experts discussing the fresh waters ecosystem said that increased water body temperatures may increase the risk of toxic algal blooms as well as the severity of fish diseases. They said that there have been recent observations of severe pathogen problems in the Yukon River in Alaska. (The Yukon River flows through the Yukon Delta National Wildlife Refuge.) Experts in the coasts and oceans ecosystem likewise noted that increasing air and water temperatures could increase the incidence of toxic algal blooms in ocean environments. They observed that increased microbial activity could affect fish, shellfish, corals, sea turtles, and some sea grasses. Another biological effect of climate change that was identified by the workshop experts is anticipated shifts in the distribution, abundance, and ranges of both plant and animal species. As an example of one observed change that is due at least in part to climate change, fresh waters ecosystem experts noted that the nonnative zebra mussel has extended its range in the Great Lakes as lake temperatures have warmed. Experts discussing other ecosystem types similarly agreed that changes in species distribution are likely to occur in the future, and that nonnative species might eventually dominate or replace native species in some areas. For example, experts discussing the coasts and oceans ecosystem noted that marine and nonnative species may invade estuaries where they have typically not lived. Oyster predators from the ocean may move into the Chesapeake Bay, for example. Likewise, experts on the forests ecosystem said that forest species composition—both the trees and the species that depend on the trees and forest vegetation—may change. They indicated that sugar maple, white bark pine at high elevations, and subalpine spruce fir forests in the Rocky Mountains have already experienced such changes. Experts discussing the grasslands and shrublands ecosystem, moreover, stated that tree die-offs triggered by drought and exacerbated by higher temperatures may lead to a shift from woodland to shrubland or grassland. They said that midwestern savannas and the southwestern pinyon and juniper woodlands are particularly vulnerable to such changes. They further noted that some rare ecosystems, such as alpine tundra, California chaparral, and blue oak woodlands in California may become extinct altogether. These experts said that native biodiversity will decrease in many areas, and that new assemblages of species will be living together, with unknown consequences. Evidence of changes in species distribution is already apparent on some federal resources. For example, according to officials at the BLM Kingman Field Office, drought conditions are causing native Mojave Desert scrub plant communities in the region to convert into nonnative annual grassland communities, which are more vulnerable to fire. This phenomenon has contributed to problems related to fire management. Prolonged drought acts as a source of stress to native plant communities. Then, in periods of wetness, invasive species (typically, invasive annual grasses) fill in the gaps between native vegetation. Invasive species can spread and grow faster than native species. As a result, the thicker and less evenly spaced vegetation leads to fire danger. If a fire starts, it burns much longer and hotter due to the invasive grasses. Native plant communities, such as saguaro cacti and Joshua trees, are not fire resistant, so fire damages these communities and provides further environment for invasive species and increased fire danger. In some instances, repeated fires of this nature have destroyed native plant communities, such that only invasive grasslands remain. A severe drought occurred in 2002 that resulted in the loss of perennial grasses, shrubs, and trees. Drought, coupled with increased annual growth in wet years, accelerates the conversion of hot desert plant communities into annual grasslands. Should continued severe drought become the norm, this conversion can be expected to continue. Furthermore, according to BLM Kingman officials, pinyon-juniper woodlands (which include pinyon pine trees and various types of junipers) near the BLM site have died off, as have some ponderosa pines and chaparral. These officials said these changes are likely due to the severe drought the region has experienced since about 1996. According to these officials, even pinyon pines hundreds of years old that have survived drought events in the past are dying, which the officials said was unusual and unique. Ponderosa bark beetles and mistletoe infestations have also stressed the trees, contributing to the die-off of the ponderosa pines. BLM officials said that changes to forested plant communities would be significant, since these communities already are small and disjunct. The resource managers said that these communities probably would either be greatly reduced in size or eliminated from many areas. Experts discussing fresh waters told us that temperature increases are most likely to threaten cold-water species, such as trout, salmon, and amphibians. An FWS fish biologist who studies and provides expertise on certain resources in Glacier National Park told us about a park species, the bull trout, that is at particular risk from climate change. The bull trout, listed as a threatened species under the ESA, is native to the western United States. It migrates in the spring from lakes and streams, such as Flathead Lake up the Flathead River system near the park, where it spawns in the fall in tributaries as far as 150 miles upstream. This fish is very sensitive to water temperature and clarity. Its spawning temperature range is 6 to 10 degrees Celsius (43 to 50 degrees Fahrenheit), and its young- rearing temperature range is below 16 degrees Celsius (61 degrees Fahrenheit). It is found in only the coldest streams. If temperatures increase, streams may become intolerable for the bull trout. In addition, if isolated glaciers disappear due to temperature increase, the mountain streams the glaciers feed may dry up late in the season, further reducing habitat. Therefore, the bull trout can only survive in a very limited area, and many of its migration corridors have been cut off as a result of ecosystem fragmentation. Scientists at Glacier National Park further noted that warming trends are expected to cause an upward migration of vegetation, changing the ground cover in many areas of the park and affecting wildlife species that depend on those habitats. As alpine habitats warm, the tree line is expected to move upslope, with forests beginning to invade alpine and subalpine meadows. Some of these changes are already occurring. Animals that may be harmed by the loss of alpine and subalpine habitat include bighorn sheep, pikas (relatives of the rabbit), mountain goats, wolverines, and grizzly bears. Many rare plants and animals in Glacier are near extinction, and the experts said that climate change may increase the likelihood that these species will cease to exist in the park. Experts on several ecosystem types also stated that climate change will affect phenology, that is, plant and animal life-cycle events that are influenced by environmental changes, especially seasonal variations in temperature and precipitation. Experts discussing the forests ecosystem, for example, said that changes will affect critical species interactions, such as pollination and seed dispersal. Experts discussing the grasslands and shrublands ecosystem observed that the distribution of plants that undergo photosynthesis during the cool season and plants that undergo photosynthesis during the warm season may change, with implications for the animals—both vertebrates and invertebrates—that are associated with them. They further noted that pollination could become out-of-sync with flowering. Likewise, one expert on the fresh waters ecosystem also stated that the phenology of fish migration and reproduction may be disrupted by changing patterns of water flow or availability. Officials at the Chugach National Forest indicated that the recent spruce bark beetle outbreaks on the Kenai Peninsula may be attributed, to some extent, to phenological changes. For example, the spruce bark beetle’s life cycle has accelerated from 2 years to 1 year. These officials explained that populations of many insects are regulated by low winter temperatures and many outbreaks end by episodes of cold temperature. However, as the climate warms, infestations by insects whose populations are controlled by cold will likely increase. Furthermore, an FWS biologist in the Florida Keys pointed out that, on the basis of some limited data sets, it appears that green turtles in the Keys region may be nesting earlier, possibly as a result of climate change. The biologist also noted that a larger study of loggerhead turtles conducted in another part of Florida between 1989 and 2003 found that the median date of loggerhead turtle nesting occurred approximately 10 days sooner. During this same 15-year period, according to the study, average sea surface temperatures increased by 0.8 degree Celsius during May, when loggerheads typically begin to nest on these beaches. This study suggests that the turtles may be responding to recent climate trends. Experts participating in our workshop noted that climate change is likely to have adverse effects on a range of economic and social goods and services supported by federal resources, including recreation and tourism, infrastructure, water supplies, fishing, ranching, and other resource-use activities. According to experts on the grasslands and shrublands ecosystem, if FWS- managed wetlands—called prairie potholes—in the upper midwest dry up, waterfowl populations would decline, since these wetlands serve as resting, feeding, and nesting habitat for migratory waterfowl. The loss of the prairie potholes would hurt midcontinent waterfowl populations and the many resources that interact with them. This loss would further result in wide-ranging economic impacts on a variety of industries, such as hunting, and on communities in that part of the country. The experts also pointed out that the increasing frequency of extreme events, such as fire or drought, could limit recreational activities on federal lands. For example, experts on the coasts and oceans ecosystem observed that accelerated sea level rise could result in a loss of beaches and associated recreational activities. They further stated that increasing air and water temperatures could affect such recreational activities as fishing and bird-watching, and that ocean acidification could negatively affect tourism and sport fishing in coastal areas. Similarly, managers at the BLM Kingman Field Office told us that climate change could cause declines in the recreational use of the land by hunters (owing to less game to hunt) and by the visiting public. NOAA officials at the Florida Keys National Marine Sanctuary told us that the continued bleaching of coral reefs in the Florida Keys—caused, at least in part, by climate change—may adversely affect the tourism and fishing industries, which are important sources of revenue for communities in the area. Coral reefs play a key role in these industries because they are important habitats for fish and other marine species and are popular with snorkelers and scuba divers. Bleaching occurs when corals eject the microscopic algae that live within their tissues in response to stressful conditions, such as warmer water. (Corals can recover from bleaching events if the stress is not too severe or long-lasting, but the stress caused by bleaching can lead to secondary problems, such as coral diseases.) If water temperatures in the Florida Keys continue to increase as a result of climate change, more coral bleaching may occur, adversely affecting the area’s tourism and fishing industries. Figure 5 shows two brain coral colonies in the Upper Keys area of the Florida Keys National Marine Sanctuary in July 2005. The smaller colony (bottom of the figure) shows healthy coloration, while the larger colony (top of the figure) is nearly completely bleached. Experts from three workshop groups noted that climate change could affect infrastructure and operational costs on federal lands. For example, experts in the grasslands and shrublands ecosystem noted that, as wildland fires become more frequent and severe as the climate changes, the costs of fire-fighting and rehabilitating land increases. Experts stated that rising sea levels will affect resource use on federal lands, and that changes in precipitation will affect dams, canals, flood protection, and reservoirs. Experts discussing the fresh waters ecosystem said that some park visitation levels, particularly in colder climates, have been restricted by weather conditions. Climate change, they noted, is expected to result in a change of visitor patterns and may result in a wider use of the land’s resources and infrastructure. Managers at Glacier National Park agreed with this perspective, saying that climate change may lengthen the primary visitation period for the park as spring comes earlier and winter comes later. According to these officials, June through August used to be the peak visitation time frame, but already companies affiliated with the park (e.g., concession owners) are getting more requests to conduct activities in May and September. Roads and facilities may need to stay open longer, which will require more staff and resources, and the potential for weather- related infrastructure damage will require more maintenance and improvements. These officials further noted that if the park is open longer, there will be more crime, more bear-human interactions, and a greater need for search-and-rescue operations, all of which will require more resources to manage. Climate change has already affected the infrastructure on some federal lands. For example, officials from the Chugach National Forest indicated that, to the extent that large storm events are related to climate change, there have been significant impacts on bridges and infrastructure in Alaska, and that the frequency of severe storm events appears to be increasing. (Forest officials noted that in the last 10 years, the Chugach National Forest region has experienced two 100-year storm events.) Similar effects and other impacts on infrastructure are illustrated at Glacier National Park. Officials at the park told us that, in 2003, the most popular and scenic road in the park, the Going-to-the-Sun Road, was shut down for 23 days due to fire. To the extent that climate change is linked to more frequent and severe forest fires, western Montana could face more fires. Glacier National Park staff noted that fires distract FS and NPS staff from their regular duties, and that if more fires occur, the visitor experience could be diminished by poor air quality and limited access to fire-ravaged areas of the park. As a result, the park and local communities could face lost revenues associated with declines in visitation. Experts in the fresh waters ecosystem indicated that climate change may also adversely affect water supplies and quality. Snow and ice serve as natural reservoirs in mountainous areas and northern regions of the United States, gradually supplying water into the summer months. Much of the west relies on spring snowmelt to provide a steady stream of water into summer months, when demand is highest. However, warmer temperatures and changes in winter precipitation patterns from snow to rain are expected to continue causing reduced snowpack and early snowmelt. Water supply shortages will likely increase the cost of water. In addition, the experts said that water quality is likely to decline if harmful algal blooms, bacteria, or botulism occur as a result of increased temperature; such occurrences would likely result in increased water treatment costs. Moreover, coastal areas that rely on groundwater supplies will have to be careful not to overdraw from the aquifer to avoid saltwater intrusion and contamination, particularly in water-stressed areas of the southwest. Experts on the coasts and oceans ecosystem stated that accelerated sea level rise could increase saltwater intrusion, affecting drinking water supplies in some regions. Water issues are particularly significant in the southwestern United States. For example, BLM Kingman Field Office managers told us that climate change-related economic costs resulting from declines in the availability of water in the region could be extremely high. According to experts discussing the fresh waters ecosystem, less surface water availability means lower groundwater recharge rates and further demand on the existing groundwater resources. The BLM managers further said that reductions in groundwater could affect communities within the field office boundary by causing wells to dry up, thereby forcing people to abandon homes or greatly increasing the cost of living in the area. Experts on various ecosystem types noted that the use of certain resources on public lands could be affected by climate change. For example, experts discussing the fresh waters ecosystem noted that Alaska may be affected economically by climate change. They said that many fish species are adapted to cold-water conditions, and that temperature increases and seasonal shifts may adversely impact fisheries upon which commercial, sport, and subsistence fishers depend. Also, experts discussing the grasslands and shrublands ecosystem stated that changing climate conditions might reduce Native Americans’ use of federal lands and reduce revenue from natural resources on their lands. They also noted that changes in the water supply might lead to greater competition for water, which could have a negative economic impact on ranchers and some communities situated near federal lands. Officials at the BLM Kingman Field Office agreed that if the climate becomes hotter and drier, there could be a decline in the ranching industry in the Kingman area. In addition, officials at the Chugach National Forest told us that large storms can be harmful for the fishing industry; they said that the last major storm destroyed salmon spawning areas in the Chugach for 1 year. Scientific experts at the workshop noted that the nature and extent of climate change effects will depend on the rate and magnitude of this change. They also stated that some changes will occur quickly and will be readily apparent, while other changes will occur gradually and be less apparent in the near term. Resource managers from the five key resource management agencies— BLM, FS, FWS, NOAA, and NPS—who participated in our workshop identified several challenges to addressing the observed and potential effects of climate change. These challenges include (1) the lack of priority given to addressing the effects of climate change within their agencies, (2) limited guidance from headquarters about whether or how to address the effects of climate change in management actions and planning efforts, and (3) insufficient site-specific information to plan for and manage the effects of climate change on the federal resources they oversee. Resource managers further stated that climate change is a complex, global issue that is difficult for one resource unit or agency to address on its own. In addition, resource managers interviewed for our case studies described similar challenges and provided illustrative examples. According to resource managers from our workshop and case studies, addressing the effects of climate change is currently not a priority within the federal resource management agencies. These resource managers said that they can use their existing management practices to respond to changing conditions at their units—some of which could be caused, at least in part, by climate change. However, they said that specifically addressing the current and potential future effects of climate change is not a priority. For example, in discussing the grasslands and shrublands ecosystem at the workshop, resource managers agreed that climate change is not on their agencies’ agendas as a policy issue. Furthermore, resource managers from the BLM Kingman Field Office and the Chugach National Forest stated explicitly that climate change is not a priority for them. Resource managers in all of the workshop groups agreed that they have a wide range of responsibilities and that, because none of the agencies have designated climate change as a priority, the managers focus first on near- term activities that they are specifically required to undertake, leaving less time and resources for longer-term issues such as climate change. For example, resource managers discussing the fresh waters ecosystem told us that they are typically accountable for things on a short-term time frame, and current planning horizons may be too short for incorporating long-term factors such as climate change into management practices. In addition, managers at the BLM Kingman Field Office said that, due to resource constraints, they can only address the most immediate, highest-priority issues, and that backlogs of required actions, such as permits, are continually growing, leaving other issues unaddressed, including the effects of climate change. Furthermore, NOAA resource managers at the Florida Keys National Marine Sanctuary said that, due to limited staffing and fiscal resources, NOAA expects sanctuary managers to place a priority on meeting the many daily challenges they face, such as implementing the management plan for the 2,900 square nautical mile sanctuary and, specifically, managing no-boating or no-fishing zones to protect sensitive areas. Climate change has not been identified as a priority in the National Marine Sanctuaries. Resource managers discussing all four ecosystem types at the workshop stated that, to address the long-term issue of climate change, agencies would have to change how they approach their missions. In this regard, they said that resource managers are currently bound to using historical data to react to observed changes, while addressing the effects of climate change would require managers to anticipate potential future changes in their planning processes. In our workshop, resource managers told us that climate change effects are typically not addressed in agency planning activities. Specifically, resource managers discussing the coasts and oceans ecosystem at the workshop said that climate change has not been considered in management plans. BLM, FWS, and NPS resource managers discussing the grasslands and shrublands ecosystem also said that current management plans do not specifically account for climate change. Similarly, resource managers discussing the fresh waters ecosystem agreed that climate change effects are not explicitly addressed in agency strategic plans. Furthermore, resource managers interviewed for the Chugach National Forest case study stated that they do not consider addressing the effects of climate change in the forest to be a priority because it is not included in the most recent list of priority threats developed by the FS Chief and is not considered a strategic issue by the agency. However, some resource managers from the workshop and case studies said that climate change effects are beginning to be addressed in resource unit planning processes, but on an inconsistent, case-by-case basis. For example, resource managers discussing the coasts and oceans ecosystem said that planning for individual units is bottom up, not top down, and is driven by local constituents. They said that climate change vulnerability issues have begun to get consideration in some planning efforts. Resource managers at our workshop also said that climate change is not a priority, in part, because of limited support from agency leaders. Specifically, resource managers discussing the coasts and oceans ecosystem said that there has been little support from agency leaders to comprehensively address climate change issues. In addition, resource managers discussing the fresh waters ecosystem at our workshop told us that there are political hazards associated with discussing climate change, and that it is not politically profitable to talk about the issue. Resource managers interviewed for our case studies made similar points. For example, NOAA resource managers at the Florida Keys National Marine Sanctuary said that they have difficulty using terms like “global warming” in presentations and in publications due to concerns raised within NOAA. Similarly, an official at Glacier National Park said that top NPS management monitored public statements on climate change more closely than any other issue, and that park managers are reluctant to talk about climate change. However, another official stated that this reluctance may be changing, although he noted that no funding or resources have been allocated directly to the issue. Resource managers have limited guidance from their agencies about whether or how to address the effects of climate change in management actions and planning efforts, according to agency headquarters officials and resource managers from our workshop and case studies. Under these circumstances, resource managers are uncertain about what actions, if any, they should take with regard to addressing or preparing for the effects of climate change. Agency headquarters officials agreed that they have provided limited climate change guidance to their resource managers. Interior issued an order in 2001 directing its agencies, including BLM, FWS, and NPS, to consider and analyze, among other things, potential climate change effects in management plans and activities developed for public lands. However, headquarters officials from these agencies told us that they have not yet provided specific direction to resource managers about how to implement this order. Officials at BLM headquarters stated that the order was signed during the prior administration, and that the order has not been emphasized because it was not consistent with the current administration’s previous position on climate change. These BLM headquarters officials added that the lack of specific authority, guidance, and direction may have limited the agency’s efforts to address the effects of climate change, and that an authoritative statute, a regulation, or guidance would provide a greater impetus to address climate change effects. In testimony before the House Committee on Appropriations, Subcommittee on Interior, Environment, and Related Agencies, on April 26, 2007, BLM’s National Science Coordinator acknowledged that there is little current guidance at BLM dealing with climate change. He said that BLM is establishing policy and technical committees to address necessary actions and develop guidance to address climate change in agency management practices. Headquarters officials at FWS and NPS said that, although they have not developed specific guidance, they operate in a manner consistent with Interior’s 2001 order in their general planning activities. NOAA, under Commerce, and FS, under Agriculture, are not subject to Interior’s order. However, National Marine Sanctuary Program headquarters officials said that the agency is establishing a working group to determine what actions it should and can afford to take to address the effects of climate change. FS headquarters officials said that, although they have not provided specific guidance on addressing the effects of climate change, the agency’s planning process is designed to identify emerging issues, such as climate change, and respond in ways to promote the sustainability of the nation’s land and water resources. FS headquarters officials further stated that they have been concerned that they would encounter litigation if they initiated activities specifically designed to address the effects of climate change within FS’s current broad authority. Resource managers who participated in our workshop said that they are not aware of any agency guidance to address the effects of climate change, and that they have received no direction on how to incorporate climate change into their planning activities. For example, resource managers discussing the coasts and oceans ecosystem said that they are not aware of any formal climate change guidance from their respective agencies—FWS, NOAA, NPS, and USGS. Resource managers discussing the forests ecosystem said that agency policies are, in some cases, geared toward responding to events as they occur, constraining the ability of managers to incorporate anticipated events in their planning efforts. These individuals added that managers are unclear about the nature of their agencies’—FS, FWS, and NPS—mandates with respect to climate change and, accordingly, differences in interpretation and implementation take place at the management level. In addition, resource managers from the Bureau of Reclamation, FWS, and NPS discussing the fresh waters ecosystem told us that most managers do not know how to build climate change into the management process but believed that there is a need to do so. These managers identified a need for direction or guidance on how to incorporate climate change into management plans. Furthermore, resource managers discussing the grasslands and shrublands ecosystem agreed that their agencies—BLM, FS, FWS, and NPS—have no explicit guidance on climate change. They further noted that there are differing views in their agencies about how to interpret broad resource management authorities with respect to climate change, and that, as a result, efforts to address the effects of climate change are ad hoc and piecemeal. These managers also stated that they need better guidance at all levels on the effects of climate change and the appropriate agency responses to those effects. They also said that their agencies need an overall mandate and a coordinated approach to address the issue, and that it will take very strong direction from high-level officials to get agencies to address the effects of climate change. Moreover, resource managers at the workshop generally agreed that they need direction on how to account for climate change when making land management decisions, and that high-level planning should recognize the potential effects of climate change and promote integrated, cross-agency approaches to addressing these effects. Resource managers we interviewed for our case studies also said that they are not aware of any guidance or requirement to address the effects of climate change, and that they have not received direction regarding how to incorporate climate change into their planning activities. Resource managers from the BLM Kingman Field Office, the Chugach National Forest, the Florida Keys National Marine Sanctuary, and Glacier National Park all explicitly stated that they do not have guidance for how or whether they should account for climate change in planning and management decisions. Resource managers from the Kingman Field Office said that they need a national directive from headquarters to implement climate change- related activities, and that such a directive could give some imperative to take action. In addition, Chugach resource managers stated that they need a clear policy about how to address the effects of climate change, including clear and focused goals. They added that they are not sure whom to contact if climate change becomes an issue because there is no agencywide facilitator or contact point regarding climate change. Furthermore, resource managers at the Everglades National Park, which is ecologically linked to the Florida Keys National Marine Sanctuary, told us that limited guidance makes deciding what, if anything, to do about climate change difficult. Moreover, resource managers at Glacier said that a formal written position on climate change would be useful to further clarify the exact official stance on the science, impacts, and communication strategy. Some resource managers identified potential complications with issuing guidance related to climate change. In our workshop, resource managers discussing the grasslands and shrublands ecosystem said that policy development can take years; therefore, in their view, the agencies may not be able to respond to climate change in an appropriate time frame. In addition, BLM Kingman Field Office resource managers said that social, political, and legal obstacles would likely present challenges to addressing the effects of climate change, even if guidance were issued. Furthermore, they told us that if they received a directive to address the effects of climate change, the field office would adjust its work priorities for the year and would have to shift or delay other activities. Moreover, resource managers at the Chugach National Forest thought that a general requirement for each forest to address the effects of climate change in its land management plans may be counterproductive because each forest would be forced to “reinvent the wheel” on its own. These managers thought that any guidance should be accompanied by an agencywide structure, which would allow land management plans across the National Forest system to be consistent. Resource managers told us that they do not have sufficient site-specific information to plan for and manage the effects of climate change on the federal resources they oversee. Specifically, resource managers said that they need local- and regional-scale models to predict change on a small scale as well as improved inventory and monitoring. Resource managers at our workshop said that they lack computational models capable of providing local projections of expected changes. Without these models, they said that most of their options for dealing with climate change are limited to reacting to already-observed effects on their units, making it difficult to plan for future changes. In discussing the coasts and oceans ecosystem at the workshop, for example, resource managers stated that they need local- and regional-scale modeling of specific ecosystems and predictive modeling tools for fisheries management and coastal erosion management to plan appropriately. Similarly, resource managers discussing the forests ecosystem said that developing high-resolution models should be a research goal because current models are not specific enough. Likewise, resource managers discussing the fresh waters ecosystem stated that they often do not know how to plan for the effects of climate change because they lack information on temperature and precipitation changes expected in their management areas and, therefore, do not know what management actions will help the resource unit adapt to the effects of climate change. They agreed that climate projection methods must be improved, and that regional climate projections with accurate temperature and precipitation projections, rather than global-scale projections, would be helpful in more accurately identifying and planning for the likely effects of climate change. These managers also said that they need climate predictions on an ecoregion or site-specific scale. Moreover, resource managers discussing the grasslands and shrublands ecosystem told us that they need better regional models to help in the decision-making process. These managers said that information needs to be packaged to help local land managers better understand what climate change means at the local level. Resource managers interviewed for our case studies also said that they need models capable of providing local projections of expected changes. For example, BLM Kingman Field Office resource managers said that, to make proactive management decisions, they need to know what climate changes to expect. These managers said that if they could accurately and confidently predict what changes would occur in the future, they could adjust their management practices accordingly. Likewise, Chugach National Forest resource managers stated that they need projections and models of a high enough resolution to generate decisions. They said that they currently do not have the necessary information to make projections, and that it is desirable to anticipate changes and identify means for effective mitigation or adaptation. Similarly, resource managers at the Florida Keys National Marine Sanctuary said that they currently lack adequate modeling and scientific information to enable managers to predict change on a small scale, such as change occurring within the sanctuary. Resource managers at the workshop said that they generally lack detailed inventories and monitoring systems to provide an adequate baseline understanding of the plant and animal species that currently exist on the resources they manage. Resource managers discussing coasts and oceans said that they need to develop baseline information and long-term monitoring systems to detect habitat changes over time. They said that they need to target inventory and monitoring systems on particularly sensitive ecosystems and species, and focus on indicators unambiguously related to climate change. In addition, resource managers discussing the forests ecosystem stated that they need a monitoring strategy that reflects the key vital signs of forests to inform management decisions. Similarly, resource managers discussing the fresh waters ecosystem said that there must be increased investment in monitoring efforts, particularly in sites identified as likely to be adversely affected by climate change. These managers also recommended an evaluation of the current monitoring system for its ability to detect and predict climate change. They also said that there is often a lack of a clearly defined purpose for monitoring, and that the link between data collection and when to take action is not always clear. They recommended that there be a clearly defined purpose for monitoring efforts, with clear linkages between data collection and habitat protection. Resource managers discussing the grasslands and shrublands ecosystem stated that the lack of baseline information is a key issue because without it, managers do not know what is changing and how fast it is changing. They recommended conducting baseline inventories of species on federal lands and periodically repeating monitoring on a scale that could provide feedback on changes. Finally, resource managers at the workshop plenary session emphasized the need to link environmental information with decision making. Resource managers interviewed for our case studies also stated that they need better resource inventories and monitoring systems. For example, managers at the Chugach National Forest told us that, without accurate baseline inventory data of the plants and animals in the forest, it is difficult to determine whether changes to species populations are within the normal range of variability. Furthermore, an official at Glacier National Park told us that staff could make various predictions about how different climate change scenarios might affect different species, communities, and processes, but without better status information and some degree of monitoring, they probably would not be able to detect predicted changes until they are catastrophic and obvious to everyone. Resource managers interviewed for the other case studies made similar points. Resource managers at our workshop pointed out that climate change is inherently a complex, global issue. These managers added that greenhouse gas emissions generally originate outside the boundaries of federal resource units, yet these units are affected by the cumulative effects of the emissions. They said that local managers cannot control the drivers of climate change, such as the burning of fossil fuels, but local action is needed to manage its effects. Furthermore, resource managers said that federal land units are fixed on the landscape, while climate change has no boundaries, posing challenges for managing an administrative unit that does not move as the climate changes. They said that cooperative arrangements are necessary because climate change will require managers to work beyond administrative borders. For example, panelists discussing the fresh waters and grasslands and shrublands ecosystems stated that interagency coordination and collaboration are necessary to address the effects of climate change. Furthermore, panelists discussing the forests ecosystem noted the value of developing a shared vision of key climate change issues and solutions to these issues. Officials with whom we spoke in our case studies further emphasized this point. For example, officials at the Chugach National Forest said that climate change is a larger issue than one federal land management unit can address. They further said that climate change is a global issue that transcends forests and agencies, and that any strategy to address the effects of climate change should be integrated across broad landscapes, not individual forests. Similarly, managers at the BLM Kingman Field Office noted that climate change is a national issue that is difficult to address locally. Resource managers further noted that climate change-related effects can interact with and amplify the effects of other, preexisting environmental problems on a given resource unit, such as nonnative species and fire, making resource managers’ jobs more difficult. Despite these challenges, some resource managers said they have taken steps to reduce greenhouse gas emissions at their units. For example, resource managers at Glacier National Park and Everglades National Park told us that they participate in the Environmental Protection Agency’s Climate Friendly Parks Program, which focuses on reducing parks’ greenhouse gas emissions. Glacier also has an Environmental Management Plan that includes a number of energy efficiency and renewable energy initiatives. In addition, Glacier requires the concessioners that run businesses in the park to abide by certain environmental requirements, some of which affect greenhouse gas emissions. Climate change has already begun to adversely affect federal resources in a variety of ways. Most experts with whom we spoke believe that these effects will continue—and likely intensify—over the coming decades. Some federal resources, depending on a variety of factors, may be more vulnerable than others. Because this issue is long term, global, and may affect federal resources in a number of ways, it will require foresight on the part of federal agencies to prepare for and minimize the adverse effects of climate change. However, federal resource management agencies have not yet made climate change a high priority. BLM, FS, FWS, NOAA, and NPS are generally authorized, but not specifically required, to address changes in resource conditions resulting from climate change in either their resource management actions or planning efforts. However, none of these agencies have specific guidance in place advising their managers how to address the effects of climate change in either their resource management actions or planning efforts. The resource managers with whom we spoke stated that in the absence of such guidance, they are unsure whether or how to take the effects of climate change into account when carrying out their responsibilities. Such uncertainty may, as unanticipated circumstances arise, force resource managers to set their own priorities, which may be inconsistent with those of the agencies’ management and may result in misdirected efforts and wasted resources. Because there is growing evidence that climate change is likely to have wide-ranging consequences for the nation’s land and water resources, elevating the importance of the issue in their respective strategies and plans would enable BLM, FS, FWS, NOAA, and NPS to provide effective long-term stewardship of the resources under their purview. At least one resource management agency—BLM—has acknowledged if not the need for, at least the value of, guidance on climate change. In April 2007, BLM’s National Science Coordinator testified in a congressional hearing that BLM is establishing committees to, among other actions, develop guidance to address the effects of climate change in agency management practices. BLM officials told us that the lack of specific guidance, among other factors, may have limited that agency’s efforts to address the effects of climate change, and that having such guidance would help to provide a greater impetus to address climate change effects. In this light, at a minimum, guidance on addressing the effects of climate change would allow resource managers to better take into account one of the key factors that is likely to affect all aspects of the resources they manage. To better enable federal resource management agencies to take into account the existing and potential future effects of climate change on federal resources, we recommend that the Secretaries of Agriculture, Commerce, and the Interior—in consultation with the Director of FS; the Administrator of NOAA; and the Directors of BLM, FWS, and NPS, respectively—develop clear, written communication to resource managers that explains how managers are expected to address the effects of climate change, identifies how managers are to obtain any site-specific information that may be necessary, and reflects best practices shared among the relevant agencies, while also recognizing the unique missions, objectives, and responsibilities of each agency. We provided a draft of this report to Agriculture (FS), Commerce (NOAA), and Interior (BLM, FWS, and NPS) for review and comment. We received written comments from all three departments. These comments are included in this report as appendixes V, VI, and VII, respectively. In addition to the comments addressed in the following text, each department also provided technical comments, which we have incorporated into this report as appropriate. While we have acknowledged many of the departments’ comments regarding efforts they are undertaking to address climate change, we did not have sufficient time to verify the accuracy of the information presented in either their letters or technical comments prior to issuing this report. In its written comments, Agriculture’s FS agreed with our recommendation, acknowledging the need to develop clear, written communication for resource managers that explains how they should address the effects of climate change, and the need to coordinate with other departments and agencies on resource management practices in preparing this guidance. FS said that the agency will work to address clarity in communicating climate change mitigation and adaptation strategies to field units. With regard to the draft report’s contents, FS stated that the report did not adequately capture the scope and urgency of the agency’s commitment to climate change adaptation, mitigation, and research. FS listed a number of initiatives that were omitted, including research measuring forest-based carbon, participation in the California Climate Action Registry, efforts to reduce the agency’s own carbon emissions, and other efforts. Although we commend FS for undertaking these useful activities, an examination of mitigation and research activities was beyond the scope of this report, which focused primarily on management actions. FS also stated that our examination of one national forest (the Chugach National Forest) is inadequate as a proxy for the 193 million acres of diverse ecosystems managed by FS, and that 12 national forest plans do, in fact, consider the effects of climate change on existing programs and local resource values. The agency further noted that forest plans are revised every 10 to 15 years to incorporate new scientific information and management strategies. Although we used only one forest as an illustrative example in our report, FS resource managers participating in several workshop sessions and the case study said that they had limited guidance from their agencies about whether or how to address the effects of climate change in management actions and planning efforts. Furthermore, these officials said that efforts to address climate change were lacking, due to a general absence of guidance and differences in interpretation and implementation of broad resource management authority. FS headquarters officials also confirmed that they have not provided specific guidance on addressing the effects of climate change. We also believe that, out of 155 national forests and 20 national grasslands, 12 forests with plans that consider the effects of climate change is not a high percentage; we encourage all 175 units managed by FS to incorporate climate change into their plans when they next update them. FS also pointed out that we neglected to mention efforts under way at the Chugach to treat thousands of acres in the forests to mitigate the threat posed by spruce bark beetles. In the second objective of our report, we sought to identify challenges that resource managers face in addressing the observed and potential effects of climate change. These challenges include the priority of the climate change issue, the lack of agency guidance, and the lack of site-specific data. Although we believe it is important to react to individual changes observed at the site level, such as treating forests to mitigate spruce bark beetle outbreaks, the larger issue—that is, the absence of a coordinated response to climate change in agency guidance—remains. Finally, FS stated that we did not give adequate recognition to FS’s Four Threats to the Health of the Nation’s Forests and Grasslands, a messaging tool that disseminates the strategic view of the agency. (The Four Threats identified by FS are fuels and fires, invasive species, unmanaged recreation, and habitat fragmentation.) FS commented that the Four Threats include two aspects of climate change discussed in this report: forest fire and invasive species. Although we agree that at least some of the Four Threats may be related to climate change, we believe that climate change is a larger, overarching issue that should be addressed in a more comprehensive manner. In commenting on a draft of this report, Commerce’s NOAA agreed with our recommendation. In this regard, NOAA stated that the agency will work toward clarifying written communication to resource managers to explain how they are to address the effects of climate change on federal resources and identify how they are to obtain site-specific information that may be needed to implement these efforts. Furthermore, NOAA stated that the agency will continue to work with relevant federal resource management agencies on a range of climate change and land management issues and, as applicable, strive to share best practices. With regard to the information presented in the draft report, NOAA noted that we did not present information on several cross-government initiatives and NOAA management actions to address climate change. For example, NOAA stated that we did not examine the current state of modeling and observation systems, such as the Global Earth Observation System of Systems and the National Integrated Drought Information System, or the agency’s contribution to the collaborative efforts with federal, state, and local partners, including the U.S. Climate Change Science Program. Although we recognize that NOAA has a well-developed research and monitoring program, a detailed review of NOAA’s many research programs was beyond the scope of our work: the focus of the second objective of our report was to obtain the views of federal resource managers on the challenges they face in addressing the observed and potential future effects of climate change in their management actions and planning efforts. In this regard, a number of NOAA managers at our November workshop, at our site visit, and at NOAA headquarters told us that resource managers need more localized, site-specific information, and that there is often a disconnect between physical science research and implementation activities at the site level. Thus, while NOAA may be undertaking a number of initiatives, these initiatives do not appear to address the site-specific information needs of the on-site resource managers. NOAA also said that the Reef Manager’s Guide, prepared by NOAA with Australia’s Great Barrier Reef Marine Park Authority, details strategies to help local and regional reef managers reduce threats to coral reefs, and that NOAA staff implement some of these ideas. Although we agree that the Reef Manager’s Guide contains many useful suggestions for managers in their efforts to respond to coral bleaching, we do not believe that it is a substitute for official agency headquarters guidance. Similarly, we applaud NOAA’s involvement with the Nature Conservancy’s Florida Reef Resiliency Program, aimed at measuring the extent of coral bleaching and improving the ability of reefs to survive bleaching events. However, we continue to believe that NOAA needs a more comprehensive approach to managing for the effects of climate change throughout the entire sanctuary system. In its comments, Interior agreed with our recommendation, and said that the department will be using the information in the report to ensure that the department is addressing concerns it shares with GAO regarding climate change. Interior also pointed out that it had already taken steps to assess the effects of climate change on public lands by convening a task force involving nearly 100 people, including the department’s assistant secretaries and other top leaders as well as career scientists, superintendents, refuge managers, and others. According to Interior, the task force is examining how possible climate changes would affect disaster management, water resource management, and habitat management and is evaluating, among other things, new responses to manage changing landscapes. Furthermore, according to Interior, the task force is currently reviewing the development of accurate modeling and the weight to put on modeling relative to the use of historic data and agrees with our recommendation that the department will need to provide direction on how to implement these new tools as they are developed and validated. The task force is also evaluating how Interior might set priorities for generating essential information to create baseline assessments of plants and animals to appropriately manage the species the department oversees. As agreed with your offices, unless you publicly announce the contents of this report earlier, we plan no further distribution until 30 days from the report date. At that time, we will send copies to interested congressional committees; the Secretaries of Agriculture, Commerce, and the Interior; and other interested parties. We will also make copies available to others upon request. In addition, the report will be available at no charge on the GAO Web site at http://www.gao.gov. If you or your staffs have any questions about this report, please contact me at (202) 512-3841 or [email protected]. Contact points for our Offices of Congressional Relations and Public Affairs may be found on the last page of this report. Key contributors to this report are listed in appendix VIII. Coasts and Oceans Ecosystem Virginia Burkett, U.S. Geological Survey, Moderator Mike Bryant, U.S. Fish and Wildlife Service, North Carolina Billy Causey, National Oceanic and Atmospheric Administration, Florida Brian Czech, U.S. Fish and Wildlife Service, Washington, D.C. Andrew Gude, U.S. Fish and Wildlife Service, Washington, D.C. Margaret Davidson, National Oceanic and Atmospheric Administration, South Carolina Randall Kosaki, National Oceanic and Atmospheric Administration, Hawaii Cliff McCreedy, National Park Service, Washington, D.C. Anne Morkill, U.S. Fish and Wildlife Service, Florida Forests Ecosystem Tony Janetos, University of Maryland, Moderator Al Abee, Forest Service, Washington, D.C. John Dennis, National Park Service, Washington, D.C. Kathy Jope, National Park Service, Washington, D.C. Linda Joyce, Forest Service, Colorado John Morton, U.S. Fish and Wildlife Service, Alaska Al Sample, Pinchot Institute for Conservation, Washington, D.C. Jim Sanders, Forest Service, Minnesota Bill Sommers, George Mason University, Virginia Fresh Waters Ecosystem Don Scavia, University of Michigan, Co-Moderator John Healey, Government Accountability Office, Co-Moderator Dan Ashe, U.S. Fish and Wildlife Service, Washington, D.C. Levy Brekke, Bureau of Reclamation, Colorado Jeffrey Bromaghin, U.S. Fish and Wildlife Service, Alaska Mike Estey, U.S. Fish and Wildlife Service, North Dakota Sharon Kliwinski, National Park Service, Washington, D.C. Robert Krumenaker, National Park Service, Wisconsin Grasslands and Shrublands Ecosystem Anne Johnson, Government Accountability Office, Moderator Bob Adamcik, U.S. Fish and Wildlife Service, Virginia Barbara Allen-Diaz, University of California, Berkeley Bud Cribley, Bureau of Land Management, Washington, D.C. Pauline Drobney, U.S. Fish and Wildlife Service, Iowa Misty Hays, Forest Service, Wyoming Julie Thomas, National Park Service, Washington, D.C. This report examines (1) experts’ views on the observed and potential effects of climate change on federal resources within the four principal ecosystem types and (2) the views of federal resource managers on the challenges they face in addressing the observed and potential future effects of climate change in their management actions and planning efforts. In addition, four case studies illustrate some of the effects of climate change on federal resources as well as the challenges to addressing them. To select the four ecosystem types, we used a classification system used by the H. John Heinz III Center for Science, Economics, and the Environment (the Heinz Center) in its 2002 report entitled The State of the Nation’s Ecosystems: Measuring the Lands, Waters, and Living Resources of the United States. This classification system is generally accepted by the scientific community and uses a limited number of distinct divisions to identify ecosystem types (in contrast to certain other classification systems). The Heinz Center’s classification is also based on a “land cover” approach. That is, it is based on dominant vegetation or other physical characteristics, as opposed to a geographic approach. We found this classification useful because many natural resource management decisions are differentiated by land type. The Heinz Center classification system identifies six ecosystem types: (1) coasts and oceans, (2) farmlands (primarily croplands), (3) forests, (4) fresh waters, (5) grasslands and shrublands, and (6) urban and suburban areas. Our work excluded farmlands and urban and suburban areas because resources within these ecosystem types are generally not managed by federal agencies. To solicit experts’ views on the potential effects of climate change on the four ecosystem types, we convened an expert workshop on November 2 and 3, 2006, in collaboration with the National Academies’ Board on Atmospheric Sciences and Climate. The workshop consisted of concurrent breakout sessions for experts in each ecosystem type, and plenary sessions in which all participants contributed. The National Academies, under contract to GAO, helped identify appropriate workshop moderators and participants, organized logistics, and issued the workshop invitations. The National Academies and GAO worked together to prepare the agenda and to identify scientific experts and economists for the first day of the workshop, using specific selection criteria (described in greater detail in the following text). GAO identified most of the federal resource managers for the second day of the workshop because the National Academies does not interact extensively with the federal resource management community. We asked National Academies staff to help us identify four individuals with the following attributes to serve as breakout session moderators: (1) experience in leading climate change assessments; (2) a strong professional reputation that might attract other highly regarded experts; (3) knowledge of one of the four ecosystem types; (4) a balanced perspective on climate change (i.e., politically neutral, with no strong ideological views on climate change expressed in past work); and (5) a willingness to assist in planning the workshop’s substance. To identify experts for the first day of the workshop on science issues, the National Academies and GAO agreed on selection criteria, which included recommendations from other experts, a demonstrated record of publication in the field, and experience contributing to climate change impact assessments or other peer-reviewed scientific reports and articles relating to climate change. Other factors were also considered, such as the individuals’ availability on the date of the workshop. The National Academies and GAO gave particular preference to individuals recommended by more than one expert. In addition to ecosystem expertise, we gave priority to those candidates whose expertise also included an understanding of climate change (e.g., an understanding of how climate change might affect coral reefs or forests). We also sought to have an economist in each session. The National Academies reviewed names in its database of experts and solicited recommendations from various National Academies officials and scientists with whom National Academies’ staff regularly collaborate. In addition, GAO identified scientists on the basis of interviews with climate change experts that we conducted in the early phases of our work; we had asked these individuals to name others with ecosystem expertise who might be good candidates for the workshop. Workshop moderators also suggested participant names. Once a consolidated list of potential invitees was finalized, it was reviewed by the Chairman of the Executive Office of the National Research Council, the principal operating agency of both the National Academy of Sciences and the National Academy of Engineering. GAO and the National Academies focused the search for experts primarily on individuals from government, academia, and nongovernmental organizations (NGO) because most climate impact-related work is either funded by these types of institutions or carried out by experts from these types of bodies. However, since many NGOs have taken strong positions on climate change, we drew upon this community to only a limited extent. To select experts for the second day of the workshop on management issues, we asked for recommendations from both federal resource management agency headquarters officials and managers in the field as well as our workshop moderators. We gave priority to senior federal resource managers with “on-the-ground” management experience in the field. We also invited managers from Washington, D.C., headquarters offices to ensure a balanced perspective. We selected managers who had a general familiarity with relevant statutes, regulations, agreements, executive orders, and other management directives aimed at protecting the resources under their agencies’ jurisdictions. We also selected managers who had a general familiarity with the issue of climate change and how it could affect one of the four relevant ecosystem types—although this knowledge was not essential. We sought to have representation from each major agency that manages resources corresponding to each of the four ecosystem types. For example, the Bureau of Land Management (BLM), Forest Service (FS), U.S. Fish and Wildlife Service (FWS), and National Park Service (NPS) all manage grasslands, and each of these agencies was represented in the grasslands and shrublands breakout session. To keep the scope of the project manageable, we did not include all federal agencies that oversee federal resources, such as the Bureau of Indian Affairs, the Department of Defense, the Tennessee Valley Authority, or others (although we did have one representative from the Bureau of Reclamation, which manages water resources in the west). We also did not include Exclusive Economic Zone waters managed by the National Oceanic and Atmospheric Administration (NOAA). Fifty-four scientists, economists, and federal resource managers from academia, government, and NGOs, attended the workshop. Appendix I contains a list of the workshop participants and moderators. Prior to the workshop, we sent all participants an information packet containing, among other things, graphs showing the range and average of model projections for the change in monthly temperature (degrees Celsius) and precipitation (millimeters per day) in the years 2020 and 2090 for 11 U.S. regions under a medium impact Intergovernmental Panel on Climate Change (IPCC) scenario. The graphs were based on publicly available results from the full suite of models used in the IPCC’s Fourth Assessment report. The graphs, prepared for GAO by the National Center for Atmospheric Research, were intended to provide a framework for the workshop discussions by bounding the range of possible future temperature and precipitation outcomes. We provided this material to participants for background information purposes only; participants were given the option of referring to these graphs when responding to the questions posed at the workshop. We also sent participants, as background reading, copies of the IPCC Third Assessment Report Working Group II’s first chapter, entitled “Overview of Impacts, Adaptation, and Vulnerability to Climate Change.” Each participant was further sent the IPCC Third Assessment chapter that corresponded to the ecosystem type (e.g., forests or coasts and oceans) on which the participant was expected to speak. On the first day of the workshop, 27 scientific experts and economists, each having particular expertise on 1 of the 4 ecosystem types, discussed scientific questions related to the potential effects of climate change on federal resources. (These questions can be found in app. III.) On the second day of the workshop, also organized according to ecosystem type, 28 resource managers discussed the challenges, constraints, and limitations they faced in managing federal resources, given the potential effects of climate change identified on the previous day. The workshop was designed to give the scientists the leading role on the first day and managers the leading role on the second day. However, in most cases, both sets of individuals participated in discussions both days because some managers had scientific backgrounds, and some scientists had experience in resource management. There were also two plenary sessions addressing questions of science and management that applied to all four ecosystem types. Summaries of the ecosystem breakout sessions and the plenary sessions are presented in appendix III. After the workshop, we sent drafts of the findings from each of the breakout sessions to participants, giving them an opportunity to comment on the accuracy of the information. It is important to note that the expert views represented at the workshop are the views of scientists and managers, not those of GAO. We did not independently review articles from the scientific literature or verify participants’ statements. In addition, although the workshop experts discussed a wide range of possible climate-related effects, we describe only some of these effects in our report. We also did not attempt to rank effects according to severity, owing to a lack of criteria to make such rankings. To illustrate some of the effects of climate change on federal resources and possible options for addressing them at federal resource units, we conducted four case studies, one case study for each ecosystem type, using a nonprobability approach. We selected our specific case study sites after soliciting selected experts’ views on which federal resources may be most vulnerable to climate change. The experts we consulted included many of those whom we invited to the first day of the workshop (including some unable to attend), as well as others recommended by other experts or individuals whose names appeared frequently in the peer-reviewed literature for the relevant ecosystem type. We e-mailed these individuals, soliciting their views on which specific federal land units they considered to be most vulnerable to climate change impacts and the nature of any adverse impacts. In making our final land unit selections, we also considered responses obtained at the workshop; one of our workshop questions asked participants which areas of the United States may be most vulnerable to climate change. Furthermore, we took into consideration land unit visitation levels, size, location, geographical diversity, ecological and geological variation, and land unit management agency in making our selections. For example, we gave priority to larger land units and to units with high levels of visitation and a range of geographic features. We also gave priority to units where more than one agency is involved in management decisions. We further considered accessibility, since it was important to visit each site. The four units we selected on the basis of these criteria are the Florida Keys National Marine Sanctuary in southern Florida (coasts and oceans ecosystem); the Chugach National Forest in south- central Alaska (forests ecosystem); Glacier National Park in northwestern Montana (fresh waters ecosystem); and the BLM Kingman Field Office in northwestern Arizona (grasslands and shrublands ecosystem). All of these units encompass multiple ecosystem types. For example, Glacier consists of glaciers, lakes, forests, and alpine meadows, among other features, while the Chugach contains a mix of forests, coasts and oceans, and fresh waters ecosystems. Management agencies for these four sites include BLM (Kingman, Arizona); FWS (four national wildlife refuges near the Florida Keys National Marine Sanctuary, the Kenai National Wildlife Refuge adjacent to the Chugach, and certain resources within Glacier); and NPS (Glacier), all under the jurisdiction of the Department of the Interior; FS, which falls under the jurisdiction of the Department of Agriculture (the Chugach and the Flathead National Forest near Glacier); and NOAA, which falls under the jurisdiction of the Department of Commerce (Florida Keys National Marine Sanctuary). In addition to the managers and experts at each case study location, we also spoke with officials from adjacent federal lands. We spoke with these officials because resource units in our specific case study land units coordinate with adjacent land units, and the ecosystems supported by the case studies generally overlap with surrounding federal resource units. For example, for the Chugach case study, we spoke with FWS experts and managers from the adjacent Kenai National Wildlife Refuge as well as staff from FS’s Alaska Regional Office in Juneau. For the Florida Keys National Marine Sanctuary case study, we spoke with experts and managers from the Everglades and Dry Tortugas National Parks as well as FWS experts and staff who oversee four Keys national wildlife refuges located near the sanctuary. For the Glacier case study, we spoke with experts and managers from FS’s Flathead National Forest as well as an FWS fish biologist based in the park. At a number of sites, we viewed firsthand some of the resources discussed at the meetings. We also spoke to representatives of some private sector organizations. For example, for the Glacier National Park case study, we also spoke with representatives of firms that do business in the park and with staff from a private foundation. We also spoke with local academic researchers, state government offices, and representatives of NGOs with expertise on the respective sites, as appropriate. It is important to note that the four case studies are illustrative only and not projectable. That is, physical and management conditions that apply to a given federal resource may not apply to all federal land or water units of a similar ecosystem type or managed by the same agency. Detailed summaries of the individual case studies can be found in appendix IV. To assess the reliability of data related to changes in Glacier National Park, spruce bark beetle infestations in Alaska, and loggerhead turtle nesting patterns in Florida, we spoke with park officials, Kenai National Wildlife Refuge officials, and University of Central Florida researchers, respectively, about data quality control procedures and reviewed relevant studies. We determined that the data and expert views obtained were sufficiently reliable for the purposes of this report. Finally, in concluding our work, we contacted legal counsel at each of the five resource management agencies as well as the White House Council on Environmental Quality, to ascertain the scope and nature of federal authority and requirements to address the impacts of climate change in resource management and planning. In this report, we use the term “federal resources” to refer to federal lands managed by BLM, FS, FWS, and NPS, and to national marine sanctuaries and one marine national monument managed by NOAA; the term “ecosystem” to refer to a system of interacting living organisms together with their physical environment; the term “resource managers” to refer to individuals who manage federal resources; the term “physical effects” to refer to observable changes in the physical condition of some part of a natural system, including, among others, extreme weather events—that is, weather events that are rare at a particular place (this may vary from place to place); the term “biological effects” to refer to changes in the interaction among organisms living in a given ecosystem; and the phrase “economic and social goods and services” to refer to economic resources, such as revenue-producing industries, including forestry and fishing, among others, and social or cultural resources, such as recreational activities, scenic views, and historical artifacts, among others. We recognize that the various effects of climate change are interrelated, and that certain effects may belong to more than one category. We conducted our work between May 2006 and July 2007 in accordance with generally accepted government auditing standards. This appendix summarizes the results of an expert workshop convened by GAO, in collaboration with the National Academies’ Board on Atmospheric Sciences and Climate, on November 2 and 3, 2006, to solicit experts’ views on (1) the potential vulnerabilities of four ecosystem types—coasts and oceans, forests, fresh waters, and grasslands and shrublands—to climate change and (2) the challenges to and approaches for addressing climate change on federally managed lands and waters associated with these four ecosystem types. The workshop consisted of moderated breakout sessions for experts in each ecosystem type, and plenary sessions, in which all participants contributed. Specifically, this appendix summarizes the responses of experts and selected federal resource managers to questions developed by GAO for each session. These summaries are based on professionally transcribed notes and information documented by GAO observers. After the workshop, we sent draft summaries of each of the four breakout groups to participants, giving them an opportunity to comment on the accuracy of the information. The summaries below reflect the comments we received from participants. The length and format of responses may vary by ecosystem type because each breakout session was moderated independently. A list of workshop participants and moderators can be found in appendix I, and a detailed description of the objectives, scope, and methodology describing the selection of experts and other topics is available in appendix II. Question 1: Based on your understanding of potential climate change in the United States, how might this ecosystem type be affected over the near term (~25 years) and over the longer term (50-100 years)? What might be some of the key ecological effects, economic effects, and social/cultural effects? Question 2: Which of these effects are most significant and adverse? Question 3: Are there certain thresholds beyond which the ecosystem in the identified areas cannot recover? Please describe the nature and scope of these thresholds and provide examples. Question 4: Which areas of the United States may be most vulnerable to climate change and why? Question 5: What types of information (e.g., research, monitoring/measurement) are needed to better understand and prepare for potential changes on these ecosystems? Question 1: What key new findings related to the effects of climate change on ecosystems have emerged in the past 5 or 6 years? Question 2: What are the gaps in scientists’ understanding of how climate change might affect these four U.S. ecosystem types? Question 1: Given some of the potential climate-related effects on this ecosystem described at yesterday’s session, what might be the implications for your unit, including how it is currently used and managed? Question 2: What are the challenges, constraints, and limitations associated with adapting to the effects of climate change on federal lands and waters? Question 3: What land management practices or approaches to planning may be considered when responding to the effects of climate change? Question 4: What is the most important type of information (research, monitoring/measurement) needed to better understand, prepare for, and address the effects of climate change on federal lands? What resources will be required to achieve this? Workshop participants provided suggestions for matters of congressional consideration related to challenges land managers face with regard to the effects of climate change on their lands and waters. Based on your understanding of potential climate change in the United States, how might this ecosystem type be affected over the near term (~25 years) and over the longer term (50-100 years)? What might be some of the key ecological effects, economic effects, and social/cultural effects? Below is a summary of participants’ responses to Question 1, with particular focus on coasts and oceans. Panel members noted that the primary (direct) and corresponding secondary (indirect) effects and impacts of a changing climate were likely to be the following: Inundation and permanent loss of coastal wetlands and barrier shorelines, including loss of island communities (other U.S. possessions, low-lying atolls, etc.) Increased saltwater intrusion, degradation of fresh and brackish coastal waters, and low-lying ecosystems; this could impact the drinking water supply Drowning/Migration of submerged aquatic vegetation and vegetated Interaction of climate impacts with shoreline development via impact on infrastructure and development on federal land; increased coastal erosion, necessitating retreat or armoring of coastal communities with impacts on ecological systems, historic lands, and cultural sites Loss of storm buffer for low-lying areas Increasing wave power/energy and increased vulnerability to storm surge and flooding Increased erosion and retreat of shorelines around bar areas and Increased sediment transport into nearshore habitats Invasion of marine and exotic species into estuaries (e.g., oyster predators in the Chesapeake Bay) Impact on tourism, recreation, and leisure (e.g., loss of beaches) Migration of mobile species could create conflicts on private lands Federal and state legal relationships/conflicts—impacts on legal regimes? Effects on protected species, such as loss of turtle and shorebird Increased storm intensity and frequency Exacerbate all effects identified above Physical disturbance - storm surge, shore erosion, wave run-up, and wind (e.g., shore erosion, vegetation inundation, and damage to coral and other reefs) Damage to infrastructure and cultural resources Altered timing and volume of fresh waters delivery to estuaries resulting in changes in salinity (impacts change in precipitation regime), flushing rates of nutrients, turbidity, flow regime, and many other variables Shifts or loss in the extent of barrier islands (e.g., creating more inlets, reducing dune systems, and declining aerial extent) Interaction with coastal developments (e.g., interference of barrier island migration) Increased runoff and land-based pollution (e.g., nutrients, sediments, turbidity, and debris) Changes in regional storm patterns Increasing air, ocean, and coastal water temperatures Loss of sea ice and coastal permafrost in Alaska; loss of ice platforms used by marine mammals and seabirds; and loss of subsistence for Alaskan natives Mass coral bleaching events and disease events Pest systems—increase in incidences of harmful algal blooms; increased outbreak of pests, disease, and pathogens (e.g., increased microbial activity could affect shellfish, fish, corals, sea turtles, and some sea grasses) Migration or loss of species in combination with ocean acidification (e.g., corals or other calcifying organisms) Changes in stratification regime (layers of habitats)—could affect Changes in hydrologic and salinity regimes of coastal systems due to Changes in timing of snowmelt/accumulation Loss of ecological functions along shoreline Economic impact on marine, coastal, and recreational (tourism— fishing, bird-watching, etc.) industry in all areas Indirect effects on eutrophication via increase in rate of phosphorus release from sediment to water Increase in invasive species and loss of native species due to changes in temperature Possible reduction in calcification rate of corals and other calcium Environmental ecological niche shifts (impacts of changing ecosystems on the oceanic food chain)—changes in plankton communities Change in distribution of species Erosion (physical and chemical) of carbonate reef structures; this has economic impacts and reduces coastal protection from storms Feedback on global biogeochemical cycles Above will impact tourism and commercial and recreational fishing. Will change resource extraction environments Changes in ocean currents and thermohaline circulation Affects upwelling, nutrient dynamics; change in biogeochemical cycling (e.g., increase in dead zones), phytoplankton productivity, and productivity of fish-based ecosystems; loss of marine mammals, fish, and birds Changes in thermohaline circulation—could provide large-scale feedback on global climate systems (there is higher uncertainty about this effect, but the consequences would be extreme) Impact on land temperature regimes, precipitation, and wind Changes in the distribution of species, including changes in larval stages Changes distribution of marine debris and pollution The group agreed that the effects of “Changes in wave climate” would be the same as those listed under “Accelerated sea level rise” and “Increased storm intensity and frequency.” Changes in salinity regime in estuaries and coastal waters Changes in quality, quantity, timing, and rate of fresh waters delivery In general, wet areas will get wetter, while dry areas will get drier, affecting groundwater, fresh waters availability, surface water, and drinking water supplies. Changes in water-quality-related incidents, such as harmful algal blooms, anoxic (oxygen deficient) zones, pathogens, diseases, and habitat quality Changes in hydrologic regimes interact with water quality and water management (e.g., dams, canals, flood protection, and reservoirs) Changes in coastal runoff, sedimentation, and erosion Ability of ecosystems to flush pollutants and nutrients Panel members also identified the following two “high-order” primary and corresponding secondary effects. The group noted that the timing and magnitude of these effects is less certain than other effects previously listed. Natural variability in storms, currents, and other climate factors have important ecological impacts. Natural variability interacts with long-term climate change in all of these impacts. Long-term climate change influences climate variability. Climate variability can be an indicator of the consequences of climate change (e.g., El Niño simulates warmer climates for much of the globe). Creates uncertainty for economic decision making and resource Makes it difficult to understand if goals are achieved if climate variability is considered—management is more difficult Interaction of climate variability and change has impacts on long- term economic investment and infrastructure development. The group agreed that the results of “Changes in biogeochemical cycles” were similar to some changes already listed, especially those referring to currents and upwelling, stratification, runoff, and precipitation regimes. See Question 2 (Day 1). Workshop participants discussed the pervasive nature of climate change events and their belief that no single event is attributable to a climate- related cause, but the composite of several events points toward climate- related causes. Therefore, over time, one would expect to see a higher number of incident-based phenomena, including forest fires, storms, and chronic phenomena, such as species migration. Many believed that it was important for people to understand the nature of the timing problem—that different types of resource management decisions must be made across different time horizons. Some decisions will have to be made in terms of variables that land managers do not fully understand. Reduced snowpack and early snowmelt Snow and ice serve as natural reservoirs in mountainous areas and northern regions of the United States, gradually supplying water into the summer months. Much of the west relies on spring snowmelt to provide a steady stream of water into summer months, when demand is highest; however, warmer temperatures and a shift of the winter precipitation regime from snow to rain are expected to cause reduced snowpack and early snowmelt. “Rain-on-snow” events increase the potential for flooding, as rainwater and melted snow cause very high runoff rates in winter and early spring. Because of this temperature-driven shift of precipitation (from snow to rain), there is an increased variance in annual streamflow volumes, with greater flow in winter months and decreased streamflows in summer months, and increased reliance on groundwater stores (which are themselves affected by precipitation changes). High runoff in winter and early spring is likely to increase soil erosion, enlarge stream channels and increase channel instability, increase sediment load, and increase turbidity in rivers and streams. If a high runoff event follows dry periods, high nutrient flux is expected, as nitrogen and phosphorus from agricultural fertilizers and decayed organic matter will be washed into streams. The extra nutrient load may stimulate plant growth (eutrophication), resulting in oxygen depletion in the water body, and the increased turbidity will likely reduce ecosystem productivity. Furthermore, disturbance events, such as peak streamflow events, are likely to occur and are expected to adversely affect the biodiversity of aquatic species, particularly insects. The reduction of summer streamflows will limit the amount of habitat available for every species dependent on the stream, since reduced streamflow and reduced stream connectivity inhibits an aquatic species’ ability to move through an area. Low summer streamflows will limit hydropower generation capacity, and it will be necessary to balance human and ecological demands for water resources. The phenology of critical biological functions, such as fish migration and reproduction, may be disrupted by changing patterns of water flow or availability, according to one expert commenting after completion of the workshop. Reduced summer flows can limit habitat directly by decreasing available habitat area, in addition to reducing connectivity, according to another expert commenting after the workshop. Furthermore, according to one expert commenting after the workshop, reduced summer streamflows will result in a contraction of the stream network and a reduction in the density of headwater streams. Since most of the total length of the stream network is in these headwater streams, there is likely to be a fairly dramatic decrease in the amount of flowing surface water late in the summer, meaning that streams will dry up sooner, according to this expert. Increased temperature of lakes, reservoirs, and rivers Higher land surface temperatures will increase temperatures of surface water bodies and will cause warmer runoff to enter streams, raising the temperature of receiving waters. For example, increased temperatures of 7 to 10 degrees Fahrenheit have been observed in water bodies in the east after storm events. Increased water body temperatures may include the following adverse effects: increased risk of toxic algal blooms; reduction in summer habitat or increased juvenile mortality of cold water and headwater obligate aquatic species (this may have significant economic consequences). For example, the nonnative zebra mussel has extended its range in the Great Lakes as lake water temperatures have warmed. Furthermore, temperature changes may result in the introduction of disease or extirpation (elimination of a species or subspecies from a particular area, but not from its entire range), particularly if the species cannot migrate to other areas. Headwater obligate aquatic species are species that must live at the headwaters, or source waters of a stream. may lead to increased rates of hypoxia (conditions of low oxygen in water), reducing ecosystem health. Lake mixing cycles and stratification of lake water are temperature- driven processes, which are necessary for nutrient cycling (turnover) and ecosystem health. If temperatures do not drop low enough in winter months, lake mixing may be reduced or stopped altogether. Reduced winter ice cover on large lakes, such as the Great Lakes, may alter “lake effect” snow patterns, resulting in more rain and less snow in areas down wind or down weather. Reduced ice cover also allows for a great deal of evaporation from the lakes through winter months, reducing the springtime water levels in the lake. This is likely to affect the shipping industry by opening routes in the winter, but restricting routes in the summer if lake levels are too shallow. If water levels of the Great Lakes are shallow during summer months and require smaller ships or dredging in lake inlets, substantial costs may ensue. Cold temperatures and lack of biological activity also help to preserve submerged cultural resources, such as shipwrecks (e.g., Lake Huron). Similarly, the United Nations has been looking at preservation challenges at archeological sites around the world, due to increased decay and erosion resulting from climate change. An FWS representative said that the fisheries in Alaska may be conditions in western North America. Salmon also play an important role in the energy and nutrient cycle in many northern streams, and if salmon abundance declines substantially, the availability of energy and nutrients to numerous aquatic and terrestrial species, such as insects, birds, and bears, will be reduced accordingly. In general, most climate forcing ecosystem impacts are occurring in higher latitudes, where ecosystems are simpler and potentially more vulnerable to both change and disturbance. Coastal areas that rely on groundwater supplies will have to be careful not to overdraw from the aquifer to avoid saltwater intrusion and contamination. This is particularly important in water-stressed areas of the southwest. Also, coastal wetlands may become contaminated with salt, killing off grasses that would normally assist in the water purification process. Increased storm surges or flow volumes may damage infrastructure, including roads, offices, and housing built in floodplains. Experts acknowledged the importance of maintaining public access to public lands, but they questioned societal decisions made to construct facilities on sites that may be vulnerable. According to one expert commenting after completion of the workshop, it is important to identify high hazard zones and then determine what to do with infrastructure that is currently sited there and to build this kind of thinking into future planning and development decisions. Reduced nutritional quality of leaves Increase of atmospheric CO results in recalcitrant leaves, which can be less nutritional or palatable for herbivores. Wetlands also purify water and provide spawning ground for amphibians (e.g., vernal pools). However, they depend on high-flow events associated with heavy rainstorms or high runoff events to disperse seeds. Changing surface water-flow regimes will result in unanticipated changes in wetland conditions, threatening some. Rising snow lines at high elevation are expected to result in a longer growing season with increased forest growth at these elevations. Water will likely be stored in the increased biomass and transpired back into the atmosphere, rather than running off into streams. Ephemeral streams are expected in these areas. According to one expert commenting after completion of the workshop, rising snow lines will result in increased forest growth with an associated increase in evapotranspiration, resulting in less water available in the soil, further reducing streamflows and the density of streams on the land. Resiliency of a system may be compromised. Regime shift—it is possible to have a fundamental change in the way an ecosystem is put together, such that it is very difficult to return to a prior state. The grasslands and shrublands breakout group collaboratively developed the following summary statement that describes the potential effects of climate change on this ecosystem type: Grasslands, shrublands, and tundra are all at risk of having a fundamental shift in dominant vegetation type and/or loss of that system, and these changes are likely to be sufficiently large to have effects that cascade through many ecological, economic, and social systems. These effects are most likely to occur in the long term (50 to 100 years), but there is risk that they can also occur in the near term. In addition, existing ecological problems, such as wildfires, invasive species, and nitrogen deposition, would be exacerbated by climate change. The group also noted the following: Tundra systems are temperature-sensitive (i.e., temperature is the fundamental driver for change). Shrublands are relatively more water-sensitive than grasslands and tundra. Grasslands are both temperature- and water-sensitive. Climate models are weakest in predicting precipitation. Breakout group participants further agreed that: Climate change will have impacts on all of the lands throughout the country, and some of these impacts will have implications for the integrity of grasslands. There will be increasing pressure on public lands for different uses for reasons related to climate change. Such potential uses include water storage and development of renewable energy sources. All of the effects described below are effects that will be observed in the next 25 years but will be intensified in the longer term. The group noted that the primary (direct) effects of a changing climate were likely to be the following, listed in the general order in which they were discussed: Increased CO An increase in extreme events (i.e., weather events that occur infrequently, such as drought, heat waves, heavy rainfall, and tornadoes) Altered seasonality of precipitation (i.e., more or less precipitation in the summer or winter) Increased wildfire frequency and severity The melting of mountain glaciers, which will affect systems downstream Next, participants identified a number of existing problems that will be exacerbated by climate change (referred to as secondary effects). These problems are also listed in the general order in which they were discussed: Increased nitrogen deposition from atmospheric pollution (especially in Southern California) Ecosystem fragmentation: migration corridors for flora and fauna could Loss of coastal prairies due to increase in mean sea level (i.e., as sea levels rise, saltwater will encroach on coastal prairies, turning them into coastal wetlands) Greater desertification in certain areas, such as the shortgrass steppe of eastern Colorado and farmed portions of the Nebraska sandhills Earlier snowmelt, altering the amount of water available to plants at critical times; earlier snowmelt will also affect the amount and timing of water available to rivers Phenological changes, such as plant flowering or bird migration; the growing season will lengthen in the north and shorten in the south; pollination could be out-of-sync with flowering Changes in distribution of plants that photosynthesize during the cool season (referred to as C3 plants) and plants that photosynthesize during the warm season (referred to as C4 plants) Increases in the number and intensity of wildfires (although in some shortgrass systems, wildfires might actually be less frequent, because there is less fuel) Increased competition between people and natural systems for water; stress on property rights as people and agriculture migrate in response to a changing climate; increased pressure to use land for different purposes, such as human settlement, water storage, or energy development Increases in pest outbreaks, especially pests that emerge under warmer or drier conditions (e.g., bark beetles in woodland systems, grasshoppers that thrive under drought conditions, various fungi, as well as diseases caused by bacteria, parasites, and viruses) Loss of or decline in certain ecological communities, in some cases leading to extinctions (e.g., alpine tundra, prairie pothole communities, vernal pools) Decrease in native biodiversity in many areas and new assemblages of species living together (i.e., new communities will emerge with unknown dynamics) Changes in the quantity and quality of forage (plants available for livestock or wildlife grazing) Changes in soil moisture dynamics Changes in soil organic matter dynamics Loss of tundra and of Arctic permafrost Shift from nonvascular to vascular plants in parts of the Arctic Increase in airborne dust (particulate matter) as a result of drought Increase in tropospheric ozone formation, which may harm vegetation Change in dominant vegetation types, providing opportunities for Increase shift to dominance or replacement by invasive species (both plants and animals) Changes in issues associated with wildland/urban interface (fire, pests, human/wildlife interactions—e.g., when coyotes or bears migrate from the natural to the urban environment) Which of these effects are most significant and adverse? Panel members identified the impacts they believed to be most significant and adverse. The group did not categorize such impacts according to their separate ecological, economic, or social effects because it believed that the impacts affect all three categories of effects. Inundation and permanent loss of coastal wetlands and barrier shorelines, including loss of island communities (other U.S. possessions, low-lying atolls, etc.) Loss of sea ice and coastal cryosphere (coastal permafrost) in Alaska; loss of ice platforms used by marine mammals and seabirds; and loss of subsistence for Alaskan natives Mass coral bleaching events and disease events Changes in biochemical cycling (e.g., increase in dead zones); phytoplankton productivity; productivity of fishery ecosystems; and loss of marine mammals, fish, and birds Changes in salinity regime in estuaries and coastal waters Economic impacts: recreational and commercial fishing, quality of life, cultural/maritime heritage, shorebirds, marine recreational coastal fishing, migratory water fowl, hunting, tourism, and coastal development and infrastructure (docks, housing, etc.) Before addressing the posed questions, forests ecosystem workshop participants suggested a list of items commonly viewed as valuable forest services. Participants suggested this as a first step toward answering Question 2, Question 1, and Question 3 (below). Valuable services forests provide include the following: Water (quality, quantity) Living area Forests ecosystem workshop participants generally agreed that the scientific community has reached consensus that climate change will do the following: Cause forest fires to grow in size and severity. Fires already have increased in size in areas such as Alaska, Northern Rocky Mountains, high elevations, and the Sierra Nevada Mountains. Climate variability and other fire management approaches, such as suppression, also have affected the southwest. It is likely that other areas in the west, such as the Pacific Northwest and the Colorado Rockies, could see temperature- driven fire activity in the future. One expert added, after completion of the workshop, that climate and demographic changes are likely to increase fire risk to communities in the east. Affect air quality. For example, increased ozone pollution and increased smoke from forest fires will impact air quality. Affect species composition—tree species, species that depend on trees, and vegetation. For example, sugar maple, white bark pine at high elevations, and subalpine spruce fir forests in the Rockies have already experienced changes. Affect phenology, disconnecting some critical species interactions, such as pollination and seed dispersal, and creating the opportunity for other, unpredictable changes Cause a reduction in permafrost, decreased snowpack, and increased Affect water regimes, which are critically important to the ecosystem. Changes in precipitation, storm intensity, temperature increase, evaporative demand, timing of snowmelt, groundwater level, and/or flashing may occur. Impact wind disturbance activity, an important ecosystem trigger. However, exactly how wind patterns will change is uncertain. Impacts of hurricane-caused timber blowdowns and subsequent buildup of down and dead fuel is a concern in the southeast. Produce more surprises in terms of unanticipated consequences and interactions with other environmental stressors. For example, increased nitrogen in conjunction with insects and climate can result in significant forest diebacks. Result in increased temperatures, which will increase insect and disease infestation range and extent. Three recent examples are the recent spruce beetle, the mountain pine beetle, and the southern pine beetle infestations. In addition, one workshop participant added the following: There are positive effects of climate change. For example, changes in precipitation (increases), or distribution (to dry areas), or increases in temperature in cold areas where such are limiting, or a combination of such, will enhance forest growth and development. Thus, some deserts and/or marginal forest areas could become highly productive forests. In general, there is an ebb and flow of ecosystem types over time. Participants identified the following effects as among the most significant and adverse: Droughts will have the greatest impact with the least ability to mitigate. Floods can be problematic for river areas and the people living within those areas (e.g., due to increased channel changes, such as widening streambeds and floodplains, and instability), although some potential mitigation is possible, through construction of dams, etc. An NPS representative believed that an increase in extreme runoff (and drought) events would lead to more human emergencies, greater costs, and disruptions to operations. Rate of climate change vs. rate of (invasive) species shift Although the relative rate of climate change versus the rate of species migration is not always known, experts expect invasive species to have a relative advantage in a changing climate because they tend to be more adaptive. Some experts have said that invasive species may compromise the resiliency of a system or may impact economic resources of an area, etc. General temperature increase Temperature increases are most likely to threaten cold-water species, such as trout and salmon, and amphibians. General reduction of water supply Reduced supply and increased demand due to population growth is likely to result in competition between human and ecological uses. The group identified the effects that they believed to be most significant and adverse. They defined “most significant” as the effects that are relatively certain to happen. They categorized such impacts according to ecological and economic/social effects. Most Critical in Terms of Ecological Effects: Extinction of rare ecosystems, such as alpine tundra, California chaparral, and blue oak woodlands in California Changes in soil content, organic matter, and moisture Shift in biomes from one type to another or from one location to another. For example, there will likely be a change from a shrub grassland system to a tree-dominated system in upper elevations at some locations and a change to an annual grassland system in lower elevations. Large-scale, transregional effects that extend beyond the region where they occur and feed back into climate change. (That is, things that happen in a local context have larger impacts on the Earth’s climate system.) Examples of transregional effects with feedbacks include dust storms, wildfire, and methane release from the tundra. (Methane is a greenhouse gas.) Simplification of certain ecosystems through loss of species diversity (e.g., replacement of native species by invasive species that become monocultures) or loss of endangered species. Examples include the shift from a shrub grassland to an annual grassland system in the sagebrush biome and the loss of forbs (wildflowers) in the California native grasslands. Most Critical in Terms of Economic and Social Effects: Changes in wildfire frequency and severity, with associated costs of fire- fighting and rehabilitation after fires Potential loss of national parks and forests with named features/species: for example, Glacier National Park (with no glaciers), Saguaro National Monument (with no saguaro cacti), Joshua Tree National Park (with no Joshua trees), and Tallgrass Prairie Reserve (with no tallgrasses) Loss of refuge function/purpose and the economic impact associated with the refuge. For example, if certain FWS wetlands dry up, the waterfowl hunting industry may be hurt in those areas, with economic implications for local communities. Waterfowl reproduction may be reduced. The refuge may thus no longer be relevant for the original purpose for which it was established. Increased frequency of extreme events, such as drought and fire, and the associated cost of the loss in productivity, wildlife, livestock, recreation, or other land-use activities Exacerbated urban/wildland interface (i.e., increased costs of fighting fires and rehabilitating land, and property loss) Reduced Native American use of lands and revenue from natural resources on their lands (e.g., livestock, and reindeer and caribou herds in Alaska) Are there certain thresholds beyond which the ecosystem in the identified areas cannot recover? Please describe the nature and scope of these thresholds and provide examples. Panel members provided the following examples and descriptions of various thresholds within the coasts and oceans ecosystem that, if breached, will be difficult to recover from: Corals: Clear temperature threshold above which bleaching and mortality occur. For tropical corals, the bleaching threshold is generally more than 1 degree Celsius over the average temperature of the warmest summer month at that location. Mortality results from accumulated thermal stress influencing various factors, such as bleaching and disease. Arctic/Subarctic coastal ecosystems: A 1- to 2-degree-Celsius increase in temperature would result in a change in ice formation dynamics, sea ice, permafrost, and glacial melt. For example, if sea ice retreats to the point where the diving depth of the seals is exceeded, the seals will die. Another example is fragmentation of ice packs for walruses and polar bears, which increases the energy needed for foraging. This impacts juvenile survival in walruses and polar bears. Coastal wetlands: Coastal wetlands have both salinity and sea level rise thresholds. In coastal fresh waters wetlands, salinity of 5 parts per thousand would result in a loss or shift of ecosystem type and a die-off of vegetation. The coastal fresh waters marsh would cease to exist in some areas. For brackish coastal wetlands, shifts in salinity will lead to shifts in species composition. If salinity levels rise above approximately 20 parts per thousand, there will be significantly less diversity. For a sea level rise threshold for coastal wetlands, tidal inundation could be high enough to transform the system to open water. When the sea level rise exceeds the ability of plant communities to grow vertically through accretion, then the community can turn to open water. Climate regime shifts: Several shifts have already been observed where complete shifts in ecosystem structure and services have changed relatively rapidly over a few years. This is an ecosystem dependent and a nonlinear response. Examples include the Northern Pacific and some fisheries. Ocean acidification: When oceanic carbonate ions drop below 200 micromoles per kilogram (approximately 425 parts per million atmospheric CO), corals will no longer be able to build reefs faster than they naturally erode. Elimination of coral reef ecosystems, many types of plankton, and fundamental shifts in food chains could result. Entire ocean food chains could change, influencing important fishing industries. Invasive species and pests: Many have their own thresholds. Loss of certain events, such as low salinity or low temperature, would wipe out certain species and introduce invasive species. For example, marine oyster predators invade oyster-growing waters when the oyster bars do not have periodic low salinity events. There is also a threshold for the capacity to control invasive species. If biological thresholds are exceeded, invasive species will persist. For example, some invasive species are freeze-intolerant. Islands and flood-prone coastal areas: There are some critical sea level rise and storm thresholds above which the islands and flood-prone coastal areas would be inundated. Some examples include insular areas, including Freely Associated States in the South Pacific, Louisiana, and Florida, and Alaskan communities. Some island territories have a maximum elevation of a few meters or less. Loss of fresh groundwater and low-lying islands: A threshold at which water supplies are contaminated by saltwater intrusion. The threshold for this depends on the island. Change in fishery productivity: Due to differential temperature preferences of predators and prey, there are different threshold temperatures for different animals. For example, in the mid-Atlantic region, the upper geographic limit is 18 degrees and moving northward for some types of clams, limiting the distribution range in the southern geographic region. Forests ecosystem workshop participants identified the following regarding climate-related ecosystem thresholds: Habitat specialists, such as the spotted owl, are more at risk. Climate extremes, such as drought and temperature, threaten certain species, such as the pinyon pine. High-elevation red spruce forests and whitebark pine are at severe risk of extinction. The fresh waters group of experts described thresholds as very context- specific, often complexly nonlinear, and difficult to identify in prospect (i.e., easier to identify in retrospect, after exceeding the threshold). Although thresholds are valuable conceptual frameworks, they may not turn out to be accurate because there are often synergistic effects between two or more variables. The group tried to identify thresholds that are sensitive to physical parameters (e.g., freezing points, etc.), but it did not identify many clear-cut examples of thresholds. One participant noted that ecologists use the word, “threshold” to describe physical parameters that stray from the traditional path of an ecosystem. Some experts questioned the importance of identifying thresholds, although they acknowledged the value of understanding the issues surrounding thresholds and identifying the types of thresholds that could be crossed, and the factors that could contribute to approaching a threshold. Land managers believed that it may be useful to set aside lands to serve as buffers to mitigate potential damages associated with reaching a threshold. Whereas land managers are accountable for protecting endangered species and upholding agency mission, they believed that they may be driven more and more to managing toward the protection of “niche” species, or managing against invasive, “opportunistic” species. They expressed concern that the threshold question may be species-specific, rather than a biodiversity issue. They also believed that there may be a false security in “managing to thresholds” (versus “managing at levels beneath thresholds”). The fresh waters scientists and managers agreed that an understanding of thresholds is important so that early-warning signals that a threshold is approaching may be developed. The fresh waters group of experts identified the following thresholds: Temperature threshold (stratified lakes) Lakes will not thermally stratify and “turnover” in the spring if winter temperatures do not drop below 4 degrees Celsius. Lake turnover is an important temperature-driven process that helps to oxygenate waters and cycle organic matter and nutrients through the water column. This threshold is presumably more significant in large lakes and has to do with the depth of the lake and latitude. Temperature threshold (cold-water species) According to an expert commenting after completion of the workshop, the mortality rate of some cold-water species, such as salmon, increases dramatically above certain temperatures. If streams dry up earlier within the annual hydrologic cycle, the threshold itself may shift as a result of changing precipitation patterns and/or warmer temperatures associated with climate change. Year-round streams may become ephemeral streams, small ponds may become vernal pools, etc. We may see a dramatic reduction of nitrogen removal from microbes in streams and wetlands, and a possible loss of species (e.g., salamanders). Areas with greater precipitation will likely result in increased connectivity (which opens migration corridors for invasive and endemic species). An expert commenting after completion of the workshop said that there is not a clear threshold for stream network connectivity. The expert said that the area necessary to sustain certain streams will be larger if more water falls as rain in the winter with less snowpack. Topographically driven and elevation-controlled incremental change in the rain-to-snow ratio affects the position of the snowline (the dynamic position where snow typically accumulates on the landscape) for areas with snow-dominated precipitation in the west. If the climate forces the snowline to move up in elevation, there will be a radically nonlinear decline in snow area, likely to cause huge changes in fresh waters systems in those areas. Migration corridors may open (for warm-water species), or species habitat may become fragmented (especially true for cold-water species). Even if migration corridors exist, they would have to be temperature- appropriate for species migration and interaction. Land use/Land management systems, such as dams, canals, and construction projects, increase this effect of habitat fragmentation. With added terrestrial connectivity (due to less winter snow cover), there is possibility of a bark beetle invasion across the United States (i.e., achieve continental connectivity). One expert commenting after completion of the workshop said that bark beetle invasions would be triggered by warmer temperatures that allow the beetles to reach existing forests to the north that are connected across Canada to eastern forests. The expert said that beetle invasions have nothing specifically to do with less winter snow cover because the connectivity is already there. According to the expert, it has been too cold for the beetles to survive until recently. Land managers may want to manage to protect the habitat of these species, which have a disproportionate positive impact on ecosystem processes (e.g., beaver, Black-Tailed Prairie Dogs). An NPS representative asked, “Under what conditions will species migrate out of particular national parks?” A species shift could have social ramifications, since park visitors value the experience of seeing species within the park. In some cases, federal land acquisition has been motivated by the presence of particular species, which may migrate to unprotected areas, according to an expert commenting after completion of the workshop. Temperature- or climate-sensitive species may be indicators of impending thresholds; enormous regional shifts are possible in systems with a high degree of connectivity, but this is not necessarily true for species that cannot easily migrate to other areas (i.e., insects can fly, fish cannot easily migrate). Wildfires are strongly dependent on the degree of spring “wet-up” conditions and the sequence of wet and dry years, since presence of an adequate amount of moisture can protect against burning. Fire is a huge driver of ecological change, so anything that changes the fire regime is likely to have ramifications and ripple effects through feedbacks into hydrological, geomorphic, and temperature response. This threshold is expressed in terms of years (i.e., years between fire events). Humans have installed a great deal of infrastructure in the west to manage water resources, including dams. Increased storminess will adversely affect aging infrastructure. With thousands of small dams in the United States, climate change may exacerbate existing stresses of aging infrastructure and inadequate water supplies in growing areas. Rain-on-snow events, characteristic of “warm” snowpacks, are a recipe for big floods and may result in damage to docks, roads, or other infrastructure on or adjacent to streams, lakes, and coasts. One expert commenting after completion of the workshop said that rain- on-snow induced floods generally result in increased damage to river- related infrastructure, not coastal infrastructure. Panelists expressed concern that society may become less tolerant for taking action to mitigate climate change, such as spending money or reconstructing infrastructure (levees) to address climate change issues. Minimum flow rate in rivers As metropolitan areas grow, water demand increases, resulting in a decrease in water levels. If we do not keep minimum flows available for aquatic species, there will be more problems for species survival; natural storage facilities (lakes, reservoirs, and streams) may not be sufficient if water demand increases. Water quality degradation Water quality is likely to decline if harmful algal blooms, bacteria, botulism, etc., occur as a result of increased temperature. This will likely result in the increased cost of water treatment. Increased temperatures are associated with an increased rate of disease outbreaks. The temperature effect may be compounded by a low-flow effect—thresholds may not be based on a simple change of a single variable, but a complex interaction of several changing variables (e.g., gypsy moths and acid rain—acidification of the system weakened the vegetation in the system, making it vulnerable to invasion by gypsy moths). This point is characteristic of the (aquatic) system’s behavior. Climate change impact on ecosystem services For example, wetlands absorb nutrient load—we can allow a certain amount of nitrogen runoff, if passing wetlands before reaching lake, but if we lose the wetlands, the system no longer has as much capacity to absorb nitrogen; if the water availability is intermittent, the wetland may not be as efficient at removing nitrogen—terrestrial systems may be more nitrogen-burdened. Snow avalanches bring nutrients and debris down to streams with direct effect on stream chemistry. The regular disturbance of snow avalanches is ecologically important at high elevations, allowing herbaceous plants to grow in tree-laden forests. A reduction in herbaceous plants results in reduced grizzly bear habitat (a culturally valued animal). Greater variability of winter runoff volumes, from high snow followed by rain, is likely to result in more snow avalanches and increased frequency of landslides and debris flows. This is a threshold-driven phenomenon sensitive to small changes in precipitation with the potential to result in extreme events in soil erosion. Salinity level of aquatic systems fresh waters inundation to saltwaters—for example, through increased runoff volumes in early spring—rapidly decreases salinity. This may be detrimental to some species, such as sea grass. Development threshold at low elevations Older federal lands tend to be high elevation, lower elevation areas (run-out zone where debris flows end up) are often outside of federal jurisdiction. However, lower elevation areas may be vulnerable to adverse effects of climate change, and it may be necessary to consider development thresholds in lower elevation areas, floodplains, etc. Experts believed that stream systems in the west are managed in ways that might “trump” climate change effects that we anticipate. For example, many man-made dams currently create a wider range of flow than anticipated with climate change. Land managers identified examples of a dam’s role in isolating populations versus opening migration corridors, and they asked whether dam operators should change practices in light of climate change. If dams are removed from an area, or if they can no longer function, a migration corridor is opened for nonnative species to move beyond the dam area. In the Great Lakes, dam removal has opened corridors for species migration from the lakes into river systems. The grasslands and shrublands group of experts defined a threshold as “the point at which an ecosystem cannot recover without substantial input in time and energy.” The group agreed that the causes of the threshold changes will be complex, and that some changes will occur quickly and obviously, but others will occur gradually and insidiously and may be overlooked until it is too late to address them. Among the key thresholds identified by the group were the following: A shift from tundra to shrubs in the Arctic, resulting in less snow to reflect sunlight, which will lead to other warming-related effects, such as the release of methane Permafrost melting will also affect the biological chemistry and the integrity of the tundra systems. Increase in the rate of invasion of annual grasses, changing shrublands to grasslands and changing the fire regime. Example: BLM lands in the western United States, from the Canadian to the Mexican borders. Tree die-offs triggered by drought and exacerbated by temperature, leading to a shift from woodland to shrubland or to grassland. Examples: midwestern savannas or the southwestern pinyon juniper woodlands. Transition to high-erosion conditions could occur through the drought- induced loss of grasslands. Example: entire United States. Disruptions in biological interactions as a result of changes in temperature and growing seasons. (That is, the life cycles of some mutually dependent organisms may change, affecting the ecosystem food web.) Example: entire United States. Seawater intrusion on coastal prairies. Examples: southern Louisiana and Texas. Which areas of the United States may be most vulnerable to climate change and why? Examples (locations) Florida Keys Protected Areas - Florida Keys National Marine Sanctuary, Dry Tortugas National Park, Everglades National Park (for temperature); U.S. Virgin Islands National Park (bleaching); the Caribbean; Northwestern Hawaiian Islands National Marine Monument (inundation—already lost islands—and ocean acidification); Palmyra Atoll National Wildlife Refuge (undisturbed, 2 meter elevation); Flower Garden Banks National Marine Sanctuary; and Biscayne National Park Arctic National Wildlife Refuge; BLM National Petroleum Reserve; Kenai Fjords National Park; Gulf of Alaska/Bering Sea/Aleutians (regime shift, ocean circulation, biogeochemical cycling, and acidification); Pribilof Islands (sea ice); and 20 other coastal parks and refuges on the coast in Alaska Delta National Wildlife Refuge; Jean Lafitte National Park and Historic Preserve; Southeast and Southwest Louisiana National Wildlife Refuge complexes; Blackwater National Wildlife Refuge; Alligator River National Wildlife Refuge (sea level rise, storm vulnerability, and salinity regimes); National Estuarine Research Reserves (Texas, coastal North Carolina, Florida, etc.); Everglades National Park; San Francisco Bay Delta; and the Chesapeake Bay Fire Island National Seashore; Gulf Islands National Sea Shore; Cape Hatteras protected lands (shoreline management); and other National Seashores—Assateague Island, Texas Coast, Corpus Christi, etc. Prior to identifying areas considered to be most vulnerable to climate change, the workshop participants briefly discussed a definition of vulnerability. The group based its responses on vulnerabilities likely to have an impact on important ecological processes and on human quality of life, and areas for which there are viable management response options or proactive responses. Examples (locations) Klamath River/Upper Klamath, Oregon; McKenzie River, Oregon; Willamette River; Rio Grande; Tennessee River; Chattooga River; Trinity River Ecosystem; Flathead River; Salmon River; Columbia and Snake Rivers; Colorado River; Sacramento and San Joaquin Rivers; and streams in urban areas (heat island effects) Examples (locations) Alaskan Arctic and alpine (Rocky Mountains and Sierra Nevada) Saguaro cactus ecosystem (Arizona) Remnant prairie biome and sedge meadows (small parcels) Great Plains (Neal Smith National Wildlife Refuge, Iowa) and various FWS and NPS lands “California complex” (large regions of the state) What types of information (e.g., research, monitoring/measurement) are needed to better understand and prepare for potential changes on these ecosystems? Panel members provided the following list of various types of information and activities that are needed to understand, prepare for, and address the potential changes to the coasts and oceans ecosystem: Develop basic baseline environmental characterizations In situ physical monitoring, monitoring the carbon system Integrated risk assessments, including ecological, sociological, and Long-term assessment of responses of ecosystems to variable climate Comprehensive suite of ecosystem indicators (“red flags”) to develop time series data. Need to be linkable to describe causality. Target observations on particularly sensitive ecosystems and species for which changes are already occurring. Focus on indicators that are unambiguously related to climate change. Long-term record, focus on historical and paleoclimatic records to Integrate ecological modeling with economic/behavioral modeling Habitat characterization to detect changes over time. Interface with land-margin, land-ocean margin habitat data. More accurate hydrographic and topographic/bathymetric (water depth) data. Water depth data are often of poor resolution. Assessments of how climate change is likely to impact lands and Characterization from genetic/microbial to landscape-scale conditions There are four components of research needed on climate change: (1) physical changes (this has been the bulk of the effort so far), (2) ecological impacts, (3) social/economic impacts, and (4) adaptation/mitigation. The focus should now be shifted to ecological, social/economic, and adaptation/mitigation research. We need to focus on vulnerabilities and mitigation/adaptation. How have systems changed in the past and how can we expect them to change in the future? The U.S. Climate Change Science Program should focus more on the ecological and societal impacts of climate change than it currently does. Need to focus research on regional and local scales. Need for risk communication—illustrate how climate change affects individuals, better communication with the public Adapting today’s management strategy to account for applied science— Research and development programs to develop mitigation techniques and strategies that are cost-effective Supply the science needed to allow local management decisions to account for climate change in the background, both short-term and long- term considerations National database of the timing of biological phenomena Vulnerability and risk assessment of the value of historic sites and other assets and recreational or commercially valuable species on federal lands Better analytical management tools for ecosystem management – these need to be dynamic so they can evolve over time. For example, predictive modeling tools for fisheries management or coastal erosion management that show impacts on property values, etc. There is currently an emphasis on reducing uncertainty. The desired level of uncertainty appears lower than the level of uncertainty applied in everyday decision making. There are tools in place to allow decision making under ambiguous risks. Develop robust policies that perform well in the worst case and better than alternatives in the best case. Tools for management, such as sea level rise estimates and projected land/sea boundary across the United States. For local management – need topography and bathymetric data. Where are shorelines in relation to commercial structures, etc? Storm surge projections, etc. Look at synergistic effects. Panelists ran out of time before they could answer Question 5. In answering this question, the group considered the types of information needed to monitor or detect current manifestations of climate change and to predict future climate conditions. The following statements represent broad categories of needed information identified during the group discussion and some overarching recommendations for further research and development: Develop early-warning signals, or “red flags” Although many monitoring programs exist, and much scientific data are generated, there is often a lack of a clearly defined purpose for monitoring, and the link between data collection and action points is not always clear. There is a lack of contextual sophistication for the collected data, and data are not analyzed to indicate when managers should begin to be concerned about changes or take action to mitigate changes. Therefore, managers recommended that there be a clearly defined purpose for monitoring efforts, and clear linkages between data collection and habitat protection. A panelist opined that the national parks and federal lands are good environments for detecting the effects of climate change, since they are relatively isolated from other effects. Assess and build on the current monitoring system Many monitoring systems in place today, such as systems to monitor stream flow, precipitation, soil, etc., were not designed specifically with climate change in mind. The panelists recommended that a “gap analysis” be performed to evaluate the current monitoring system for its ability to detect and predict climate change. They believed that current monitoring networks do not collaborate, and they recommended that a list of parameters (e.g., gas fluxes, soil moisture, and basic water chemistry) be established, and that these parameters be monitored at various sites throughout the country. Panelists believed that it was important to manage aquatic systems so that they can “withstand the unexpected” with respect to climate change. They suggested that managers consider ways of providing buffers for systems to restore characteristics of unimpacted systems, despite the stresses of climate change. For example, if an area is likely to experience increased flooding, management options might include building a dam or moving houses or businesses from the flood zone. When deciding between management responses, it is important to consider how the particular adaptation action may affect other ecosystem processes. Managers identified the need to know when to try to prevent changing conditions versus when to adapt to them. To make such management decisions, it is important to develop technical modeling and detective capacity to know which management decisions will maximize benefits. Participants identified the need to build institutional capacity, improve record-keeping, deploy scientists and researchers on-site, and improve modeling capacity to summarize broad-scale changes. Regional scale climate predictions are needed Managers need climate predictions on an ecoregion or site-specific scale. Managers said that they often do not know how to plan for the effects of climate change because they lack information on the types of physical changes (i.e., temperature and precipitation changes) that are expected in their management areas. Therefore, they do not know what management actions will help the system adapt to the effects of climate change. The scientists suggested using the current monitoring networks or developing well-distributed monitoring networks to create a series of nested monitoring stations to monitor snow-water equivalent extent and groundwater stocks. Panelists believed that interagency coordination and collaboration are necessary, and that there must be an increased investment in monitoring efforts, particularly in sites identified as likely to be adversely affected by climate change. If changes in temperature and precipitation were detected and understood at a regional scale, managers could compare projections of climate models with observed changes. Managers need to consider what the response of waterfowl and wetland extent is likely to be with respect to a range of climate projections, and they will need to make decisions based on how much land must be set aside to support wildlife through added stresses of weather extremes. Collaboration between scientists and land managers Workshop participants believed that it was important that scientists and land managers work together at early stages of the planning process, and that federal lands would benefit from having scientific expertise on-site, (i.e., to serve as park interpreters, naturalists, and data analysts). FWS land managers said that it is difficult to detect changes in wetlands, because the technology to determine and monitor wetland extent is expensive and requires specialized skills, including flyover photography and geographic information system analysis. Crosswalk between land-use change and water quality If hydrologic aspects, such as streamflow variability, are better understood and linked to ecological responses, models can be used to project ecological responses to physical changes in runoff volumes, whether as a result of climate change or land-use changes. Panelists agreed that land management and planning are not just related to the question of future climate conditions, but also about land-use changes, and they believed that there is a general lack of understanding in the relationship between land-use change, land management, and erosion and deposition processes. Some suggested that managers should view anticipated change in the context of anthropogenic stressors that are already present and likely to be exacerbated by future anthropogenic and climate stressors. One scientist from FS suggested that the Congress should look at the projected changes in temperature and precipitation overlaid with projected population growth. By developing “vulnerability maps” that incorporate societal impacts, managers might be able to view areas under stress and consider the added stress of climate change when making management decisions. Study synergistic effects of extreme weather events and multidecadal Panelists identified the need to study the synergistic effects of two dynamic systems—extreme weather events (such as intense storms) and multidecadal events. The group agreed that the most important types of information or research needed include the following: Improved precipitation modeling to better understand and prepare for temperature and precipitation changes on these ecosystems. Precipitation modeling is currently one of the greatest weaknesses in projecting future climate change effects. Research and consensus on the criteria and indicators of ecosystem change or thresholds, with specific research on identifying monitoring methods to help scientists detect change thresholds Information on the economic value of grassland and shrubland Better information on the location and rate of desertification Information on positive feedback (i.e., the interaction of climate change on natural systems that can lead back to an intensification of climate change itself) Experiments on interactions between climate change and other ecological drivers, such as those previously identified (e.g., nitrogen deposition, etc.) Synthesis of information collected by the Long-Term Ecological Research and the proposed National Ecological Observatory Network (NEON). Are these programs in a position to provide answers to climate-related questions? Data on land use and the number of livestock grazing on federal lands (to be able to distinguish between ecosystem effects related to livestock grazing versus effects related to climate change) Research to improve understanding of the mechanisms that trigger complete regime changes. Is there just a single trigger, such as nitrogen deposition, management style, and El Niño, or are there multiple triggers? Conversion of shrubland to grassland (i.e., the ratio of annual alien grasses to native perennial plants that triggers a conversion to an annual grassland system in some areas) as well as research to improve understanding of the mechanisms that lead to a complete regime change Conversion of grasslands to shrublands or woodlands, due to shifts in precipitation timing and intensity, altering water availability to favor deep-rooted woody species Research on the consequences of alpine community disruption Research on the consequences of a transition to high-erosion conditions through the drought-induced loss of grasslands Research to determine conditions to predict tree, grass, and forb mortality. Research to clarify the factors influencing the trends and direction of change in the controls of soil moisture and soil organic matter on groundwater hydrology Research on phenological changes, including development of a U.S. In this session, workshop participants were asked two questions. The first question was to identify key new findings related to the effects of climate change on ecosystems that have emerged in the past 5 or 6 years (i.e., since the publication of the National Assessment of the Potential Consequences of Climate Variability and Change in 2000 and the IPCC Third Assessment Report in 2001). For the second question, we asked the participants to identify the gaps in scientists’ understanding of how climate change might affect the four U.S. ecosystem types. This session was moderated by Dr. Virginia Burkett of the U.S. Geological Survey (USGS). Dr. Burkett also moderated the coasts and oceans breakout group. What key new findings related to the effects of climate change on ecosystems have emerged in the past 5 or 6 years? Participants identified the following new findings that have emerged in the past 5 or 6 years: 2005 Caribbean coral bleaching event Results from Virgin Islands National Park: About 47 percent of previously healthy Caribbean corals are now dead due to bleaching and disease, both associated with thermal stress (increasing temperature). Prior to 2005, the first massive loss of corals was in 1990. Global events also occurred in 1997 and 1998. Documentation of 2005 bleaching events elsewhere corroborated that sea surface temperatures are causing coral die-offs. This phenomenon is not only limited to tropical areas, but is also beginning to affect temperate waters such as the northwest Hawaiian Islands. Also, many corals not typically associated with bleaching have been affected, like elkhorn coral, recently listed as threatened under the Endangered Species Act (ESA). Climate regime shift in the Pacific Documentation exists about the climate regime shift in the Pacific and its impacts that have cascaded up the food chain, ultimately affecting fish populations and phytoplankton communities and resulting in a loss of marine mammals and seabirds. Hypoxia off the Pacific coast The “dead zone” off the Pacific coast, while not proven to be related to climate change, is an example of future events that could potentially represent a major, new, unanticipated climate change consequence. Recent evidence suggests that sea surface temperature increases are related to the intensification of destructive tropical cyclones. This report, published in late October 2006, is a global assessment that discusses the causes and consequences of climate change (externalities in public goods are valued on a global level) with long- term and persistent impacts (intergenerational inequity). Uncertainties and risks are pervasive (ambiguity reigns, given large uncertainties). There is a serious risk of major irreversible, nonmarginal changes (“Act now or it will cost a lot more later”). Faster and more heterogeneous sea level rise Satellite Altimetry Measurements of sea level change have enabled global ocean and coastal trend analysis. Published/Documented Changes Since 2000: Observational evidence (National Aeronautical and Space Administration data) suggests that the Greenland Ice Sheet is breaking up faster than any models projected, with major implications for sea level rise. This implies that current models are not competent to deal with the rate of loss of both the Greenland Ice Sheet and also the West Antarctic. Warmer springs have resulted in earlier snowmelt, longer summer drought, and increased wildfire activity in forest ecosystems where fires are limited by drought, rather than fuel in the western United States. The bottom line is a 300 percent increase in the frequency of large fires and a 600 percent increase in area burned, comparing 1970-1986 with 1987- 2003. Dr. Tony Westerling acknowledged that if he had changed the time periods of comparison, the previously mentioned percentages would have changed significantly. He chose these years because he had 34 years of data, and he cut that time period in half. Unprecedented ocean-oscillation changes from 1987-1988 took place that affected many systems. These have been well-documented since 2000. An unprecedented pine bark beetle migration across British Columbia heading east has been observed. Migration patterns have been driven by warm winters. Similarly, the southeastern United States has seen southern pine beetle migration into red spruce area caused by drought, nitrogen deposition, and beetle infestation. There have also been shifts in the intensity and extent of the spruce bark beetle in the Pacific Northwest and Alaska caused by an accelerated life cycle from 2 years to 1 year. New England sugar maples have been damaged by pests as well. There has been a major loss of glaciers in the western United States and Alaska, coupled with other kinds of ecosystem changes. Loss of glaciers is not simply an iconic signal of climate change. Early estimates of the role of terrestrial ecosystems as a carbon sink (through COfertilization) are less than thought. There have been multiple observed shifts in species distribution of both animals and plants. Examples include manatees in the Carolinas and Mid-Atlantic and polar bear decline. A paper by Thomas, et al. (2004), which is the most cited paper in environment and ecology in the last 2 years, shows that climate change has caused changes in species and extinctions over the last 30 years. Die-off of pinyon pines across the southwestern United States— magnitude of the die-off has been tied to warmer temperatures. Cascading effects include the infestation of beetles. Dust storms coming out of the Great Basin impact the rate at which snow melts during the season. Both grazing and drought are contributing causes of dust storms and are becoming more frequent. There have been documented increases of net primary production in both temperate and boreal forests related to natural factors. There is evidence of increased turnover rates in tropical forests. This is considered, by some, to be an indication of some kind of climate shift, possibly climate change. Turnover rates in undisturbed primary forests have increased all around the world. There is well-documented evidence of the impacts/consequences of permafrost thaw in Arctic ecosystems and economies. There is documentation of temperature-induced drought die-back in boreal systems in Alaska and Canada. There has been a decline in the duration of lake and river ice cover throughout the northern hemisphere associated with increasing temperature. There has been an increase in continental runoff in North America. There has been an increase in shrub cover in the grasslands of Alaska. There has been wetland drying in Alaska. What are the gaps in scientists’ understanding of how climate change might affect these four U.S. ecosystem types? Participants identified the following gas in scientific understanding of climate change effects: The role of elevated CO The ability to model and project amount, timing, and distribution of rainfall, especially for all grasslands, scrublands, deserts, and rangelands The ability to downscale and upscale climatic predictions to a level of specificity that is useful for resource managers (modeling at the appropriate scale) Currently, much data are collected among different entities. If all of the data that are being collected could be inventoried and put in one place, a lot could be done with these data. Will federal forest lands make it easier or harder to meet some kind of international obligations to reduce greenhouse gases (GHG). What if federal forest lands are more susceptible to fire? Many questions exist about carbon sequestration. We need to know the direction of the net ecosystem exchange for forests in the United States. The mechanisms that control the loss of atmospheric carbon (carbon sinks) are not well-understood and carbon turnover is not well-modeled. Models might falsely project an elevated level of carbon storage. There is uncertainty about the interactions among snow, groundwater, streamflow, and vegetation in reducing flow regimes of the future. In other words, how do these different elements of the hydrologic cycle interact in a climate-challenged world? How flexible (plastic) will individual species be in adapting to climate change? Phenotypic plasticity of species is rarely discussed in the modeling community, but is a significant consideration in the real world. How are these differences associated with climate gradients? What is the interaction of climate change and demographic changes in assessing future vulnerability to climate change? Sensitivity analysis of water balance—how much precipitation is needed, and at what timing, to balance an increase in temperature? This coupling between terrestrial ecosystems and water resources is in the early stages of modeling and development. Use the modeling technique previously mentioned to assess how important precipitation uncertainty is given expectations about temperature. Aquatic ecosystems—we are probably experiencing longer durations of late summer, low streamflow that is degrading aquatic ecosystems, but no papers quantifying this have been released. Management—how will land managers begin to address climate change issues? It is a science issue of determining the most effective way of addressing and coping with these changes. Have scientists and managers come to consensus on the criteria or indicators of ecosystem thresholds? We need research identifying adequate research tools so that we can identify thresholds before they happen. What are the changed use patterns of federal lands? How does this affect infrastructure? How will this affect the staffing and services that the land management agency provides to the public? What are the strategies for addressing these issues? Given some of the potential climate-related effects on this ecosystem described at yesterday’s session, what might be the implications for your unit, including how it is used and managed? Panel members provided examples of implications on various land units based on the climate-related effects of the scientific panel: Lose acreage (inundation): On refuges, acreage will be lost due to storm events in combination with sea level rise (increase in storm surge) – Coastal plain of Louisiana (hardwood – swamp – fresh waters marsh – barriers islands). Land is being lost in all of these. This is a possibility for all federally managed lands that are prone to flooding. Applies across the board (including national seashores and other coastal assets), but may manifest differently, especially with human development impacting the ability of species to migrate. There are 157 coastal refuges - Atlantic and Gulf coast salt marshes are the key ecosystem type that is threatened by sea level rise – impacts ability to support shorebirds and other species. Models of sea level rise identify areas that will be impacted. The United States Geological Survey Coastal Vulnerability index and maps are a good source for this information. Complete loss of low-lying islands: Islands of 1- to 3-meter elevation may be lost. This could result in the loss of critical habitats and, therefore, the loss of species that have no capacity for migration. Transition of habitat: Inundation and saltwater intrusion will cause different species to take over or existing species to move. For example, the pine rockland habitat community in the lower Florida Keys is shrinking due to declines in the extent of the fresh waters lens. As a habitat is lost, the species that live in that habitat are lost as well. Beach erosion is also a problem for some species, such as turtles that nest on eroding beaches. Coastal development is also putting pressure on some habitats. Federal lands are one of the last remaining undisturbed habitats for some species, but these refuges can only protect fragments of ecosystems. However, development, combined with sea level rise, impact some refuge areas (e.g., Assateague Island). Federal lands are also a unique tool to educate the public about habitats and species. If these lands are lost, a very valuable educational tool will be lost. Saltwater intrusion into fresh waters table: Dramatic effects on low- lying islands. For example, the only population of key deer is limited to the lower Florida Keys because this is the only area with fresh waters. The fresh waters lens loss is affecting species. Intrusion into surface water as well for long periods of time changes habitats and species that are supported. Loss and alteration of intertidal habitats and sessile species (such as sponges and coral polyps): Some species cannot move, so if certain habitats are lost, the species is lost. Some man-made structures, such as causeways, cause considerable alteration to natural areas. For example, Hurricane Wilma’s storm surge of 6 feet led to extensive flooding. Due to the broad realm of federal holdings, including holdings such as the Exclusive Economic Zone (EEZ), there is a great potential for adaptive management and experiments (some are already under way). Warm conditions creating low soil moisture conditions (brown marsh events) What happens to recreational usage, economy, and competition for water resources when we start to respond to climate change? Per capita density is heaviest along the coast—this compounds the effects and the ability to respond with management strategies. Climate change has not been considered in management plans. In the Everglades, studies have found that interannual variable precipitation is most important for the ecosystem. Far more important than the Comprehensive Everglades Restoration Plan influence. If the future is drier, the restoration plan reduces vulnerability, but not enough to offset the impact of climate change. Infrastructure for ports and commerce: Engineering impacts—U.S. Army Corps of Engineers is trying to figure out how to deal with these issues. Dredged materials’ influence on habitat. Much more pollution: Sea level rise and storm surges will increase pollution along highly developed coastlines. Coral bleaching: There is an increasing trend in occurrence of bleaching and related diseases. Beginning in 1978, 1980 (fish die-off), 1982 (first basin-scale bleaching event, linked with climate change drivers), and 1997—coral bleaching has expanded geographically and intensified each time. Inshore reefs (1990—lost 65 percent of one species, the Fire Coral), which are more resistant to bleaching, have started to bleach. In 2005-2006, the Virgin Islands National Park lost one-half of its live coral cover to bleaching and disease. Sea surface temperatures drive coral bleaching. Dissolved oxygen and light are also important. Higher metabolic rates, lower oxygen levels, and greater stratification are all related to temperature. Lack of wind, combined with the previous issues, results in large problems with bleaching. The Florida Keys and U.S. Virgin Islands reefs would provide a good case study for this issue. Panel members provided the following examples of potential effects of the previous list on the value of federal lands: Economic impact—cultural and historical value—impact on Alaska coastal societies and subsistence-based societies Fisheries lost—subsistence economies, recreational economy, and Outdoor recreation activities (approximately $5 billion in National Wildlife Refuges alone) will be impacted. Much due to waterfowl hunting. Some of these species will be impacted. Coastal parks—75 million visits per year; $2.5 billion in revenues and 57,500 jobs generated for local economies. Florida Keys—4 million visitors per year, resulting in 14.3 million visitor days. Visitors to the Keys spend $1.2 billion dollars directly while visiting. The Keys are dependent on snorkeling, scuba diving, and fishing ($50-$70 million worth of seafood, totally dependent on a healthy coral reef system). Not limited to subsistence communities. Apalachicola Bay provides 70 percent of the oysters from Florida. The economy is dominated by oyster production, but now the economy is shifting to retirees and housing developments. Harmful algae blooms and toxins can limit fisheries as well as coastal development. According to the Department of Labor’s National Ocean Economics Program, the United States’ coast accounts for more than 60 percent of the Gross National Product. State-level data about this topic are expected to be released (California and Florida also have studies). Coasts drive the economy of coastal states. The U.S. Army Corps of Engineers spends significant amounts of money on federal activities in coastal areas. If federal activities in these areas are factored in, they have a huge multiplier to economic and resource effects. Between the Corps and the Department of Transportation, much money is spent on roads and bridges, etc., so impacts could be great. Not all climate-related changes are bad. For example, the Arctic may open up, presenting some economic opportunities in the area. Also, there may be shrimp in the Chesapeake Bay as the ecosystem changes, but pollution problems must be resolved. Change is a given over the next 50 years, regardless of actions in changing greenhouse gas emissions. However, changes in emissions can change the rate and extent of the change. Adaptation is within the realm of influence for some systems. General loss of ecological integrity. Degrading ecological integrity. Need to understand paleoclimatic context. See Question 2 (Day 2). Participants identified the following potential climate-related effects on this ecosystem: Change in public use and visitor patterns An NPS representative said that some park visitation levels, particularly in colder climates, have been restricted by weather conditions, resulting in a “self-selection” of visitors, based on their willingness to participate in water activities in cold water. Climate change is expected to result in a change of visitor patterns and may also result in a wider use of the land’s resources and infrastructure. As water temperatures increase, there have been more people using the parks, sometimes in inappropriate or illegal ways. This requires greater enforcement and rescue efforts, and may require more frequent replacement of equipment or a change in infrastructure. Because funding is not related to the number of visitors to a park, the change in visitor patterns may impose an additional stress on park managers. According to one expert commenting after completion of the workshop, if climate change leads to substantial reduction in the abundance of actively managed species, more-intensive management plans may need to be developed, particularly on those federal lands where consumptive uses are permitted (e.g., wildlife refuges). An NPS representative said that NPS may face challenges in preserving many cultural resources that were previously preserved by dry conditions (e.g., archeological resources in the desert) or cold waters (e.g., shipwrecks in the Great Lakes). With warmer conditions and the possibility for increased erosion, cultural resources and landscapes may be at risk of degradation. Reduced supply of water during the summer season A representative from the Bureau of Reclamation said that the expected reduced summer season supply of fresh waters (due to earlier and reduced snowmelt volumes), when demand is highest, is likely to be exacerbated by a lower storage capacity in the winter season (due to reservoir flood control rules being adjusted to reserve more space, compensating for elevated snowlines and more of the upstream watershed participating in runoff generation during threshold storm events, according to this expert commenting after completion of the workshop). This will likely cause an increase in the cost of water. Land managers along the Great Lakes region expressed similar concern, saying that lake levels may fall during dry periods, requiring dredging near docks, extending docks, or limiting shipping routes or recreational access to smaller vessels. Whether dredging or limiting the size of ships in the Great Lakes, this is likely to have an adverse economic impact. As runoff volumes and patterns change, migration corridors may open in some areas and close in others. This migration pattern change may necessitate additional support for local and regional wildlife, such as the introduction of migration corridors. Managers asked fundamental management questions, including whether particular mitigation and adaptation strategies (such as construction of artificial migration corridors) were necessary, and, if so, under what conditions. An FWS manager said that it was important to also consider the risks associated with implementing particular strategies. Representatives of four federal land management agencies (BLM, FS, FWS, and NPS) described some of the challenges they face on their land types. The group generally agreed that, because all grassland and shrubland ecosystem types are likely to change, there are going to be cascading effects on public lands. The full group—including participants from the previous day’s discussion on impacts—further agreed on some management-related issues that apply across all agencies and developed the following overarching statement: Because all of these ecosystems will change, and there will be cascading effects for all major land management agencies, there are several issues of concern: (1) managers of individual management units need to recognize that the entire system is vulnerable to vegetation change, (2) increased coordination and strategic planning across isolated units are needed to increase management effectiveness and minimize ecosystem/species losses due to climate change, (3) agencies need additional resources to address these issues, and (4) agencies need an overall mandate and a coordinated approach to address the climate change issue. In addition, the group noted the following: Agencies cannot easily process new information due to current bureaucratic structures. (They lack the agility to adapt quickly to new scientific information.) Climate change will most affect federal lands and these lands will be the reservoirs containing the species that will populate the earth in the future. However, climate change is currently not a priority in agencies that manage the federal lands. The following is a summary of some of the specific concerns identified by representatives of BLM, FS, FWS, and NPS with respect to the types of units they manage: Land cover conversions are occurring as a result of wildfire in the Great Basin. The challenge is to reestablish sagebrush cover, which is very difficult to do, but these cover types are critical from a habitat and species management perspective. (The same thing is also occurring in Water cycles and managing water resources on the rangelands are Riparian areas are important on BLM lands, as they represent critical A key BLM task, the allocation of forage resources among wildlife, livestock, and watershed needs, may need to change if resources are changing (i.e., if temperature and precipitation patterns change). To date, BLM has not managed with this possibility in mind. Red brome is a nonnative annual grass that flourishes in warm climates. It competes with other grasses and displaces native species. The grass sprouts early in the spring, grows quickly, and dies, leaving a dense carpet of dry grass that carries fire. Riparian areas are those on the bank of a natural watercourse, such as a river, or sometimes a lake or tidewater. BLM does not manage landscapes. Rather, it manages smaller planning Managing habitat under severe drought conditions will be a challenge. If droughts become more severe, how should FS manage national grasslands? How should FS manage for changes in species and habitats (e.g., sage grouse, other birds, mammals, etc.)? Reduction and loss of wooded habitats—including, to name a few, juniper woodlands, pine woodlands, green ash, and cottonwood flood plains—is a concern. The ESA obligates federal land management agencies to prevent loss of species, yet species will inevitably shift due to climate change. The question arises as to how to meet the intent of the ESA while also managing for the shift in species. (If the FS mandate is to recover an endangered species, but the systems that support that species no longer exist, what do we do?) Climate change represents a moving target: What are we managing toward, given that the historical policy has been to manage for the status quo (i.e., policy to manage for pre-European habitats, mandates to manage for native species)? Invasive species will be a major issue, particularly invasive cheatgrass and invading bromes. Better regional models and multiple scenarios are needed to help in the decision-making process. Some rare prairie and savanna types are being lost at a rapid rate. For example, oak barrens at the northern edge of the United States are a type of dry savanna that is critical for certain threatened and endangered species that are being lost. Some of these oak barrens support threatened and endangered species—such as the Karner blue butterfly, for example, which is dependent upon lupine, a plant species that grows in the barrens. Phenological relationships may be threatened, especially C3 and C4 plant species composition and relationships and all fauna—both vertebrates and invertebrates—that are associated with them. Species currently on the edge of the range in which they can survive may become important as future “last survivors” of their species. This is an issue in the dry areas of the tallgrass region, for example. New areas may become the main part of the range. As temperature or water availability changes, favorable habitat may shift from one geographic area to another. For a nonmobile species, such as plants or certain invertebrates, rare outholdings may serve as sources for repopulation if new areas become favorable to its growth. For example, a species in a warm, moist area of midwestern grassland that is becoming hot and dry may cease to exist where it was previously most common. A small population existing in a cooler area with a shorter growing season in suboptimal conditions for the species may become the main part of the range if that area becomes warmer, with an extended growing season. Riparian areas may be threatened as a result of both drought and temperature increases. This could have implications for certain species, such as sandhill and whooping cranes, for which water habitats are important for migration. “Funneling points” where birds congregate prior to migration may disappear. Lowland oak savannas (rare ecosystem) that occur in oxbows (a bend in a river) and wet areas will be threatened if water disappears or if the timing of water changes (e.g., if snowmelts come earlier). Timing, frequency, and intensity of wildfires may also threaten these savannas as the environment becomes drier. Mychorrizal fungi live in and around the roots of most plants, serving as a secondary root system. Mychorrizae extract mineral elements and water for their host plants and live off the plants’ sugars. They may confer increased resistance to pathogens to the plants’ roots. The skills and abilities to reconstruct natural systems need to be developed so that buffers can be developed in critical areas for effective connection of land management areas. FWS has guidance for many things, such as maintaining biological The current FWS approach to addressing climate change is ad hoc and Lack of baseline data is a key issue; without it, managers do not know what they are losing and how fast. The cost of baseline data is high. Protocols for monitoring are also needed (e.g., for monitoring phenological changes and rate of increases of invasive species). A mechanism for interpretation of these data is necessary for the agency Managers also need guidance and acquisition policies to maintain FWS is also unprepared for the increasing pressures of using federal The NPS management policies address individual issues, but the agency has no explicit guidance on climate change, except that NPS “can’t change the weather” (i.e., practice cloud-seeding.) The Park Service’s Organic Act, which created NPS and defines its mission, is very general. There is no mention in the act of ecosystems or climate change; the guidance to protect resources is implied. Because guidance in the Organic Act is implied, different managers have different ideas on how to interpret the Park Service’s Organic Act with respect to climate change, since the act, which was created in the early part of the 20th century, does not explicitly address climate change. Therefore, some managers will attempt to address climate-related issues, and others will not. In addition, each individual park has enabling legislation that gives additional guidance along with the Organic Act. Thus, each park has its own set of mandates based on the type of park, and there is no single, coordinated approach. The public approval process is also inconsistent. For example, if climate change is mentioned in the course of the public comment process for park general management plans, NPS addresses the issue. However, if it is not brought up, it is not addressed. Since federal lands are not contiguous, and there is development between habitat corridors, agencies could cooperate more, particularly with respect to planning corridors for endangered species. The Cooperative Ecosystem Study Unit (CESU) is an existing tool that has not been fully utilized but could be utilized to conduct regional-scale, cross-ownership boundary climate change effects. More adaptation is needed in the national parks. Planners should be trained to take possible climate change into consideration. However, this may be challenging because every park has different enabling legislation. NPS currently sponsors a Climate-Friendly Parks initiative with the Environmental Protection Agency. The goal of the initiative is to educate park personnel so they can educate the public. Emissions inventories are conducted for member parks and included in Environmental Management Systems (EMS). The focus is on greenhouse gas emissions mitigation, not necessarily adaptation, although bigger culverts have been suggested for under the Going-to- the-Sun Road at Glacier National Park to accommodate waters resulting from faster, more concentrated melting of snow or ice, and NPS has built portable bathhouses on some barrier islands where severe storms and flooding are problems. Also, the Cape Hatteras Lighthouse was moved in response to rising sea levels. (At the time, they called it merely “coastal erosion, but it is also a result of sea level rise, a climate change effect.) What are the challenges, constraints, and limitations associated with adapting to the effects of climate change for this type of federal land? Panel members discussed multiple challenges facing land managers in the coasts and oceans ecosystem in adapting to the effects of climate change. Panel members gave the following examples of challenges based on management guidance, planning processes, and other general challenges and constraints: Wildlife refuges: Created under a variety of acts and executive orders. Some refuges have their own enabling legislation. The Refuge Improvement Act is one recent example in the system history that looks beyond certain species in a more holistic manner. Refuges often have no specific guidance. This issue is being raised more often in the planning process. FWS briefing statements for next 5 or 6 years, address certain places. There are rapidly developing models to project sea level rise. Also have increased consideration of climate change in land acquisition processes. This is driven by managers and planners. $20-$50 million per year for land acquisition, trying to shift paradigm inland and upland in general to catch transition zones to accommodate marsh migration. Little support from political leadership to address these issues comprehensively. No leadership example set in agencies to sit down or even use specific terms in political statements. Marine sanctuaries: No formal guidance, but open to talking about climate change if there are quantifiable data. NPS: No specific climate change-related guidance, but must base decisions on best available science. This is based on statutory guidance in the Thomas Bill. Common theme: Guidance is bottom up, not top down. It mainly comes from constituents through the planning process. Wildlife refuges: The public is starting to call for consideration of climate change in the planning process. Comprehensive Conservation Plans (CCP)—have started to address climate change impacts in more recent plans. Climate change vulnerability issues have begun to get consideration in some planning efforts. For example, collaborating with state agencies to redefine the purposes of shellfish leasing from harvesting to conservation and buying commercial fishing licenses. Marine sanctuaries: Management plans are being rewritten. Each sanctuary has advisory councils that bring up concerns. Climate change has been a driving factor in the Florida Keys since the early 1990s. This process is bottom up. In general, the planning process is midlevel or below in the federal government—bottom-up guidance is driven by constituents. The states are taking the lead in some cases (e.g., California). Some federal lands have static boundaries and, in some cases, very specific purposes. This limits management options. Global changes and local impacts: On a local scale, managing particular units, not a lot of control over the big drivers. Certain changes will happen, such as temperature increase. Local action is needed to manage these impacts. With big climate changes out of management control, managers have responsibility and jurisdiction to control the local factors that they can potentially influence. Need to look at local management regimes in light of climate change. New options need to be examined, such as buying upstream land or establishing local planning boards. Dollar limitations: FWS land acquisition dollars have declined from about $125 million in 1999 to $10 million more recently. This impacts the ability of FWS to manage the lands it has, let alone buy additional lands. Furthermore, the agency is spending more on current holdings to expand and adjust. Preserving ecosystem values and services: One way to do this is to build resiliency into current holdings by protecting areas that are minimally impacted, and to identify additional lands—resources that are not federally controlled, but that can be influenced through federal interaction with other landholders. Institutional: There is a lack of top-down leadership. The federal legislative branch has the opportunity to take the leadership role and fill the vacuum. There are also impediments within agencies. Management impediments exist between field and higher-level leadership (if any higher-level leadership exists). Conflicting agency missions—different agencies have different missions. Some agencies focus on conservation, others extraction. Education and public buy-in (climate literacy): Most people do not understand the long-term nature of climate and think it is too complex to understand. When they see the “debate” they do not understand the fundamentals and think there is actually uncertainty regarding whether climate change exists. This does not reflect scientific consensus. Within the scientific community, there is no debate over the reality of climate change and its human cause. The climate change issue is not on the public agenda. This issue needs to be posed by showing its impact on the economy and everyday activities. Coastal community resilience indicators and self-assessment tools are being developed to assist coastal communities to plan for impacts. Remarkable recent change in public awareness of climate change has occurred in some areas, but other areas do not have much public enthusiasm about climate change. There is an EPA study about perception, discontinuous appreciation of the issue after Hurricane Katrina. People perceive that Katrina was associated with climate change. This has recently led to a much greater appreciation of climate change. Lack of information: The Thomas Bill requires NPS to manage resources using the best available science. Established inventory and monitoring networks are based on bioregions. Models and indicators are needed to track ecology. Climate is playing a role. Local- and regional-scale modeling of specific ecosystems, not artificial boundaries, is important and necessary to plan appropriately. Barriers also exist with state, local, and other land-use management agencies. When the information is available, it is easier to designate protected areas and preserve ecosystems. To demonstrate performance of reserves, more information on the functioning of systems and species connectivity and better understanding of other stressors, such as bleaching and disease, are needed. Is leadership paying attention to the information available? Shift from historic paradigm to looking to the future: For example, should money be spent on prescribed burning to preserve pine rockland that will not exist in 50 years? It is important to set up a system for future managers. Scientific debate (endless debate after science has been established as well): Gives decision makers a reason not to make a decision. Adaptive management needs to take over—needs to move with the majority of scientists, both at the management and leadership levels. For example, out of 928 papers, none disagreed with IPCC’s assessment. Scientific debate is over; however, public debate is ongoing. Setting aside protected areas conflicts with economic goals: For example, fishery extraction is limited or prohibited in protected areas, just as timber extraction is prohibited on some terrestrial protected areas. This raises two questions: Is there an ecological limit to the production and consumption of goods and services? Is there a conflict between increasing production and consumption of goods and services (i.e., economic growth) and ecological health? If so, then protected areas and conservation lands will be encroached upon or degraded as long as economic growth ensues. This implies that biological conservation and environmental protection entails macroeconomic policy reform. Economy is primarily driven by fossil fuels: With fossil fuel combustion constituting the primary source of greenhouse gases, and with an economy that is 85 percent fossil-fueled, ceteris paribus, economic growth entails more global warming. Does the goal of economic growth trump the need for a stabilized climate? Does the pursuit of economic growth, which imperils the stability of global climate, likewise imperil future economic prospects? Need for an integrated approach: Climate change, land-based sources of pollution, habitat and hydrologic alteration, invasive species, and overfishing are the major management challenges. There is a need for integrated approaches to deal with all of these challenges. EPA completed a relative risk analysis of stressors across the country and came up with the previous factors, plus invasive species, as management challenges. Burden of proof to take actions: The burden is on federal land managers to prove that conservation areas work. Land managers are constantly defending themselves against consumer groups. For example, protected areas are important to sustain fish harvests. Marine reserves and limiting the taking of species (“takes”) can help. In the tropics, this is much more important to demonstrate that the reserves work. In temperate and higher latitude areas, marine reserves and limiting takes do not always work because of differences in ecosystem functions due to highly mobile fish species. In tropical areas, fish are there because of the reefs. On other fishing grounds, fish are mobile; but some reserves have worked. This is known as spatial nature. In tropical areas, fish are site-attached. Conflict between federal and state water management: About 85 percent of existing protected waters are state waters. If resource managers can agree on commonly held conservation goals, needs, priorities, and threats, they will have more commonalities than differences: Oceans are connected. We need to transcend administrative authority barriers. All share the same threats and issues. If these were drivers of debate, jurisdictional authority issues would go by the wayside. Ocean/Land interface: Improve management of land-based resources as they relate to the coasts (coastal watersheds). Need to maintain critical streamflows for anadromous fisheries (e.g., Sacramento River National Wildlife Refuge for Chinook and Coastal Alaska). Forests ecosystem workshop participants from FWS, FS, and NPS identified the following management challenges and constraints: Climate change will demand a paradigm shift on how FWS approaches its mission—essentially, species conservation/preservation—due to paradigm shifts in climate regime and the related impacts on species. The 1997 Refuge Improvement Act directs the National Wildlife Refuge System to “ensure that the biological integrity, diversity, and environmental health are maintained for the benefit of present and future generations of Americans.” The impacts of climate change will impose an enormous burden on the National Wildlife Refuge System, depending on how “biological integrity, diversity, and environmental health” are interpreted. Examples of unprecedented change abound in the Kenai National Wildlife Refuge, Alaska, including anomalies related to fire events, glacial retreat, tree line rise, wetland decrease, species shifts, and insect infestations. Other wildlife refuges may face similarly unpredictable or unexpected disturbances, so managers may need to make preparations/plans on the basis of assumptions that are fundamentally different from the past. The appropriate document for managers to develop would be a CCP. Many National Wildlife Refuges and Waterfowl Management Areas are inherently at risk due to small size, sensitivity (many are wetlands), and location (i.e., coastal). There will be a need to revisit assumptions about regeneration, management, and system resetting activities. Climate change will require a reexamination of the multitude of fragile partnerships developed for the protection/preservation of land use (e.g., the Northwest Partnership to secure viability of spotted owl habitat was hindered by massive fire damage). Climate change will require managers to work beyond administrative borders, so arrangements that encourage groups and organizations to come together are needed. The body of legislation that regulates day-to-day management was developed in the social context of the 1970s. Managers today are still bound to backward-looking viewpoints, while climate change issues loom tomorrow. Of the major ongoing fire management activities, some are not being developed with climate change or long-term monitoring in mind. For example, LANDFIRE, an interagency project generated by the 2000 National Fire Plan, does not address monitoring effectively and does not incorporate the concepts of climate change. Climate change may cause NPS to reexamine its role in view of its fundamental mission, which in part involves “conserving wildlife and historic objects for future generations.” Climate change will affect the ability of NPS to fulfill its mandate to preserve certain species, which may not be able to migrate away and, therefore, will face die-off. Climate change will challenge NPS’s ability to achieve some broad mission goals, such as maintaining visitation levels and preserving cultural resources, in view of increased climate variability, such as storms, floods, fires, and extreme heat and cold. Climate change will challenge NPS’s ability to manage insect outbreaks and invasive species events. Federal land systems are fixed on the landscape, while climate has no boundaries, posing challenges for managing an administrative unit that does not move with the climate. In some cases, policies and laws, geared toward responding to events as they occur, constrain the ability of managers to incorporate anticipated events into planning and to incorporate climate change within the context of natural diversity. Managers lack risk assessment or approaches that allow for the inclusion of climate change and demographic change in planning activities. Political pressure to do something, regardless of whether it is likely to be effective in reducing the actual risk or whether it was appropriate for that system, can be a challenge. Defining “natural variability” by looking at snapshots of the past is not appropriate; regardless, the future will be different, whether it is considered “natural” or not; no accurate predictions exist; and preparing for the future in the face of this uncertainty is challenging. Climate change effects will exacerbate other environmental stresses and already existing problems. There is some degree of disconnect about the nature of agencies’ mandates with respect to climate change and, accordingly, differences in the interpretation and implementation of such guidance at the management level. Managers operate in an administrative environment that is highly fragmented. Stakeholders include FS as well as landowners, state agencies, and industry. Climate change effects span large areas, creating problems that defy remedy along administrative lines. No one has all the information, which punctuates the importance of having infrastructure in place to develop a shared vision of issues and solutions. The social interface between research and management is lacking. For example, social factors play an important role in determining which fires are suppressed and which are not. Although researchers may provide rational, scientifically based recommendations to managers, legal and social constraints may take precedence. fresh waters ecosystem workshop participants identified the following management challenges and constraints: Various water rights laws create problems. According to a USGS scientist, certain western water allocations and rights were established during a relatively wet period in the history of the United States (the wettest 15-year period in the history of the United States). As water resources become scarce, and competing demands increase, NPS and FWS land managers face pressure regarding use of water resources, and several of the land managers expressed concern over whether enough water resources would be set aside for ecosystem functions. An FWS land manager said that the agency has a very limited ability to convincingly state water requirements to protect fish habitat and aquatic ecosystems. Land managers believed that competing demands for water resources are largest in areas of rapid development, such as Las Vegas, Nevada. Other water-stressed areas include groundwater reserves under parts of Nebraska and Kansas. Land managers believed that a collaborative effort to equitably assign water rights was necessary, otherwise public lands would suffer. Some suggested that the Congress should reassess the mandates regarding water allocation. A USGS representative said that it will be increasingly difficult to obtain hydrologic information from USGS because funding for the agency’s stream gauging network and hydrological data is being eliminated. According to the USGS representative commenting after completion of the workshop, many core monitoring efforts are being reduced unless USGS can find funding through other, nonagency budget means. A NPS representative believed that the eastern United States already faces water challenges, and that human demand for water puts added strain on eastern aquatic ecosystems. In addition to complexities associated with various water laws and a dearth of hydrologic data, managers face reduced management options if interrelated water supply systems are affected, and increased complexity regarding mitigation of protracted droughts or reservoir spills. Organic Acts and some statutory requirements are explicitly vague. NPS is asked to manage land such that it is “unimpaired for the enjoyment of future generations,” and FS is required to manage in order to maintain “favorable conditions of flow.” An FS scientist explained that it is difficult to manage flow regimes with respect to a historic range or variability because of the added stress associated with climate change and increased demand for water resources. Many land managers believed that the mandates are vaguely written and not specific to ecological preservation. An FWS land manager said that land managers react based on statutory requirements, which presumably reflect human societal values; however, other land managers believed that the general public and the Congress do not have a clear understanding of the purpose of the federal lands. Management planning horizons and climate change are on different timescales. NPS and FWS officials said that planning can be difficult with so much uncertainty about future climate conditions. Accountability structures that have emerged over the past decade are very short term in nature. For example, land managers are typically accountable for things on a year-to-year time frame, and “long-term” planning horizons are commonly just 10 to 15 years. An FWS land manager explained that he is required to create a general management plan on a 15-year planning horizon, which he believed was too short for incorporating management practices for addressing long-term climate change, although he also believed that decisions beyond the 10- to 15-year time frame would be very speculative. An NPS superintendent suggested that management plans may help address this timing issue by including a section on long-range issues expected beyond the time frame of the plan. For example, long-term planning in coastal areas will need to consider rising sea levels, and consider whether the management decisions being made today are also relevant for the future. This will require adaptability and will require that each management agency consider how climate change may affect its mission in the long term. Land management has historically been intuitive. Because climate is expected to change more rapidly than in the past, managers will have a difficult time making assumptions about future conditions to justify anticipatory land management practices, and any assumptions will have to be justifiable. Managers believed that land management has historically been intuitive, and they expressed concern over their ability to react quickly if they were to reach a threshold and experience a relatively quick, dramatic change. Land managers cited the example of the whooping crane, whose population decreased to such a low level in the past that FWS had to embark on an intensive program of management. The agency is improving models to help determine continental population objectives to help make management decisions. Political hazards are associated with discussing climate change. Land managers and scientists believed that it is not politically profitable to talk about climate change. An FWS representative said that climate change impacts are not explicitly addressed in agency strategic plans, but may occur at a unit level, for example in the Kenai or Blackwater National Wildlife Refuges’ management plans. An NPS representative agreed, saying that the agency may discuss “sea level rise” rather than referring directly to climate change. NPS has decided to talk about the effect of climate change, such as the sustainability of parks, and has implemented programs, such as “Climate Friendly Parks,” to mitigate those effects. Participants generally stated that land managers have to accept the notion of climate change in order to develop a recovery plan. For example, regarding the polar bear, land managers must decide whether to list the species under the ESA, based on what is likely to happen to the species as a result of climate change. Grasslands and shrublands ecosystem workshop participants identified the following management challenges and constraints: BLM does not have any policy from the national office to the field A possible entree for bringing up climate change might be through BLM field offices address their situation with respect to current climate BLM has been involved in seed-banking for about 5 or 6 years through its fire rehab program. The agency collects native seeds for this purpose, and some of the seeds go to a botanical garden for storage. There is no real direction trickling down of guidance from the FS Chief’s level. FS talks about sustainability but does not discuss climate change per se. One of the barriers to managing for climate change on national grasslands is that some FS lands are intermingled with private or state lands. Therefore, even if FS buys off on climate change, it is necessary to have the private landowners on board and in agreement. Being able to manage a system with the fragmented ownership and landscapes is a challenge; it is difficult to impart an understanding of what climate change means to private landowners and having them believe it. The way the public involvement process works on multiple-use federal lands can really complicate discussions like adaptive management. There is a general mistrust in some circles of FS use of the adaptive management concept. Another challenge is that the process for planning is outpaced by the speed of scientific information coming in. Science is coming down the pike faster than it can be processed. The agency will start its planning process, and new information will come in that cannot be addressed because the planning process will not allow for it. Land management planning is complicated by this country’s litigious society. Certain groups are able to obtain scientific information and sue the agency for taking or not taking certain actions; these groups can sue quicker than an agency can incorporate new science. FS may recognize that climate change is important, but the agency does not see it as urgent. A demonstration of urgency might make the agency view the issue as a priority. What land management practices or approaches to planning may be considered when responding to the effects of climate change? Panel members provided examples of steps that can be taken in land management planning that are important to consider in order to better respond to the effects of climate change: Planning for resilience on a large scale: Set relatively undisturbed areas aside to limit impacts. Identify more resilient communities to help preserve them for the future. Marine reserves are a promising management tool for adapting to climate change by managing for resilience. Remove the effects of fishing as a stressor. For example, Australia set aside one-third of reefs as protected areas. Showcase Marine Protected Areas that are multiagency (state and federal) state partnerships as “poster children” to decision makers. Such partnerships can demonstrate the effects of reserves. Best practices: National Association of Counties, etc., to adopt best practices for lands management. Look at the past and the future. Prioritize investment of resources on habitats that may be impacted in the future. Consider the past, but plan for the future. Needed: A coastal manager’s guide to climate change similar to A Reef Manager’s Guide to Coral Bleaching, a 2006 report on ways that local managers can help make coral systems more resilient to manage stresses during bleaching events and plan for future bleaching events. Workshops and training courses are in development. Managers need a coastal land manager’s guide and training course for how to plan for, adapt to, and mitigate climate change on federal holdings. National Estuarine Research Reserve Conceptual Models: Climate change is important, but not the only thing that is important. Climate change creates multiple stressors, but other stressors also affect the coastal system. Emphasize cumulative stressors within the ecosystem management context. Plan needs to be in context with other stressors. Integrate watershed-level planning with coastal management adaptation. Manage fishing and its impacts on marine and coastal environments ESA critical habitat designations: Can prevent extinctions and provides land acquisition authority for the National Wildlife Refuge System. Legislation to create refuges: Use the following as a model to protect marine areas: wildlife (ecosystem services) first, wildlife-dependent public uses, where appropriate, based on compatibility assessments. Using the management paradigm of limiting fishes in order to limit commercial harvests. Other agencies have different missions. Need regional demonstration projects. Natural capital banking: Optimize the ratio of natural capital existing in a state of ecological integrity to the ratio of manufactured capital and consumer goods that flow from the stock of natural capital. Create a balanced account to optimize the public welfare. What about things that cannot easily be measured economically? Resource economists are working on this—need improved methodologies for valuing ecological services. Cooperative conservation approach: Beyond government jurisdiction— adopt a seamless approach for managing coastal zones and marine waters that allows for adaptation to climate change (migration, etc.). Need to include public, private landowners, and interested constituents. Manage the greater ecosystem. Also need this approach for monitoring programs. Restore hydrology and wetlands functioning: This can be done, for example, by constructing weirs (small dams) and increasing the land’s capacity to adapt to changes. Learn about anticipated future conditions and build/remove infrastructure as necessary. Remove ditches, roads, etc., as necessary. “Retreat” (i.e., moving man-made structures) is an option. Change incentives for building in high-risk areas, for example, by mapping erosion zones. Higher resolution coastal mapping of flood, erosion, other high-risk zones. Offer tax incentives for conservation easements or to move to different areas? In North Carolina, people can be reimbursed for destroyed coastal property, but the property will then be placed in public hands. Rolling easements (past example: Upton- Jones Amendment). In Louisiana, the Federal Emergency Management Agency has provided funds to wetland mitigation projects for storm protection. This program should be expanded beyond wetlands. Mitigation pays 4:1 across the country, but 7:1 in coastal areas. The cost of adapting now would be less than paying later. There is a tremendous lack of investment in adaptation at this time, but investment in the future may change this ratio. We may not be able to spend our way out of this problem. Florida coastal control line: Line drawn around the boundaries where overwash is expected. Setback lines in combination with building requirements and permitting in areas at risk. For example, the Maryland Critical Areas Act is intended to stop eutrophication of the bay with setbacks, but serves a similar purpose. These concepts should be enhanced using scientifically based lines. Florida water management districts: Management boundaries are based on watershed boundaries. These districts have taxation authority. Boundaries are contiguous with natural boundaries, allowing the districts to address watershed-scale issues. United Kingdom Climate Impacts Program: Good model for what can be done at a national and local level to enhance adaptive capacity. This program provides a Web site (http://www.ukcip.org.uk/) and a monthly newsletter, and each political subdivision in the United Kingdom has a devoted team to help people adapt in all sectors. One potential suggestion to the Congress: Create a Climate Impacts Office, which would be distinct from Climate Change Science Program and the Climate Change Technology Program, and create a climate change extension program in every county. Coastal Barriers Resources Act: Private lands are demarcated as relatively immune to development. Delivery of the program is problematic due to top-down approach. This is a half-hearted fix to the problem. Work with insurance and financial industry to construct incentives for mitigation and adaptation. Need to also focus on what could be, not just what has already happened. Also need to include incentives for other coastal areas at risk, including New York, etc. Need to build a community of practice. Expand the community of practice, such as local land trusts, and expand influence. Workshop participants contributed the following ideas with regard to management options for addressing or mitigating climate change effects: A monitoring strategy that is affordable and reflective of some of the key vital signs of forests is needed to inform management decisions. One approach is to conduct vulnerability assessments to identify characteristics associated with species loss, and to pay special attention to those species most threatened. The Kenai National Wildlife Refuge has launched the Long-Term Ecological Monitoring Program in cooperation with FS’s Forest Inventory and Analysis Program, in which vegetation data are coupled with wildlife sampling to produce a spatial explicit, comprehensive species inventory. The program has already resulted in the identification of new species to science and the modeling of species distributions. The Kenai National Wildlife Refuge also helped launched the Alaska Landscape Cumulative Effects Simulator, a stock-and-flow model to which several stakeholders—public, private, and nonprofit agents, and other communities and groups—contribute. The main objective of the simulator is to provide a strategic-level land planning tool by identifying and examining landscape change drivers, including climate change, in the context of other management issues to provide an effective strategic land planning tool. What is needed is a national data repository and a separate Bureau of Statistics to provide a holistic portrayal of the status of the landscape. This will facilitate collaboration and address the issue that the sum of local level choices may result in a suboptimal or counterproductive aggregate outcome. In one instance, individual agency actions resulted in threatening the spotted owl in the Pacific Northwest. A holistic view also will address the issue that, although information is abundant, much of it is not comparable or compatible. Some did not agree with this approach. While research needs to be conducted iteratively over time to reach a level of certainty, managers need information in real time to make decisions. The needs gap may be closed by using better communication tools. FS tools developed for broad-scale application do not have capability at the species level, which managers would like. Developing such high- resolution models should be a research goal. One approach to scenario modeling is to use it to convey possibilities to the public, to change expectations and alleviate pressure on land managers, which provides more freedom to make the correct decision. The concept of moral hazard, the idea that climate change is inevitable, should not be used as a reason for inaction. The question of where to invest resources has been ignored. Should a billion dollars be put toward trying to slow the rate of climate change, fending off its effects, or adapting? Five basic management strategies are being submitted for consideration in an upcoming paper: (1) reduce GHGs by sequestering carbon, (2) resist climate change by legislating that the landscape remain as it has been historically (this approach is increasing in cost and is likely doomed to fail), (3) create resilient landscapes that can revert to their previous state after a disturbance, (4) respond to climate change by anticipating change and seizing opportunities, and (5) conduct triage by acknowledging priorities in conservation efforts (this approach would be legislatively challenging). There is a need for an agreed-upon suite of indicators that address social, economic, and ecological vital signs of the sustainability of forest lands. The research community can help identify such indicators by leveraging ongoing developmental systems, such as the Sustainable Forest Roundtable process. FS is testing a program that utilizes a combination of high-elevation aircraft and helicopters to produce low-cost imagery at a half-a-meter resolution that can be linked to models and indicator systems, thereby providing scalability. The nation’s satellite system currently is not equipped to improve the problem of out-of-date National Forest land cover information. There is no operational commitment to conduct regular reporting on the actual state of land cover. It will be at least 5 to 7 years before 30-meter resolution data become available. Land managers are heavily dependent on technology platforms for information, but as technology changes continuity and reliability become a serious issue; there is a need for better integration of existing inventory monitoring programs that are scaled at the landscape level. The Healthy Forest Restoration Act has brought people together to manage fuel treatment strategically, rather than on an acre-by-acre basis. An ecological risk assessment framework, in which a desired outcome is identified and trade-offs discussed with stakeholders, is better than a “support-this-but-not-that” triage approach, which limits options and discussion. Land managers had some difficulty in identifying management practices for specifically addressing the effects of climate change. They said they are likely to draw on historic practices, although the frequency of the use of each practice may change. In general, they saw opportunities for public outreach and collaboration across federal agencies. Opportunity for public outreach and education Managers of federal lands said that the federal lands with visitor centers provided an opportunity for people to learn about the benefits that protected areas provide to the public. A USGS official said that several USGS employees were told explicitly not to interpret climate trends for the public, but NPS officials said that they had more latitude for public outreach and education as part of the park interpretive experience. The management structure at each park has flexibility to include public outreach efforts, and workshop participants said that each park should take advantage of this. Land managers said that the Congress should mandate that parks incorporate public outreach and education as a low-cost, effective part of management practices. Participants also said that land management agencies should jointly fund facility investments and minimize energy use. Use of historic record for planning A scientist from USGS suggested that land managers look at paleostudies, including the National Tree Ring Database, to understand past climate variability and hydrologic responses. Because some ecosystems have already gone through analogous changes as are expected with climate change, land managers can learn from past periods of drought during the past several hundred years. If severe droughts of the past are becoming the “norm” of the future, land managers should address this in management plans. The scientist believed that the historic record may be a better planning tool than current general circulation models, since many of the climate models are poor predictors of precipitation. Collaboration among federal land management agencies A representative from NPS said that BLM has fragmented landscapes and migration corridors because of a mandate requiring the agency to expedite energy development. Panelists generally agreed that this could have been avoided, if BLM were required to cooperate with other federal land management agencies as part of the energy development efforts. Panelists further identified “economies of scale,” including examples where it is more efficient for agencies to work together. They cited the National Interagency Fire Center as a successful model of incident management (e.g., fire suppression). Although an FWS representative said that collaboration among agencies can be inefficient, since agencies have differing missions and priorities. However, the panelists generally agreed that the agencies have some common interests with respect to climate change, which may necessitate the need for fire protection, cooperative snow surveys, groundwater data collection, regional model development, and data collection and dissemination, in general. An FS representative believed that USGS has a clear role to support agencies’ need for water resource (hydrology) data, and to coordinate and share information. He believed that USGS was developed to address emerging needs and issues, but this function has recently been outsourced. For example, approximately 28 percent of USGS stream gauges have been eliminated over the past decade, and the current USGS long-term monitoring and research function is a user-pay, client-based system that is less useful than many university-level efforts. Panelists generally agreed that monitoring and research functions related to climate change are inherently governmental functions, because of the need for national-scale data that must be beyond the range of a single appropriations cycle or contract period. Although land managers discussed the possibility of physically managing and manipulating an animal habitat to maintain species health in a location where the environment would no longer naturally support the species (presumably due to changed water availability), this option was not viewed as optimal because it may require considerable infrastructure investments. Reevaluate the concept of ecological succession Experts believed that climate change impacts will result in species shifts, and may require a paradigm shift in the way that land managers think about and react to invasive species. For example, invasive species in a particular region may become the norm under a new climate regime. When treated as an invasive species, rather than part of natural ecological succession, there is a tendency to make value judgments (based on an ecological response, rate of disturbance, etc.) and fight against the species. Land managers considered what control of invasive species is likely to resemble in the future, and the degree to which managers should continue to manage (against) invasive species. An FS representative believed that land managers need to throw out the idea of what species should and should not be on a landscape, because the world (of pandemics, microbes, and seed dispersal) is changing faster than any other time in (documented) history. Development of adaptive management strategies Managers generally agreed that the current management structure on federal lands does not provide the flexibility needed to mitigate or adapt to climate change impacts. Land management plans generally cover a 10- to 15-year time frame, although some managers considered whether they should also be looking at a 50-year time frame, and how to handle the uncertainty associated with long-term climate effects and planning. FWS managers and others believed that an adaptive, or anticipatory, style of management and decision making would be necessary to reflect learning that takes place over time (e.g., with respect to climate change and ecological responses). This would require managers to state assumptions regarding the future conditions of a system and manage on the basis of those assumptions. The assumptions can later be verified against observational data and used for improving regional models. According to participants, a good adaptive management framework should involve a clear set of assumptions, which are checked against real, observed situations. For example, if a resource manager must make productive habitat for wintering populations of endangered whooping cranes, he or she should do this on the basis of assumptions of what the landscape will look like 5, 10, and 15 years in the future. Although this style of management is not specifically managing for climate change, it helps an agency meet its mission (i.e., protecting species habitat). Some panelists believed that they currently lack a clear understanding of the baseline from which to adapt, because they lack adequate scientific information about their management area. However, they thought it would be useful (to the Congress) if agencies would state their assumptions about what they expect their areas to look like in the future and how that is likely to affect visitation, employment, and economic resources of these areas. FWS has a successful adaptive management model for migratory birds that is highly driven by climate considerations, such as the availability and timing of water in prairie pothole regions. An FWS representative said that the model is transferable, and that the agency is moving toward adaptive management in many of its program areas. Possible modification of agency mission or management statutes Land managers expressed concern that climate change might present such a large challenge that an agency may face difficulty in fulfilling its mission. They considered ways of incorporating climate change into a management process and believed that agencies may need to consider changing land management practices (FS, NPS) as a potential means of mitigating effects of climate change. For example, FS may consider managing in a way to specifically free up water supplies. Build public-private partnerships for environmental stewardship An FWS representative spoke about the possibility for public-private partnerships between federal land managers and private energy companies wanting to purchase carbon credits by planting trees. For example, FWS reforested 3 to 4 million acres in the lower Mississippi valley in the past few years, at the expense of the private sector. This partnership helped FWS to meet its goal of habitat restoration and provision of a recreation area, and the industry met its goal of carbon sequestration (carbon credits). The group’s responses to this question, in the general order discussed, are below: Conduct seed-banking (storing seeds of endangered plant species for later planting). Educate agency staff and the public on the significance of federal lands and how climate change might affect these lands (internal and external outreach). “Protect what you can”—that is, manage current stresses, such as invasive species, pests, and pathogens, because climate change will only make these worse. Analyze and synthesize existing information on the effects of climate change on federal lands in each ecoregion. Make a list of the lands that will likely be impacted by climate change in 25 to 100 years under various kinds of scenarios. Improve coordination among land agencies; interconnectivity needs to be explicitly valued where management goals could be combined to ensure sustainability. (Connect smaller land parcels to create a region of a size that enables the resilience of species. Strategic land easements or purchases could create larger corridors.) Adopt adaptive management scenario planning (contingency planning) for climate change. the most adverse and significant effects under Question 2, and the effects on the most vulnerable areas identified under Question 4, and the reduction in the flows of goods and services due to climate changes. Take action at the highest levels of government to integrate climate change into planning and decision making at all federal land management agencies. Improve coordination among agencies on management for climate change, leading to a concerted national approach (following the model of the interdepartmental Coral Reef Task Force or the Invasive Species Task Force). Conduct baseline inventories of species on federal lands to determine their type and health. Periodically repeat monitoring on a scale that can provide feedback on changes. Have a method of interpretation that can allow managers/decision makers to develop effective land management and connectivity strategies. Find a specific and tangible “success story” for each agency that shows that the federal land management community is making progress to help get some traction for the climate change issue. What is the most important type of information (research, monitoring/measurement) needed to better understand, prepare for, and address the effects of climate change? What resources will be needed? Land management panel members agreed with the information needs identified with the scientific panel. See Day 1, Question 5. Forests ecosystem workshop participants identified the following as information and/or research needed to better understand and prepare for the potential climate change effects on forest ecosystems: Information related to biology and biogeography of forest pests and pathogens—factors that cause life cycles to accelerate, interactions with natural enemies, and phenology of infestation outbreaks Interactions between disturbance events and monitoring of forest establishment after disturbances, especially the potential for forest composition to change substantially Information on water balance, related to temperature-induced drought Remote sensing, especially from LANDSAT and Geostationary Operational Environmental Satellite platforms that provide indicators of seasonal to interannual stress—particularly with regard to fire and other disturbance phenomena—and related to this, a family of models that are based on actual land cover—not potential vegetation—and that are more closely integrated with decision-making models and that are spatially relevant at the 30- to 100-meter level High-elevation monitoring of climate, soil moisture, and streamflow Monitoring and assessment of the amount of residual aquifer groundwater available throughout the country Stream gauging network needs to be improved Optimize monitoring systems for early impacts Ecological studies of all the species likely to be engaged in responding to climate change. (One expert disagreed with this approach.) Fresh waters ecosystem workshop participants identified the following as information and/or research needed to better understand and prepare for potential climate change effects on fresh waters ecosystem: Need for better understanding of current anthropogenic stressors Stream systems in the west are managed for other purposes in ways that are likely to “trump” climate change effects that we anticipate (e.g., dams out west create a wide range of flow). Human-induced changes may “swamp” climate change effects—how should our water management practices be changed, if at all, in light of climate change? An NPS representative said that millions of dollars are spent on infrastructure on federal lands, but asked whether federal land managers are adequately addressing the effects that climate change might have on these investments in the future. Panelists suggested that the Congress may want to consider requiring that climate change be considered in environmental impact analyses (environmental impact statements, environmental assessments, etc.) required under NEPA. This could be mandated by changes in the regulations promulgated by the Council on Environmental Quality. One official commenting after completion of the workshop said that this sentiment was directed at proposed projects requiring an environmental impact statement where (1) climate is significant in the project’s context and (2) the look-ahead horizon is long enough where significant climate change is projected to occur. This official said that federal agencies plan projects where NEPA is required but conditions (1) and/or (2) are not met. Need for better understanding of current ecological stressors Existing ecological problems, such as fires, invasive species, and nitrogen deposition, may be exacerbated by climate change. The panelists believed that a “model-based” capacity to think about ecological succession would be helpful in making management decisions. Develop a national-scale program to establish linkage between water A national-scale program to establish ecological flows for rivers and wetlands would provide a knowledge base with the ability to respond to management questions—for example, regarding the amount of water needed to protect particular species, the (seasonal) timing of the water demand, and the relationship between water flow (availability) and demand. This would provide a science-based system for making management decisions regarding surface water- flow variability and the ecological response. Workshop participants explained that the NEON network is dedicated to the study of phenology, or the interaction between climate and biological systems. They strongly advocated for the creation of a national phenology network dedicated to observing and recording “on-the-ground” changes over time and sharing those observations with other resource managers. One expert commenting after completion of the workshop said that NEON has not actually been established yet, and that other observatory networks, including the Critical Zone Observatory network and the Hydrologic Observatory network are also in the works. According to this expert, all of these networks are still in the “request for proposal” phase (with NEON being out in front) and all are highly vulnerable to lack of funding in the NSF budget. Another expert commenting after the completion of the workshop wanted to make clear that NEON and the national phenology network are not one and the same. The expert said that some of the same scientists are involved, but the two networks would be separately funded and managed. Establish consistent data collection, management, and storage and Several federal agencies collect ecological data, each with its own data quality standards. Workshop participants recommended that existing data be cleaned up and formatted uniformly, and that current and ongoing data collection efforts be standardized. Participants acknowledged that some data may be useful to a wide range of agencies, while other data may be agency-specific. They suggested that a monitoring program be developed to collect data on “vital signs” (of ecosystem health). An expert commenting after completion of the workshop said investment in data translation tools designed to make data sharing easier was a better idea than enforcing some uniform data format. This expert said that encouraging data sharing preserves agency-centric creativity and control when it comes to information management, and that requiring a specific data format would be a bad idea, forcing many agencies to change their information management structure. Furthermore, the expert said that requiring a standard format would likely cost more than encouraging the development of information sharing tools using existing data formats. Need for regional climate models Experts generally agreed that climate projection methods must be improved and that regional climate projections with accurate temperature and precipitation projections, rather than global-scale projections, would be helpful in more accurately identifying (and planning for) the likely effects of climate change. Federal land managers believed that phenological records, or documented ecological responses to changes in environmental conditions, would complement regional models and would be helpful in better understanding the relationship between projected climate change and plausible ecological responses. Although FWS collects some phenological information, it does not currently have a system to compile this information and make it readily accessible to answer questions about species’ tolerance for seasonal shifts and any other possible limiting interactions. Participants agreed that hydrological and ecological models are needed to couple these systems with climate models at a scale that supports land management decision making. Guidance for incorporating climate change into management plans is Most managers did not know how to build climate change into the management process, but believed that there is the need to do so. They identified the need for direction or guidance on how to incorporate climate change into management plans, and what set of tools may be useful in addressing climate change. Need for financial support An NPS representative referred to a previous GAO report when discussing the “decimation” of NPS’s operating budget. He said that NPS has less money to fulfill its mission, and that it is difficult to assign additional resources to long-term problems, like climate change, when performance is evaluated on an annual basis. The group’s responses to this question, in the general order discussed, are as follows: Need information on what will happen in specific regions. In particular, information is needed on flora, invertebrates, soil conditions, surface water, and groundwater. (It is very likely that this will not require new research, but rather a synthesis of information that already exists. The information needs to be packaged for a local land manager to be able to see what the global change means for him or her at the local level.) Managers need to better understand how the management actions of today will interact with climate change so they will know how their actions will affect either the climate itself or exacerbate the impacts of climate change. Need better information on temperature and precipitation changes from which models can be developed. Or vice versa—managers need better models to anticipate the temperature and precipitation change. Need better guidance at all levels on the effects and impacts of climate change and the appropriate agency responses to those impacts. Sometimes the appropriate response is to do nothing. The genius is knowing when that is. At the end of the second day, GAO Director John Stephenson convened a plenary session in which he asked all participants for ideas, from big to small, that might be of interest to the Congress. Suggestions could include ideas for future hearings or specific items of legislation that might be constraining managers’ ability to act. Below are the suggestions that came out of this plenary session. Consider the poor condition of the civilian satellite program. This program is to the point that continuity of basic earth observation is on the verge of failing. Examine the current body of legislation that constrains natural resource managers to manage lands/waters with respect to historical conditions (rather than in light of conditions that may be very different in the future). Review and possibly revisit specific acts as appropriate. Examine prescribed fire fuel management policies. Spatial, budget, and temporal targets are too narrowly defined. Land managers cannot shift resources from one area to another to meet immediate needs. Explore Canada’s national park system as a model. Parks Canada has a very explicit ecological integrity mandate. Specifically, the Congress should add guidance to give NPS a mandate for ecological integrity, along the lines of what Parks Canada has (but do not reopen the NPS Organic Act). The Council on Environmental Quality should provide guidance that federal agencies should consider climate change in analyzing proposed actions in environmental documents. The NEPA process can be a hindrance in managing for climate change. NEPA requirements begin when an agency takes action, so there is an incentive for agencies not to take action because NEPA costs agencies money. The Congress should empower the Council on Environmental Quality, or a special committee, to develop a multiscale monitoring and evaluation framework (National Indicator Initiative) that could be used in existing planning efforts at the regional level. Then, these indicators should be migrated into the respective mission statements of affected federal agencies. For example, FS would deal with indicators for forests and rangeland information would be dealt with by BLM or the Natural Resources Conservation Service. Information from shared indicators that are common across the landscape would be aggregated for all to use. The Congress should establish a Bureau of Environmental Statistics and a central environmental data repository to be used by agencies, universities, etc. The Congress should enforce Title II of NEPA, which requires the administration to submit to the Congress a report on the status and trends of the nation’s resources, the foreseeable trends in impacts, and the adequacy for filling the human and economic requirements along with remedies for deficiencies in resources. The Congress should request and fund a report detailing climate change on all federal lands. What are the impacts likely to be for all federal lands? People will then have a clear idea what scientists and land managers are talking about when there is information available about “their” federal lands. (That is, the Congress should request and fund an effort similar to the Millennium Ecosystem Reports.) Develop a metric that builds on the Bureau of Economic Affairs’ accounting efforts to capture the value of maintaining natural capital. There needs to be a supplementary way to account for the value that natural system services and flow of ecological services provide (i.e., develop a federal environmental accounting initiative). This can help managers identify what is being lost as a result of climate change. Many land management policies and regulations operate under the assumption that federal land managers manage on their own lands only (and that the effects of land management are confined to those lands). Climate change should be managed at the regional scale or above. Statutory authority and incentives are needed to work outside and beyond individual lands for the common goal of adaptation. The Southern Appalachian Biosphere Reserve is an example of such an arrangement. Some statutory authority to make such arrangements would be useful. The structure of the national fire centers and multiagency, colocated budget directors is also useful. There needs to be a cross-agency, cross-governmental assessment of the capability of our current EMS. How effective are current networks for measuring and predicting climate change? This network needs to be optimized to collect and analyze data that are relevant to climate change. Federal land managers need legislative direction to account for climate change when making land management decisions. NOAA needs an Organic Act; this act should include language requiring direction on managing lands in anticipation of climate change. The Congress should promote planning at the highest level of the executive branch that recognizes the potential impacts of climate change and promotes integrated, cross-agency approaches to addressing these impacts, including a functional review of the current legal and policy frameworks that drive land management decisions. The Congress should direct and provide funds for federal land managers to develop prototype management documents on how to address climate change in the immediate future. Land managers need the ability to forecast the effects of climate change on their lands. The United States needs better short-term general circulation model forecasts. Land managers also need the ability to forecast natural resources’ response to climate change. Land management agencies need to reconcile their divergent missions. The moderator of the coasts and oceans breakout session referred GAO to her group’s answers to Day 2, Question 3 of the workshop notes. Develop climate impacts offices at the county level (or through extension programs), based on the United Kingdom’s climate impacts program. Each office in the United Kingdom’s program has a Web site, a monthly newsletter, and a staff that helps stakeholders deal with climate change. The Congress and federal agencies should encourage on-the-ground entrepreneurship and creativity to address climate-related problems. These kinds of creative responses can then “bubble up” through management. The Congress should authorize the preparation of a “Stern Report” that focuses on the United States. (The Stern Report is a 700-page report released on October 30, 2006, in Britain, stating, among other things, that climate change will cause tremendous economic and social disruption.) The Congress should fund an objective assessment of the conflicts and outcomes of the Healthy Forests initiative. A mechanism to raise the visibility of climate change among the American people is needed. In particular, the constituents of the most politically powerful Members of Congress should be alerted to the potential negative effects of climate change—and not just on federal lands. We selected the Florida Keys National Marine Sanctuary, managed by NOAA, as our coasts and oceans case study. The sanctuary is part of the south Florida ecosystem. The coasts and oceans ecosystem, according to the Heinz Center, includes habitats such as coastal wetlands, coral reefs, seagrass meadows, shellfish beds, and ocean waters as far as 200 miles from the U.S. shoreline. The south Florida ecosystem consists of a mosaic of subtropical habitats connected and sustained by water. The sanctuary is home to coral reef systems that are part of a marine ecosystem, including a variety of plants and animals. The sanctuary’s extensive nursery areas, feeding grounds, and spawning grounds support a multimillion dollar commercial fishing industry that lands nearly 20 million pounds of seafood and marine products annually. Approximately 4 million visitors come to the nearby Florida Keys each year, providing tourist revenue and economic benefit to the region. FWS manages four National Wildlife Refuges in the Florida Keys. These refuges are located within the boundaries of the Florida Keys National Marine Sanctuary but are separate and distinct units from the sanctuary and managed under different authorities and mandates. One of these refuges, the National Key Deer Wildlife Refuge, is home to 22 federally listed endangered and threatened species, 5 of which are found nowhere else in the world. (The other three Keys refuges within the sanctuary’s boundaries are Crocodile Lake, Great White Heron, and Key West). National Key Deer and the other refuges were established to provide habitat and protection for threatened fish, wildlife, and plants. The refuges also protect globally imperiled habitat, including pine rockland and tropical hardwood hammock. The sanctuary’s ecosystem is also closely linked to other south Florida ecosystems, including those of the Everglades and the Dry Tortugas National Parks. North of the Keys, the Everglades provides drinking water for 5 million people and supports a diverse range of flora and fauna, including 14 endangered species. Each year, more than 1 million visitors come to the Everglades National Park, managed by NPS, contributing to the region’s $13 billion annual tourism industry. Dry Tortugas National Park, which is situated more than 70 miles west of Key West, is also under the jurisdiction of NPS and includes a cluster of 7 coral reef and sand islands. The three agencies managing these federal units—FWS, NOAA, and NPS— coordinate with one another in managing their resources. For example, FWS and NPS assisted NOAA in the development of the comprehensive management plan for the sanctuary. These federal agencies also coordinate with certain state agencies, universities, and NGOs. Sanctuary scientists told us that climate change may increase sea water temperatures in the area of the Florida Keys National Marine Sanctuary and may cause sea levels to rise. Climate change could have a range of ecological effects as warming sea temperatures could harm coral reefs, which are the foundation of rich marine ecosystems in the area, and rising sea levels could threaten low-lying animal and plant species. Officials also told us that climate change could result in increased storm activity, which could threaten humans as well as plant and animal species. Furthermore, officials noted that the ecological effects brought on by climate change could have a negative impact on the economic and social goods and services supported by the South Florida ecosystem. NOAA officials told us that climate change has already contributed to the degradation of coral reefs, the key component of the complex marine ecosystems that support the Florida Keys’ ecology and economy. According to NOAA scientists, if the climate—and sea temperature—warm, the reefs could be increasingly vulnerable to coral bleaching, a stress response that occurs when the corals expel the algae that live within the coral tissues and give the healthy corals their color. Bleaching, which turns the corals white, has affected the sanctuary with increasing frequency. Corals can recover from bleaching events if the stress is not too severe and long-lasting, but the stress on corals caused by coral bleaching has led to secondary problems, such as coral diseases. The corals are first stressed by the conditions that lead to coral bleaching, which is directly related to increased sea surface temperatures, and then afterward may succumb to a variety of coral diseases. A NOAA scientist told us that, as a result of climate change and seawater temperature increases, coral reefs could bleach every year, starting around midcentury. NOAA officials stated that climate-related factors, in conjunction with other environmental factors that stress the ecosystem, such as pollution, disease, and overfishing, may make coral reefs increasingly vulnerable to bleaching and degradation. Many other species in the surrounding marine ecosystem, such as fish and crustaceans that depend on the reefs for food or shelter, may be threatened by widespread bleaching. Officials stated that, in the long term, the deterioration of coral reefs and the attendant loss of biodiversity could be “devastating.” A University of Miami scientist who has been studying coral reefs and climate change for 11 years told us that coral reefs are also vulnerable to ocean acidification, which occurs when increased carbon dioxide levels decrease carbonate ion in the seawater; carbonate ion is a substance that corals need to build their skeletons. By 2050, carbonate ion could be 34 percent less abundant, according to this scientist. FWS officials told us that various habitats found on the Keys Wildlife Refuges may be vulnerable to climate-related changes and other factors that stress the environment. These officials stated that endangered species, such as the Key deer and Lower Keys marsh rabbit, may have greater difficulty surviving as a result. In addition, rising sea levels and increased storm surges after hurricanes that may result from climate change can cause saltwater intrusion on land, which can overwhelm sources of fresh waters that support the ecosystem’s plant and animal life. Increasing salinity can change where fire occurs as well as the distribution of species, according to FWS officials. FWS officials said that increased storm activity that may result from climate change will pose a threat not only to humans on the low-lying islands, but also to many animals—including sea turtles—which may find it difficult to lay eggs on eroded beaches. NPS officials pointed out that hurricanes, exacerbated by higher sea levels, will do more damage if they become more frequent as a result of climate change. An NPS official indicated that eight major hurricanes occurred in a 14-month period in 2004 and 2005, something that had not occurred in at least the previous 100 years. NPS officials told us that the low-lying Everglades ecosystem is particularly vulnerable to potential sea level rise because portions of the park are currently just a few feet above sea level. These officials indicated that the ocean front is already encroaching further inland, pushing the salt content higher in border areas and traditionally fresh waters areas, a concern because many fresh waters species cannot tolerate increased salinity. NPS officials noted that increased saltwater intrusion will affect the endangered Florida manatee, a fresh waters species, as well as the crocodile, which flourishes in brackish water. Wading birds are also vulnerable to such changes, since as salinity increases, their key food source—fish—also decreases. Other species, such as shrimp, blue crab, and spiny lobster, are likewise affected by salinity. NOAA managers told us that the South Florida economies that depend on the reefs to support such activities as snorkeling, diving, and tourism, may be adversely affected by coral bleaching. Other economic activities, such as fishing as well as cultural resources, including Native American artifacts and historic buildings, may also be vulnerable, according to NPS officials. For example, Fort Jefferson, the 170-year-old military fort on Dry Tortugas National Park, could be severely damaged by increased frequency and intensity of hurricanes and sea level rise. Similarly, shipwrecks and other submerged artifacts valued by divers could be harmed. According to an NPS official, there may be over 1,000 shipwrecks located around the Dry Tortugas National Park. Managers with whom we spoke from all three agencies near the Florida Keys National Marine Sanctuary face some common climate change-related management challenges. For example, these managers said that they lack information about climate change, suggesting that making decisions in the face of uncertainty is difficult. NOAA managers stated that determining specific relationships between climate and its effects against a complex background of other interactive environmental stressors is nearly impossible. Therefore, prioritizing where and how to focus conservation efforts remains difficult. NOAA officials also noted that they currently lack adequate modeling and scientific information that would enable managers to predict change on a small scale, such as that occurring at the sanctuary. FWS officials stated that more research is needed in a number of areas, including acres lost to sea level rise. In addition, more monitoring of water levels, water salinity, fauna, and vegetation—especially indicator vegetation (plants that provide clues as to overall ecosystem health)—is needed. Furthermore, an NPS manager said that more information is needed to reduce uncertainty on the expected rate of sea level rise. Another common concern expressed by these managers is a lack of climate-related guidance from their agencies’ headquarters. NOAA managers, for example, indicated that the agency has no specific guidance on how to address the effects climate change, and that most of their guidance is focused on meeting the many daily challenges they face, such as designating no-boating or no-fishing zones to protect sensitive areas. FWS officials commented that, although climate change is embedded in general discussions on ecological issues, it is not explicitly addressed; there is little or no guidance specifically on climate change. According to an NPS official, how to interpret limited guidance and deciding what, if anything, to do about the effects of climate change is difficult. Nonetheless, overall management authority is broad and gives managers some flexibility to act as they believe appropriate to protect the resources under their jurisdiction. Officials also noted a number of planning and resource challenges to addressing the effects of climate change on their land and water units. FWS and NPS officials indicated that they operate in the context of a 10- to 20-year planning process, but that they would need at least 50 years to adapt to climate-related effects. They stated that it is unclear how to account for such a long-term issue within a short-term planning horizon. FWS officials also stated that FWS budgets are being cut, and that biologist positions are being lost. NPS officials said that funding reductions and loss of research stations pose challenges to conducting the research necessary for appropriate decision making relating to climate change issues. NOAA officials indicated that the limitation that the agency places on discussing climate change is a significant challenge to addressing climate- related issues. NOAA officials stated that the agency’s control of the message on climate change is rigid, and that, in general, the agency prefers to focus on more immediate concerns. NOAA officials further said options to address climate change at a local level are limited and reactive; the issue must be addressed at a national and global level. Likewise, NPS staff stated that, to address the effects of climate change, it is necessary to address the source—greenhouse gas emissions—at a national and international level. We selected the Chugach National Forest in south-central Alaska as our forests ecosystem case study. According to the Heinz Center, the forests ecosystem consists of land areas of 1 acre or more that are at least 10 percent covered by trees. This includes areas in which trees are intermingled with other cover and both naturally regenerating forests and areas planted for future harvest. The Chugach—the nation’s second largest national forest—covers approximately 5.5 million acres. The Chugach is a contiguous, interconnected unit, which also includes private, state, and other federal land. It encompasses a wide variety of habitats that support over 232 vertebrate species, including brown bear, lynx, moose, wolf, and wolverine populations. However, only about 18 percent of the land area is forest vegetation and approximately 35 percent of the area is covered by perennial snow and ice. The Chugach has three distinct geographic areas: the Kenai Peninsula region (21 percent of the land area); the Prince William Sound region (48 percent of the land area); and the Copper River Delta region (31 percent of the land area). Southeast of Anchorage, the Chugach is a recreation area for activities such as fishing, wildlife-viewing, and hiking and receives approximately 8 million recreation visits per year. The Chugach also serves as a primary resource for subsistence hunting, fishing, trapping, and gathering activities for many south-central Alaskan residents. Furthermore, the forest also supports extraction activities, including mining. The Chugach is located next to or near several other land units, including the Chugach State Park, Kenai Fjords National Park, and the Kenai National Wildlife Refuge. The Chugach’s staff, therefore, coordinates with multiple stakeholders in managing the forest, including FWS, the Alaska Department of Natural Resources, and several Alaska native corporations. The Chugach scientists and managers described a variety of changes currently affecting the lands they manage that may be attributable to climate change. In this regard, they attributed a number of changes in the forest ecosystem, at least in part, to the warming and drying of the climate on the Kenai Peninsula area of the forest. For example, the peninsula has been the center of a spruce bark beetle outbreak that has killed large numbers of Sitka, White, and Lutz spruce trees on 4 million acres in south- central Alaska. In lowland areas of the peninsula, lake levels have declined by as much as 1 meter, and many ponds documented in aerial photographs from the 1950s are now grassy areas with spruce and hardwood trees. In the Kenai Mountains, the tree line has risen an average of 1 meter per year during the past 5 decades. Furthermore, many glaciers in the region have been retreating since the 1850s, but the pace has greatly accelerated in recent years in response to a warming and drying climate. For example, one large ice field in the Kenai Peninsula has lost 70 vertical feet and 5 percent in surface area in the last 50 years. As they have continued to melt and recede, the runoff from many glaciers has created glacial lakes, which capture glacial sediment and decrease the amount of sediment going into glacial rivers. As a result, the rivers are transforming from glacial, multiple channel systems to single channel meandering systems that can have considerable impacts on fish habitat, riparian and floodplain vegetation, and water quality. Officials at the Chugach also told us that they have observed an increase in the frequency of severe storm events, along with a seeming increase in lightning strikes and fires caused by lightning in recent years. In addition to changes that the region is already experiencing, managers and scientists told us that they were concerned about a variety of potential effects from climate change that may impact the Chugach in the future. For example, although invasive species have not been a problem to date in most of Alaska, occurrences of invasive species could increase in response to disturbances associated with climate change, according to these officials. Furthermore, as habitats shift, sensitive and rare species could be adversely affected. Hydrological changes resulting from climate change could affect salmon fisheries and spawning habitat. Although the impacts are not yet known, climate change could affect tourism and recreation activities in the region, according to the Chugach officials. For example, any changes in snow cover will affect the mix of motorized versus nonmotorized vehicles permitted on forest land. In addition, tourism and property could be negatively affected by more frequent extreme events that may result from climate change, such as wildfires. Managers from both the Chugach National Forest and the Alaska Regional Office of FS told us that they were unaware of any requirements for or guidance on considering climate change in their planning and management efforts. Furthermore, due to budgetary constraints, managers at the Chugach said they have little flexibility to address the effects of climate change because climate change activities have, to date, not been funded in annual budgets. Alaska Regional Office officials added that once the budget is set by FS headquarters, individual land units do not have the flexibility to modify funding priorities. Chugach managers also told us, however, that they can respond to the effects of climate change, but that their responses are reactive and not predictive. However, they stated that they would face difficulty basing management decisions on forward-looking projections about the potential effects of climate change because of the lack of reliable models of future conditions in the forest. This lack of information makes it difficult to anticipate potential effects caused by climate change. However, these officials noted that better modeling and communication about risks could help them better anticipate changes. Finally, Chugach officials told us that because climate change is a global issue, individual forests cannot effectively address climate change in a piecemeal manner. Officials with whom we met stated that any strategy to address climate change needs to be integrated across broad landscapes, not individual forests. These officials said that they hoped that the National Forest system will develop a method to monitor climate change effects on a large scale. We selected Glacier National Park in northwestern Montana near the Canadian border as our fresh waters case study. The fresh waters ecosystem, according to the Heinz Center, consists of streams, rivers, lakes, ponds, reservoirs, fresh waters wetlands, groundwater, and riparian (riverbank) areas. Water sources such as glaciers and snowfields in mountain systems, according to park officials, are also considered to be part of the fresh waters ecosystem. Encompassing more than 1 million acres, the park features forests, alpine meadows, mountains, glaciers, rivers, streams, and lakes. It is home to a number of endangered and threatened species, including bald eagles, bull trout, gray wolves, and grizzly bears. In recent years, approximately 2 million people visited the park annually. According to an estimate from the early 1990s, once the Going-to-the-Sun Road, one of the park’s main attractions, opens in the spring, the daily economic benefit of the park to the surrounding region would be $1.1 million; today this figure would probably be considerably more, according to NPS. Bordering the park are the Flathead and Lewis and Clark National Forests, managed by FS. NPS and FS cooperate on regional activities, such as wildland fire and river management. FWS also participates in the management of some wildlife resources within the park’s boundaries. NPS also coordinates with USGS, which has a field research station in the park, and various Canadian organizations that oversee resources north of the U.S. border. A USGS scientist told us that the average temperature in western Montana has increased over the past century. While the northern hemisphere has warmed 0.6 degree Celsius during that period, the mountainous areas of the park have warmed 1.6 degree Celsius. Spring, measured by such indicators as point of maximum snow melt, initiation of first melt, and water level, is coming 3 weeks earlier now compared with the historical average. In addition, a USGS scientist mentioned that the area may be affected by extreme weather events caused by climate change. For example, forests of the intermountain west and Glacier National Park become more vulnerable to fire due to evaporative stress (drying) when more consecutive days above 90 degrees Fahrenheit are experienced. Since the early 20th century, Glacier (and western Montana) has gone from an average of 5 to approximately 20 days per year above 90 degrees Fahrenheit, with 2003 setting the record at 31 days. In addition to causing moisture stress in plants and increasing fire hazards, the increasing number of extremely hot days poses substantial human health risks, especially in regions that historically do not have air-conditioning. USGS officials also told us that physical features of the park, such as glaciers and snowpack, as well as ecological features, such as streams, forests, and alpine meadows—all of which provide habitat for a large number of species—are vulnerable to the effects of climate change. Some park infrastructure, such as roads, campgrounds, and trails, may also be vulnerable if warmer winters lead to more snow avalanches, landslides, and flooding. According to USGS scientists, 70 to 80 percent of the western United States’ drinking water comes from mountains. An NPS official stated that in the park region, precipitation patterns are changing, such that there is more rain in winter and less snow, causing winter streamflow to increase. Accordingly, snowpack has decreased by more than 30 percent. Officials explained that, with less snow and warmer winters, the timing of spring runoff can be up to 20 days earlier than in the past. Park officials expect the park to continue to receive less snow in winter on average, with more rain and midwinter melting of snowpack. Summers in the park are expected to be drier, especially later in the season, and stream flow probably will continue to be lower than normal in late summer. Scientists stated that some mountain streams will become ephemeral (short-lived), and that the overall ability of the system to provide fresh waters to aquatic and downstream communities will likely decrease. In addition, these scientists said that, as precipitation patterns and streamflow change, the structure and function of river communities will be stressed, possibly causing the loss of species diversity. This, in turn, could have negative consequences for the downstream communities—both natural and human—that those species support. A USGS scientist informed us that, since 1850, the number of glaciers within the park has dropped from 150 to 26, and that current trends in the rate of glacial melting in the park suggest the remaining glaciers will be gone in the next 25 to 30 years. According to scientists with whom we spoke, the loss of glaciers is symbolic of the overall changes to the natural systems in the park, including the water cycle and water temperatures. NPS officials told us that the increasing number and severity of storms and lightning that may result from climate change may cause more forest fires, while more dead vegetation and drier conditions late in the season may feed larger, more intense wildland fires. An official also said that warmer temperatures and more severe drought may increase the risk that insects and diseases will harm already stressed trees. Greater disturbances to the park’s natural systems will place native plants and animals under greater stress, and invasive (nonnative) species may be able to get a firmer hold and spread more easily, out-competing native species. According to an NPS official, warmer temperatures are expected to negatively affect mountain aquatic organisms, including insect larvae, which are an important part of the food chain as well as fish species, such as bull trout, that thrive in cold water. An NPS official explained that organisms that cannot migrate upstream to colder temperatures will not survive. An NPS scientist noted that climate change is expected to cause vegetation in the park to migrate uphill in many places, where it is cooler, changing the ground cover in many areas of the park and affecting wildlife species that depend on those habitats. An official said that as alpine habitats warm, trees are expected to move upslope into areas that are currently treeless. Forests are already beginning to invade alpine and subalpine meadows. (Alpine refers to the zone consisting of slopes above the timberline and characterized by, among other things, the presence of low, shrubby, slow- growing woody plants.) These officials added that several animal species may be negatively affected by the loss of alpine and subalpine habitat, including bighorn sheep, grizzly bears, mountain goats, and wolverines. They observed that because many rare plants and animals in the park are living at the edge of their range, climate change may cause some of these species in the park to die off. Officials noted that the park has already been afflicted by a mountain pine beetle infestation. This insect has decimated large areas of forest, owing to an increased vitality that has been linked, in part, to warmer temperatures. Park and USGS officials are concerned that warmer winters resulting from climate change may lead to more avalanches and to more winter flooding, which will threaten park infrastructure. For example, they told us that there may be an increase in the frequency of heavy rainfall on snow cover, which can cause severe floods. According to these officials, if this happens, trails would need to be modified to meet such conditions, and the greater potential for weather-related infrastructure damage will require more maintenance and improvements. In addition, climate change might result in a longer park visitation season as spring comes earlier and winter comes later; this would place additional demands on park resources. For example, they said that there would be pressure for roads and facilities to stay open longer, which will require more staff and resources. These officials also said that if more fires occur, the visitor experience could be diminished by reduced air quality or limited access to fire-ravaged areas of the park, and the park and local communities could lose revenue from visitation. For example, in 2003, the Going-to-the-Sun Road was shut down for 23 days due to fire. Officials also noted that fires divert park and FS staff from their regular duties. Resource managers from FS, NPS, and USGS told us that they face several challenges in addressing climate change, including limited funds, insufficient monitoring capability, the lack of baseline information, competing priorities, the need to involve surrounding communities, and the inability at the local level to make a significant impact on a global issue, among others. NPS and USGS officials stated that monitoring systems—programs that monitor the health of various park plants, animals, and physical features—within the park are insufficient due to lack of funding. For example, USGS, which has provided much of the monitoring effort for the park in the past, has closed down about 28 percent of stream gauges nationally. An NPS official noted that, while legislation directs NPS to conduct and use research to support resource management decisions, programs to support their efforts, and the efforts of their other federal partners, have suffered from incomplete or partial funding due to budget shortfalls. The NPS Inventory and Monitoring program was developed to address managers’ needs for better scientific information about park resources. Although one of the goals of the Inventory and Monitoring program is to create baseline inventories of basic biological and geophysical natural resources, NPS officials stated they do not have sufficient baseline information, and the program is not comprehensive enough to meet all of their information needs. In addition, because no systematic monitoring of species currently exists, it is very difficult to determine which species are at risk, determine the health of the species’ populations, and develop early warning systems to predict specific effects of climate change. According to Glacier National Park officials, a number of issues may compete with climate change for priority in receiving resources and attention. These issues include the impacts of a proposed upstream coal mine in Canada, a request from a railroad to trigger avalanches with explosives inside the park, the proliferation of noxious weeds, the deterioration of park infrastructure, and urban encroachment along the park’s borders. An NPS official expressed concern that high growth rates in the surrounding community may exacerbate some of the impacts of climate change on park resources. One of the ways in which plant and animal populations might adapt to climate change is to migrate as conditions change. For migration to occur, migration corridors must be connected to other regions. As development and land-use pressures increase on neighboring lands, these corridors will disappear, which may limit the ability of park ecosystems to adapt, according to an NPS official. NPS officials emphasized that since climate change is a global issue, little can be done to stem the problem of climate change within the park, other than to respond, to the limited extent possible, to the symptoms of climate change through activities such as prescribing burns, reducing vegetation that may serve as kindling for forest fires, or controlling noxious weeds. However, park officials said that they are trying to address climate change—to the extent possible—by, among other actions, setting a good example in reducing the park’s own greenhouse gas emissions. For example, they told us that the park is participating in the Environmental Protection Agency’s Climate Friendly Parks program, which focuses on reducing parks’ greenhouse gas emissions. The park also has an Environmental Management Plan that includes a number of energy efficiency and renewable energy initiatives. In addition, the park requires the concessioners that run businesses in the park to abide by certain environmental requirements, some of which affect greenhouse gas emissions. NPS officials also told us that there is currently no explicit guidance from NPS headquarters on addressing climate change, and that no funding or resources have been allocated directly to the issue. In addition, an NPS staff member felt that it would be useful for the park to produce a formal written position on climate change to further clarify the park’s stance on the science and impacts and to outline a communication strategy for discussing the issue. NPS staff also indicated that one of the greatest values of parks such as Glacier may be in informing visitors about the potential of climate change to disrupt natural ecosystems and decrease the benefits that these systems provide to human society. We selected the land managed by the BLM Kingman Field Office, Arizona, as our grasslands and shrublands ecosystem case study. According to the Heinz Center, the grasslands and shrublands ecosystem comprises lands in which the dominant vegetation is grasses and other nonwoody vegetation, or where shrubs are the norm. Bare-rock deserts, alpine meadows, and Arctic tundra are included in this system as well. Also included are some pastures and haylands, which represent an overlap with the farmland system. The field office manages approximately 2.6 million acres of public land in northwestern Arizona, including portions of the Sonoran Desert, Mojave Desert, Colorado Plateau, and six different mountain ranges. This land unit is home to a variety of wildlife, including the largest desert bighorn sheep population in the world, the desert tortoise, and several other threatened and endangered species. The land unit receives approximately 540,000 visitors per year for a variety of recreational activities, such as camping, hunting, hiking, bird-watching, and all-terrain-vehicle 4-wheeling. It also supports economic activity through multiple types of resource extraction, most notably livestock grazing and sand, gravel, gold, and copper mining. In managing this land unit, the field office staff coordinates with several other agencies that manage adjacent land units. These agencies include FWS, NPS, the Arizona Game and Fish Department, and others. In our meetings and site visits, officials described a variety of changes currently affecting the lands they manage at the BLM Kingman Field Office that may be attributable to climate change. For example, the officials said that a prolonged drought in the region had likely resulted in high mortality rates of old growth pinyon pine trees, most notably those located on south- facing mountain slopes as well as some ponderosa pines and chaparral. Ponderosa bark beetle and mistletoe infestations had also acted as stressors, contributing to the die-off of ponderosa pines. Furthermore, according to field office staff, drought conditions in the region are causing desert scrub plant communities to convert into annual grassland communities, which are more vulnerable to fire. They said that this phenomenon has contributed to problems related to fire management. Prolonged drought acts as a stressor to native plant communities. Then, in periods of wetness, invasive species (typically, invasive annual grasses) fill in the gaps between native vegetation. Invasive species can spread and grow faster than native species. As a result, the thicker and less-evenly spaced vegetation leads to fire danger. If a fire starts, it burns much longer and hotter due to the invasive grasses. Native plant communities, such as saguaro cacti and Joshua trees are not fire resistant, so fire damages these communities and provides further environment for invasive species and increased fire danger. In some instances, according to officials, repeated fires of this nature have destroyed native plant communities, such that only invasive grasslands remain. A severe drought occurred in 2002 that resulted in the loss of perennial grass, shrubs, and trees. This drought, coupled with increased annual growth in wet years, accelerated conversion of hot deserts plant communities into annual grasslands. Should continued severe drought become the norm, this conversion can be expected to continue. The drier climatic conditions experienced in the region have created a list of vulnerable species and natural systems on land managed by the field office. For example, BLM scientists and resource managers told us that continuing dry conditions will likely cause changes in vegetation composition and species populations. They also said that dry conditions increase soil erosion; decrease plant productivity, resulting in less forage for cattle; decrease wildlife species abundance and diversity; decrease habitats for certain endangered species; reduce water flows in creeks and rivers; and dry up natural springs, leading to reduced water availability for wildlife (including wild burros), livestock, and riparian (riverbank) plant communities. With less precipitation, there would also be less groundwater recharge, potentially creating a situation where groundwater removal could exceed its replenishment. BLM Kingman Field Office managers with whom we met told us that they were unaware of any requirements or guidance for how to consider climate change in their planning and management efforts. In addition, field office staff said that climate change is not a priority, as partially evidenced by the fact that climate change-related activities have not been included in agency budgets. They further said that they evaluate priorities on a year-by-year basis, due to resource constraints. Because of these constraints, the field office is necessarily only addressing the highest priority issues, leaving many other issues untouched. Another management challenge facing the field office is that much of the land it oversees is situated in a “checkerboard” pattern of land plots, alternating between public and private ownership. This pattern is primarily due to the system of railroad land grants, in which the federal government gave the companies land parcels to encourage railroad development in the region. The alternating pattern of land ownership makes managing these parcels for habitat protection purposes very difficult. BLM can face public resistance when making land management decisions. For example, fire closures that restrict access to certain areas of land leads to public complaints. Land managed by the field office is also under stress due to the high level of development of lands adjacent to BLM land that has taken place over the past several years. Furthermore, field office officials told us that they have adequate management tools, such as reducing grazing-use levels, to reduce the impacts of climate change. However, they said they must show a clear pattern of historical data to make decisions or they risk opening themselves to litigation. These managers added that they would likely face challenges and opposition if they based their management actions on theoretical projections. Therefore, the managers stated that they were unsure whether they could base management actions on projected changes that may be brought about by climate change. In addition, they stated that climate change, because of its large scale, is difficult to deal with on the local level. That is, although they might be able to react to the effects of climate change on the land they manage, they are not able to control changes in the atmosphere or greater climatic patterns. In addition to the contact named above, Vincent P. Price, Assistant Director; Marc Castellano; John Healey; Ian Jefferies; Anne K. Johnson; and Joseph D. Thompson were major contributors to this report. Kisha Clark, John Delicath, Heather Holsinger, Richard Johnson, Karen Keegan, Carol Kolarik, David Marwick, Micah McMillan, Jean McSween, and Anne O. Stevens also made important contributions. | Climate change has implications for the vast land and water resources managed by the Bureau of Land Management (BLM), Forest Service (FS), U.S. Fish and Wildlife Service (FWS), National Oceanic and Atmospheric Administration (NOAA), and National Park Service (NPS). These resources generally occur within four ecosystem types: coasts and oceans, forests, fresh waters, and grasslands and shrublands. GAO obtained experts' views on (1) the effects of climate change on federal resources and (2) the challenges managers face in addressing climate change effects on these resources. GAO held a workshop with the National Academies in which 54 scientists, economists, and federal resource managers participated, and conducted 4 case studies. According to experts at the GAO workshop, federal land and water resources are vulnerable to a wide range of effects from climate change, some of which are already occurring. These effects include, among others, (1) physical effects, such as droughts, floods, glacial melting, and sea level rise; (2) biological effects, such as increases in insect and disease infestations, shifts in species distribution, and changes in the timing of natural events; and (3) economic and social effects, such as adverse impacts on tourism, infrastructure, fishing, and other resource uses. Experts at the GAO workshop also identified several challenges that resource managers face in addressing the observed and potential effects of climate change in their management and planning efforts. In particular, BLM, FS, FWS, NOAA, and NPS have not made climate change a priority, and the agencies' strategic plans do not specifically address climate change. Resource managers focus first on near-term, required activities, leaving less time for addressing longer-term issues such as climate change. In addition, resource managers have limited guidance about whether or how to address climate change and, therefore, are uncertain about what actions, if any, they should take. In general, resource managers lack specific guidance for incorporating climate change into their management actions and planning efforts. Without such guidance, their ability to address climate change and effectively manage resources is constrained. While a broad order developed in January 2001 directed BLM, FWS, and NPS to consider and analyze potential climate change effects in their management plans and activities, the agencies have not yet provided specific direction to managers on how they are to implement the order. A BLM official stated at an April 2007 hearing that BLM is establishing policy and technical committees to address necessary actions and develop guidance to address climate change in agency management practices. FWS and NPS officials said that their agencies have not developed specific guidance but believe that they are operating in a manner consistent with the 2001 order. While NOAA and FS have not provided specific guidance to their resource managers, NOAA officials said that the agency is establishing a working group to determine what actions to take to address climate change effects. FS officials said that FS planning processes are designed to identify and respond to emerging issues such as climate change. Finally, resource managers do not have sufficient site-specific information to plan for and manage the effects of climate change on the federal resources they manage. In particular, the managers lack computational models for local projections of expected changes and detailed inventories and monitoring systems for an adequate baseline understanding of existing local species. Without such information, managers are limited to reacting to already-observed climate change effects on their units, which makes it difficult to plan for future changes. |
MDA’s mission is to develop an integrated and layered system to defend the United States and its deployed forces, friends, and allies against ballistic missile attacks. The BMDS aims to engage all ranges of ballistic missiles during all phases of flight. This challenging expectation requires complex coordination within an integrated system of defensive components—space-based sensors, surveillance and tracking radars, advanced interceptors, and a battle management, command, control, and communication component. A typical engagement scenario to defend against an intercontinental ballistic missile would occur as follows: Infrared sensors aboard early-warning satellites detect the hot plume of a missile launch and alert the command authority of a possible attack. Upon receiving the alert, land- or sea-based radars are directed to track the various objects released from the missile and, if so designed, to identify the warhead from among spent rocket motors, decoys, and debris. When the trajectory of the missile’s warhead has been adequately established, an interceptor—consisting of a kill vehicle mounted atop a booster—is launched to engage the threat. The interceptor boosts itself toward a predicted intercept point and releases the kill vehicle. The kill vehicle uses its onboard sensors and divert thrusters to detect, identify, and steer itself into the warhead. With a combined closing speed of up to 10 kilometers per second (22,000 miles per hour), the warhead is destroyed above the atmosphere through a “hit to kill” collision with the kill vehicle. Some interceptors use sensors to steer themselves into the inbound ballistic missile. Inside the atmosphere, these systems kill the ballistic missile using a range of mechanisms such as direct collision between the missile and the inbound ballistic missile or killing it with the combined effects of a blast fragmentation warhead (heat, pressure, and grains/shrapnel) in cases where a direct hit does not occur. Table 1 provides a brief description of 10 BMDS elements currently under development by MDA. To manage BMDS development, MDA uses an acquisition strategy defined by a block structure. From its inception in 2002 through 2007, MDA developed BMDS capability in biennial increments, ultimately delivering two blocks—Block 2004 and Block 2006. These 2-year blocks each built on preceding blocks and enhanced the development and capability of the BMDS. However, in response to recommendations from GAO, in December 2007 MDA announced a new block structure that was intended to improve the program’s transparency, accountability, and oversight. The new blocks are not based on biennial time periods, but instead focus on fielding capabilities that address particular threats. Because the new block structure is not aligned to regular time periods, multiple blocks are underway concurrently. Table 2 details the current blocks and categories included in the BMDS block structure. MDA uses a Statement of Baselines and Goals to report modifications to established block baselines. For those blocks that are currently or will soon be underway, block baselines are created to make a firm commitment to Congress. The Statement of Goals also includes the following: BMDS Baseline Capabilities – Assets and engagement sequence groups that will be made available for fielding for a particular block. During 2008, cost baselines were under development for Block 2.0 and Block increments 3.1/3.2. MDA established schedule and performance baselines for Blocks 1.0, 2.0, 3.1, and 3.2 in 2008. BMDS Capability Goals – Assets and engagement sequence groups expected to be made available for future blocks. Adversary Benchmarks – Adversary missile systems used for block performance estimates. BMDS Budget Breakdowns – Detailed fielding, development, and integration budgets for each block and BMDS Capability Development activity. MDA also uses an incremental declaration process to designate BMDS capability for its blocks. Three capability designations are applied to all BMDS elements, their hardware and software components, and engagement sequence groups. This allows these BMDS features to play a limited role in system operations before they have attained their expected level of capability. Each capability designation in the delivery schedule represents upgraded capacity to support the overall function of BMDS in its mission as well as the level of MDA confidence in the system’s performance. The designations are defined as follows: Early Capability Delivery signifies readiness for contingency use. At this point, MDA has determined that the capability can be utilized by the BMDS. When integrated, the capability must be adequately demonstrated to build sufficient confidence that it will safely perform as intended without degrading the existing capabilities of the BMDS. Partial Capability Delivery is an intermediate state of maturity indicating that a capability has been shown through testing to perform as intended in certain scenarios. At this point, MDA is sufficiently confident that the capability can support the warfighter’s partially mission-capable objectives and logistics support is adequate to achieve defensive operations. Full Capability Delivery is the point at which a capability satisfies the BMDS block objectives and is considered to be completely mature and ready for full operational use. MDA’s capability goals for fiscal year 2008 for Blocks 1.0, 2.0, 3.1, and 3.2 are shown in table 3. MDA has not yet established baselines for total costs or unit costs, both fundamental markers that most programs use to measure progress. MDA had planned to establish total cost baselines at the element and block levels in 2008, but the initial set of total cost baselines will not be available until the spring of 2009. Similarly, MDA has not established unit costs for selected assets, such as GBIs. Consequently, for the sixth year, we have been unable to assess MDA’s overall progress on total or unit cost. While MDA plans to establish some total cost baselines in 2009, most efforts will not be captured in a baseline. MDA also plans to establish unit costs, another improvement, but is considering a narrower definition of unit cost than is used by other weapon system programs. MDA’s definition will report a subset of procurement costs called flyaway costs, which only includes the major piece of equipment and excludes all research and development as well as some procurement costs—those for support equipment and spares. Moreover, these unit costs will only be tracked within those blocks that are baselined, which will represent a minority of those assets being produced and fielded. Without total cost baselines in place, the BMDS concept continually evolves, as indicated by the number of realignments to the program of work at the individual contract level. While the changing nature of the BMDS and the lack of total cost baselines precludes analysis of total cost progress, we were able to analyze contractor fiscal year performance on the current work under the contract. We were also able to project overruns or underruns at completion for BMDS contracts using the contracts’ current budgeted costs at completion as a basis for our projections. However, in some cases, the current budgeted cost at completion changed significantly over time. In one case, the budgeted cost at completion increased by approximately five times its original value. Our analysis of fiscal year 2008 progress shows that several prime contractors exceeded budgeted costs. To provide accountability, major defense acquisition programs are required by statute to document program goals in an acquisition program baseline. MDA is not yet required to establish an acquisition program baseline because of the acquisition flexibilities it has been granted. However, Congress has enacted legislation requiring MDA to establish some baselines. Baselines serve an important discipline both by ensuring that the full cost commitment is considered before embarking on major development efforts and by identifying cost growth as a program proceeds. Since we began annual reporting on missile defense in 2004, we have been unable to assess overall progress on cost—that is, comparing BMDS baselined costs with actual costs. For example, under the prior block structure, we reported that BMDS costs grew by at least $1 billion, but the total cost growth could not be determined because MDA did not account for all costs for a given block. In response to recommendations we made in March 2008, MDA agreed to develop cost estimates and to provide independent verification for blocks outlined under its new approach. Upon conclusion of those estimates, MDA will develop cost baselines. In addition, on April 1, 2008, the Director, MDA, testified before a Senate Armed Services Subcommittee that cost baselines for the new block structure would be available by the end of 2008. As of January 2009, the agency had not yet developed full cost baselines for any blocks. MDA plans to have these cost baselines for Blocks 2.0, 3.1 and 3.2 completed, independently reviewed by DOD’s Cost Analysis Improvement Group, and released by the spring of 2009. The only information that was available for this report was limited to budget projections for BMDS blocks and capability development for fiscal years 2008 through 2013, totaling approximately $42 billion. Even with the release of some block cost estimates in 2009, all block costs will not be baselined and no date has been established for when the remaining block costs will be baselined. MDA does not plan to baseline Block 1.0 costs, but will provide the actual costs of the block since it is near completion. Full cost baselines for Block 2.0 are anticipated to be available in the spring of 2009, but only portions of Block 3.0 and none of Block 4.0 and 5.0 costs will be baselined at this time. As figure 1 shows, if MDA does complete baselines as planned, they will only cover about 26 percent of its block and capability development costs. At this point, MDA plans to baseline between 2 and 26 percent of BMDS block and capability development costs from fiscal years 2010 to 2013 as depicted above. MDA has not determined when other blocks will be baselined. If other blocks were to be baselined before 2013, the percentage of funding baselined would be increased. The rapid decline in percentage of baselined funds also shows that initial baselines are being set late in a block’s duration. For example, Block 2.0 will be completed within 2 years of its baseline being set. If baselines are to facilitate management and oversight, they will have to be set sooner for Block 3.3 and beyond. Additionally, agency officials stated that although cost estimates will be developed for individual capability development efforts—such as ABL, KEI, and MKV—the agency does not plan to baseline their costs until these elements are matured and moved into a defined block. MDA may eventually baseline these elements as part of a block once a firm commitment can be made to Congress. The budgets for capability development elements account for approximately $22 billon—or more than half of MDA’s fiscal year 2008 6-year Future Years Defense Plan for BMDS blocks and capability development. Major defense acquisition programs are required by statute to report certain unit costs to Congress, track unit cost growth against their original and current baseline estimates, and perform an additional assessment of the program if certain cost growth thresholds are reach This cost monitoring mechanism helps ensure that programs are being held accountable. MDA is not yet required to report these unit costs because of the acquisition flexibilities it has been granted by DOD, but Congress has enacted legislation requiring MDA to provide unit cost reporting data for certain BMDS elements, and MDA does plan to develop and report unit costs for some of its assets in the spring of 2009. The agency has also established thresholds for reporting cost growth. However, the approach MDA is taking, while an improvement, provides a much less comprehensive assessment of unit cost compared to the traditional acquisition costs that are typically reported for major defense acquisition programs. Normally, unit costs are reported in two ways: (1) program acquisition unit cost, which is the total cost for the development and procurement of, and system-specific military construction for, the acquisition program divided by the number of fully configured end items to be produced, or (2) average procurement unit cost, which is the total of all funds programmed to be available for obligation for procurement divided by the number of end items to be procured. ed. MDA’s development of the BMDS outside of DOD’s normal acquisition process makes it difficult to compare the actual unit co st of a delivered asset with its planned unit cost. For example, MDA plans to only report recurring unit flyaway costs for the blocks that are baselined. Figure 2 reveals the significant reduction in standard areas of costs covered by MDA’s approach compared to that normally reported for major defense acquisition programs. MDA’s decision to report only flyaway unit costs will not capture research and development costs associated with BMDS assets—which account for more than 97 percent of the nearly $56 billion MDA costs to date. In addition, the procurement costs for initial spares and support equipment are not included. Thus, while the flyaway cost baseline will provide visibility into changes in recurring manufacturing costs, it will not provide a basis for comparison with the costs of other DOD programs. If a cost increase occurs in research and development or nonrecurring procurement, it will not be reported in MDA’s unit cost. Agency officials told us that the reason for using flyaway unit c the new MDA block structure. They further explained that within the block structure, there are many cases where MDA procures and delivers a weapon system for more than one block and, in some cases, the same configuration in more than one block. For example, THAAD deliveries are included in Blocks 2.0 and 5.0. Agency officials cite this as a key difference between MDA and other defense programs. For MDA, most of the development costs are assigned to the first block where a capability is delivered and very little of the development cost is assigned to subsequent blocks. MDA officials further stated that if the agency were to use the standard unit cost methodology, it would show very dissimilar unit costs between the first and subsequent block deliveries and the difference could not be explained by learning curves and manufacturing efficiencies. MDA officials also told us that they chose unit flyaway cost for unit cost reporting because flyaway cost provides a better measure of what the individual system components cost to procure. However, MDA is not precluded from also determining and reporting unit costs by taking the entire cost of the asset being developed without regard to the capability or block for which it is originally developed. Without a firm cost commitment or baseline in place for the full scope of the BMDS, in some cases the work currently under contract changes frequently. These changes manifest themselves in realignments that often add scope, cost and time to the value of the work under the contract. Since contracts began on the BMDS, MDA has performed 31 realignm where, in some cases, the period of stability between these major realignments average only between 1 to 2 years. These frequent chang indicate that the total BMDS effort has not been fully determined and is likely to grow. While we have been able to make an assessment of contractor costs, that assessment is limited to the current approved program. es Until total and unit cost baselines are established, the only tool for us to use in assessing BMDS costs is the costs reported on individual contracts under BMDS’s Earned Value Management System. All BMDS contracts that we assessed have a cost and schedule baseline against which progress, measured by cost and schedule performance, can be measured. It is appropriate for a program to realign its current status with the remaining contractual effort when officials conclude that the baseline no longer provides valid performance assessment information. A program can realign its current status with the remaining contractual effort through rebaselines, replans, and restructures. A rebaseline is a more general term to describe a major realignment of the performance measurement baseline used to better correlate the work plan with the baseline budget, scope, and schedule and can refer to replans and restructures as well. A replan is a reallocation of schedule or budget for the remaining effort within the existing constraints of the contract. A restructure includes adding funds to the performance manageme budget that exceed the value of the negotiated contra contract modification. Our analysis of contractor costs indicates that during fiscal year 2008, MDA contractors collectively overran budgeted costs by $152.4 million. These overruns occurred in 11 of 14 MDA contracts we reviewed, with the STSS contract accounting for more than 50 percent of the total. Based on cost performance during the fiscal year and using formulas accepted within the cost community, we estimate that at completion the cumulative overrun in the contractors’ budgeted costs could be from about $2.0 billion to $3.0 billion. Our projections are based on the current budgeted costs at completion for each contract we assessed, which represents the total current planned value of the contract. However, the budgeted costs at completion, in some cases, have grown significantly over time. For example, the ABL contractor reported budgeted costs at completion totaling about $724 million in 1997, but as depicted in table 5, that cost has since grown to about $3.6 billion. Our assessment only reveals the overrun or underrun since the latest adjustment to the budget at completion. It does not capture, as cost growth, the difference between the original and current budgeted costs at completion. As a result, comparing the underruns or overruns for MDA programs in table 5 with cost growth on major defense acquisition programs is not appropriate because those major defense acquisition programs have established their full scope of work as well as developed total cost baselines, while these have not been developed for MDA programs. Our analysis is presented in table 5. Appendix II provides further details on the cost and schedule performance outlined in the table. Technical difficulties caused most elements to overrun their fiscal year 2008 budgeted costs. For example, STSS attributed most of its overrun of approximately $87.9 million to hardware problems on the program’s second space vehicle including the flight communication box and the main spacecraft computer. The box overheated during testing which required a thorough test of the unit. Upon successful completion of this testing, it was determined it did not require a replacement. In addition, the program had a failure in the main spacecraft computer for which the program office initially recommended the removal of the entire computer from the spacecraft. However, after extensive research and testing, the program manager determined that the event with the spacecraft was an unverifiable failure with a low probability of occurrence and low mission impact and decided not to remove the computer from the spacecraft to resolve the issue. However, as a result of these issues, the launch was delayed from April 2008 to at least the third quarter of fiscal year 2009. The MKV Task Order 6 and ABL contractors also experienced technical difficulties. The MKV contractor for Task Order 6 reported cost overruns during the fiscal year of $1.4 million due mostly to software development issues and late delivery of government-furnished components. ABL’s fiscal year cost overruns of $10.6 million were mainly related to late deliveries of key laser system components and the acquisition or refurbishment of the Beam Control/Fire Control system components. For example, a major component of the laser system required redesign and fabrication, delaying planned delivery and installation onto the aircraft. Also, multiple Beam Control/Fire Control hardware components either were not refurbished to specification or failed initial testing, delaying delivery and integration testing. The overall effect was an approximate 1-month slip that the contractor believes will be made up in time to make the current lethality demonstration planned for the end of fiscal year 2009. Three elements’ contracts—Aegis BMD’s contract for 27 SM-3 Block 1A missiles, MKV Task Order 7, and GMD—performed below their fiscal year budgeted costs by nearly $58.3 million with the GMD element accounting for approximately $53.9 million of that. The GMD element’s underruns occurred partially because the contractors delayed or eliminated some planned work. For example, the GMD program did not emplace the three GBIs it expected to in fiscal year 2008 or conduct either of its two planned flight tests as scheduled during the fiscal year. As a result, it employed less labor than originally intended. Drivers for the MKV Task Order 7 contract’s fiscal year cost underruns include a restructuring of the effort and decisions to use one rather than several approaches for coordinated attack, and using less manpower than originally planned in its procurement and software efforts. Lastly, the Aegis BMD contract for 27 SM-3 Block 1A missiles underran its fiscal year 2008 budget by approximately $3 million due in part to spending less than planned for engineering efforts with the missile’s third stage component as well as adjustments made in program management, labor efficiencies, and material transfers in the missile’s fourth stage component. Although several tests showed progress in individual elements and some system-level capabilities, all BMDS elements experienced test delays and shortfalls, in part due to problems with the availability and performance of target missiles. Most significantly, GMD was unable to conduct either of its planned intercept attempts during fiscal year 2008, however it was able to conduct one delayed intercept test in December 2008. As a result, key performance capabilities of the current configuration of the GMD kill vehicles may not be demonstrated and the new configuration is being fielded prior to flight testing. As a consequence of testing problems, none of the six MDA Director’s test knowledge points for 2008 were achieved. Poor performance of targets continues to be a problem that caused several tests to either fail in part or in whole. Shortfalls in testing have delayed validating the models and simulations that are used to assess the overall performance of the BMDS as a whole. Consequently, comprehensive assessments of the capabilities and limitations of the BMDS are not currently possible and therefore MDA still does not have the capability to model or simulate BMDS capability from enemy missile launch to its engagement. During fiscal year 2008, all BMDS elements experienced delays in conducting tests, most were unable to accomplish all objectives, and performance challenges continued for many. Moreover, the inability of MDA to conduct its full fiscal year 2008 flight test campaign as planned precluded the agency from collecting key information specified by the Director, MDA—known as Director’s test knowledge points—to make certain decisions at critical points in some BMDS programs. Table 6 below summarizes test results and target performance for BMDS elements during the fiscal year. As a result of test delays, MDA restructured its flight test plan for fiscal year 2009, increasing the number of tests and compressing the amount of time to analyze and prepare for subsequent tests. For example, MDA plans to conduct 14 of 18 flight tests in the third and fourth quarter of fiscal year 2009. MDA’s past performance raises questions about whether this is realistic. In fiscal year 2008, MDA had planned to conduct 18 flight tests, but it only accomplished 10, plus it had several flight tests delayed into 2009 from 2008. An MDA official acknowledged that the 2009 plan is aggressive, but stated that it can be achieved. Specifics of each element’s testing experience during fiscal year 2008 follow. According to Aegis BMD officials, budgetary constraints prompted the Aegis BMD element to delay some tests, reducing the number of tests planned for 2008. However, the program was able to successfully complete its first test involving two non-separating targets, conduct a short-range ballistic missile intercept, and participate in a THAAD intercept during the fiscal year. The program also planned to participate in a BMDS-level ground test during the year, but the test was delayed until at least the second quarter of fiscal year 2009 because of real-world events. Finally, Aegis BMD standard missile flight tests showed that interoperability issues persist between THAAD and Aegis BMDS with respect to correlation and object reporting. ABL experienced delays during fiscal year 2008, but achieved all of its primary test objectives. The program planned to complete the installation of its high energy laser on the aircraft by June 2008 in preparation for testing. However, it was not completed until August 2008 because of problems with activating some of the laser’s subsystems. The program delayed the final testing of the laser until the problems could be resolved. Once the problems were resolved, the ABL program was able to complete functionality testing of the laser in September 2008. C2BMC experienced delays in conducting tests, but achieved several test objectives. For example, software upgrade verification testing slipped from fiscal year 2008 to 2009 but the program was able to participate in many other system-level ground and flight tests during the year that enabled the program to demonstrate multiple capabilities, including situational awareness and sensor management. The C2BMC element extended development for its next software release, 6.4, by more than a year because of delays in system-level BMDS testing and challenges in developing the network server for version 6.2, as well as unplanned work to incorporate effects from earth rotation in the 6.4 C2BMC planning architecture. C2BMC added earth rotation effects to address a requirement that Spiral 6.2 and later releases have the ability to model the true extent of ranges for long-range threats. Finally, C2BMC is still developing its capability to generate a single track from multiple sensors through a new resource management function, the Global Engagement Manager. For example, the development team for this function had to modify the design of this function’s new track processing that experienced an unacceptable level of delays when processing data. In fiscal year 2008, the GMD program was unable to conduct either of its two planned intercept attempts—FTG-04 and FTG-05. MDA first delayed and then later canceled the FTG-04 test in May 2008 due to a problem with a telemetry component in the interceptor’s Exoatmospheric Kill Vehicle (EKV) needed to gather test data. MDA also delayed FTG-05 from fiscal year 2008 and conducted it in December 2008. Over the past two years MDA had expected to conduct seven GMD interceptor flight tests by the end of the first quarter of fiscal year 2009. However, MDA was only able to conduct two, as shown in figure 3. The cancellation of FTG-04 raised concerns within the test community and members of Congress. FTG-04 was at first delayed and then canceled. MDA replaced it with a test to assess sensor capability—FTX-03. The sensor test allowed GMD to verify fire control software and integration with multiple sensors. The DOT&E was not consulted on the decision to cancel FTG-04 and expressed concern that the elimination of any intercept test reduced the opportunity to gather data that might have increased confidence in the models and simulations. In the conference report accompanying the National Defense Authorization Act for Fiscal Year 2008, conferees expressed concern about the loss of the FTG-04 flight test and requested that we review the circumstances and the effects on the BMDS. Details of our review of the FTG-04 flight test cancellation appear in appendix III. Because GMD conducted FTG-05 in December 2008, there are only two full sets of GMD intercept data to date available for analysis which limits the ability to verify and validate the models and simulations. Additionally, FTG-04 and the subsequent test—FTG-05—were planned to present different stresses to the kill vehicle which would provide critical data needed to further verify the fielded configuration of the kill vehicle. The cancellation and subsequent restructuring of the first test caused a delay in FTG-05 from the third quarter of fiscal year 2008 until December 2008. In the FTG-05 test, the interceptor hit its intended target. However, MDA judged the target as a failure because it failed to release its countermeasures as planned. Consequently, all primary test objectives were not achieved. Looking forward to the next GMD intercept flight test—FTG-06 in at least the fourth quarter of fiscal year 2009—MDA is accepting a higher level of risk than it previously expected in conducting this first test of the CE-II EKV because it will contain several objectives that had planned to be previously tested, but have not been. MDA had set up an approach to test one new major component change at a time. For example, MDA had planned to test the CE-I EKV first against simple targets, then the CE-I against a complex target, and once that had been proven MDA planned to test the CE-II EKV against a complex target. However, MDA was not able to test the CE-I EKV against a complex target due to a target failure. Due to testing problems, GMD has only been able to assess the CE-I EKV with a target without countermeasures. As a result, the FTG-06 flight test will be the first GMD test assessing both a CE-II EKV and a complex target scene. Adding to the risk, this will be only the second test using a newly developed FTF LV-2 target. During fiscal year 2008, the KEI program experienced problems during testing that required it to rework components which, in turn, caused a delay to subsequent testing. More importantly, due to technical issues experienced by the program over the past two years, the first booster flight test—a key decision point for the program—has been delayed by nearly a year and is not scheduled to occur until at least the fourth quarter of fiscal year 2009. Technical difficulties delayed the MKV program’s fiscal year 2008 hover test until fiscal year 2009. This hover test will allow the program to integrate and test key components of the system in a repeatable ground-based free flight environment as their technologies reach maturity. Although originally planned for the fourth quarter of fiscal year 2008, the test was successfully conducted in December 2008. The STSS program encountered problems during testing that forced the program to delay the launch of its demonstration satellites from April 2008 to at least the third quarter of fiscal year 2009. The program continued to experience technical difficulties with its space vehicles. For example, during testing, the program experienced problems with its main spacecraft computer as well as an overheating flight communications box. After extensive testing, the program determined that these components were acceptable for flight. Similarly, in fiscal year 2008, the Sensors element also experienced flight test delays as well as difficulties in achieving planned objectives due to target performance, but met some primary objectives. The element successfully participated in other tests during the fiscal year which demonstrated the ability for the sensors to acquire and track a target. One test event, FTX-03, provided the first opportunity for four key sensors— Sea-based X-band radar, AN/TPY-2, Upgraded Early Warning Radar, and an Aegis BMD radar—to operate in a more operationally realistic test scenario. This test demonstrated the capability for the sensors to correlate target information in order to conduct an intercept test. However, the target failed to release its countermeasures as planned. This failure precluded sensors from assessing capability against a dynamic lethal target scene with countermeasures. As a result, the sensors could not collect all of the expected data, which delayed the element’s ability to develop algorithms needed for the discrimination capability. These objectives will need to be addressed in future testing. The BMDS Operational Test Agency has had ongoing concerns regarding the formatting, tracking, and accounting of messages from GMD sensors. The timely reception of messages from sensors to weapon systems is key to support decisions and achieve effective intercepts. Since 2000 the BMDS Operational Test Agency has reported these concerns to MDA about poor data collection and management practices involving sensors affecting its assessment of tests. These data management problems prevented the analysis of message data, according to BMDS Operational Test Agency officials. In response, the contractor proposed a message monitoring system among communications nodes. Consequently, MDA recommended that this issue be closed out, but the BMDS Operational Test Agency still considers the matter to be open because GMD has not funded the monitoring system. THAAD planned to conduct three intercept attempts, but due to a target failure, it was only able to conduct two. The program could not complete its final flight test of the fiscal year because the target experienced an anomaly during flight. The test was planned to be a BMDS-level event and was designated as a developmental test/operational test mission utilizing multiple BMDS elements and operationally realistic criteria. The program also expected to demonstrate that it could launch more than one THAAD interceptor during the engagement. Program officials rescheduled this test for the second quarter of fiscal year 2009. In addition, THAAD’s radar data collection test, RDC-2, was planned for 2008 but was deleted due to target availability and funding. As a result, program officials told us that these test objectives will be covered in the future with hardware-in-the-loop simulations and other radar events. The program successfully completed its first two planned tests for the fiscal year. In October 2007, THAAD successfully demonstrated an intercept of a target outside the earth’s atmosphere. This was the first time THAAD had successfully conducted an intercept outside of the atmosphere since 1999. Additionally, in June 2008, THAAD completed a successful intercept of a separating target. This intercept utilized warfighter procedures developed by the U.S. Army Air Defense School. As a consequence of flight test delays as well as a delay in a key ground test, MDA was unable to achieve any of the Director’s test knowledge points scheduled for fiscal year 2008 as shown in table 7. In May 2007, the Director, MDA, established key system-level and element- level knowledge points to provide critical information for making key decisions regarding the BMDS. According to MDA, these knowledge points are unique management approaches chosen to manage MDA’s critical program risks. Each knowledge point is based on an event that provides critical information—or knowledge—for a key MDA decision requiring the Director’s approval. In fiscal year 2008, among the Director’s test knowledge points delayed, MDA had to defer the confirmation of the 72” target performance due to delays in qualifying components. Additionally, MDA had to delay the confirmation of the booster for the KEI program as problems were encountered during testing of the nozzle. While targets have caused problems in fiscal year 2008 testing, poor performance of targets is not new. Targets’ reliability and availability problems have significantly affected BMDS development and testing since 2006, and issues have grown even more problematic in recent years. Although target anomalies and failures have affected many of the missile defense elements, THAAD and GMD have been most affected. In 2006, the THAAD program was unable to achieve its first intercept attempt (FTT-04) because the target did not function properly. In 2007, two THAAD radar characterization tests (RDC-1c and RDC-1d) were unsuccessful due to target anomalies. These tests flew targets with characteristics needed for radar observation in support of advanced discrimination algorithm development. However, target problems prevented an opportunity for the radar to exercise all of the planned algorithms, causing a loss of expected data. In addition to target failure issues, the THAAD program deferred some flight tests because targets were not available, which cost the program about $201 million. GMD also experienced similar long-term effects on its flight test schedule when it was unable to achieve primary test objectives in a 2007 intercept attempt (FTG-03) due to a target failure. MDA’s existing targets are becoming less capable of meeting requirements for near-term flight tests. These targets are aging and likely to grow even less reliable with time; some components, such as the rocket motors, are more than 40 years old. Among other things, MDA’s Targets and Countermeasures program office has also had problems incorporating requirements into contracts and has experienced problems obtaining supplies as vendors left the market due to the lack of business. To address the growing need for more sophisticated and reliable targets for the future BMDS test program, MDA was developing a new family of targets called the FTF, which was originally intended to be a family of new short, medium, and long-range targets with ground-, air-, and sea- launch capabilities. MDA embarked on this major development without estimating the cost to develop the family of target missiles. MDA proceeded to develop and even to produce some FTF targets without a sound business case and, consequently, their acquisition has not gone as planned. The funds required for the FTF were spent sooner than expected and were insufficient for the development. Getting the FTF target’s components through the qualification process, however, was more difficult and costly than the program expected. For example, MDA originally planned to launch the first FTF target—a 72-inch LV-2—in a 2008 STSS flight test, but the test was rescheduled due to delays in satellite integration and target affordability and availability. While many of the target missile’s components are found on existing systems, their form, fit, function, and the environment they fly in have been changed for the 72- inch LV-2 target. Consequently, many critical components initially failed shock and vibration testing and other qualification tests and had to be redesigned. The process was recently scheduled to be complete in early October 2008 but, after several delays, was not finished until December 2008. Despite this, MDA expects the target to be complete and ready for its first launch in a third quarter fiscal year 2009 Aegis BMD flight test (FTM- 15). We recently reported that the FTF has been delayed, costs have increased and exceeded $1 billion, and the program’s scope has been reduced. Work on all but one of the FTF target variants, the 72-inch LV-2, was canceled in June 2008, including plans for development and production of the second type of FTF target, the 52-inch, originally scheduled to launch in 2009. With guidance from the Missile Defense Executive Board, MDA is currently conducting a comprehensive review of the targets program to determine the best acquisition strategy for future BMDS targets. It is expected to be completed in mid-2009. Whether or not MDA decides to restart the acquisition of the 52-inch targets, or other FTF variants, and the nature of those targets depends on the results of this review. Currently, MDA has narrowed its FTF development efforts, focusing on a single vehicle, the 72-inch LV-2 ground-launched target. The first launch was supposed to determine the viability of the FTF concept and the feasibility of discontinuing the use of existing targets. However, rather than first conducting a separate developmental test to confirm the target’s capability, MDA has chosen a much riskier approach. The first launch of the new LV-2 target will be in an Aegis BMD intercept test. Aegis BMD originally planned to use this new target in a fiscal year 2008 flight test; however, because the target was not ready, the test is delayed until at least the third quarter of fiscal year 2009. Repeated target problems and test cancellations have also affected the development of capabilities needed to discriminate the real target from countermeasures. Without opportunities to test the functionality of the software, there now is a system-level shortfall in BMDS progress toward developing a target discrimination capability against more sophisticated countermeasures in the midcourse phase of flight. In order to improve the effectiveness of the BMDS against evolving threats, MDA elements are developing advanced discrimination software in their component’s sensors. The advanced discrimination software is critical to distinguish the threat re-entry vehicle from associated countermeasures and debris. Target failures during tests prevented opportunities to gather data to assess how well discrimination software performs in an operational environment. MDA’s modeling and simulation program enables MDA to assess the capabilities and limitations of how BMDS performs under a wider variety of conditions than can be accomplished through the limited number of flight tests conducted. Flight tests alone are insufficient because they only demonstrate a single collection data point of element and system performance. Flight tests are, however, an essential tool used to both validate performance of the BMDS and to anchor the models and simulations to ensure that they accurately reflect real performance. Computer models of individual elements replicate how those elements function. These models are then combined into various configurations that simulate the BMDS engagement of enemy ballistic missiles. To ensure confidence in the accuracy of modeling and simulation in representing BMDS capability, the program goes through a process called accreditation. Element models are validated individually using flight and other test data and accredited for their intended use. MDA intends to group these models into system-level representations according to user needs. One such grouping is the annual performance assessment, a system-level end-to-end simulation that assesses the performance of the current BMDS configuration. The performance assessment integrates element-specific models into a coherent representation of the BMDS. Performance assessments are used to: assess objectives from MDA’s Deputy of Engineering and the BMDS Operational Test Agency, support MDA decisions about engagement sequence group capability deliveries, and support MDA decisions about BMDS fielding and declaring capabilities. Fundamentally, performance assessments anchored by flight and ground tests are a comprehensive means to fully understand the performance capabilities and limitations of the BMDS. Developing an end-to-end system-level model and simulation has been difficult. BMDS Operational Test Agency officials told us that they do not anticipate a fully accredited, system-level model and simulation capability to be available until 2011. MDA’s first effort to bring together different element models and simulations to produce a fully accredited, end-to-end model and simulation for Performance Assessment 2007 was unsuccessful primarily because of inadequate data for verification and validation to support accreditation and a lack of common threat and environment input data among element models. Though Performance Assessment 2007 was a success in establishing a capability for integrated modeling and simulation in a short time frame, it was unsuitable to assess system-level performance due to low confidence from a lack of accreditation. Consequently, acting on a joint recommendation between MDA and the Operational Test Agency, MDA officials canceled their 2008 performance assessment efforts in April 2008 because of developmental risks associated with modeling and simulations, focusing instead on testing and models for Performance Assessment 2009. MDA officials believe that the refocused efforts will increase the chances for success during Performance Assessment 2009. According to the BMDS Operational Test Agency’s January 2009 Modeling and Simulation Accreditation Report, confidence in MDA’s modeling and simulation efforts remains low although progress was made during the year. MDA is now exercising stronger central leadership to provide guidance and resources as it coordinates the development of verified and validated models and simulations, as recommended by a 2004 Defense Science Board study. MDA and element officials are now working more closely with the BMDS Operational Test Agency. For example, MDA and the BMDS Operational Test Agency have agreed on performance parameters and criteria used to validate element models and simulations. Nonetheless, BMDS Operational Test Agency officials stated that there are several weaknesses in the BMDS testing program such as: Insufficient consideration of modeling and simulation requirements in MDA flight test plans, though they emphasized that MDA is finalizing a list of such parameters for future flight test plans, Use of artificialities in flight tests which limit the realism of scenarios for anchoring models and simulations, and Inadequate test planning for comprehensive modeling of weather conditions. MDA intends to verify and validate models and simulations by December 2009 for Performance Assessment 2009. However, BMDS Operational Test Agency officials stated that there is a high risk that the Performance Assessment 2009 analysis will be delayed because of remaining challenges and MDA’s slow progress in accreditation, as follows: The compressed schedule of ground and flight tests leaves little time for data analysis that is essential to anchor models to those tests, particularly for a complete analysis supporting MDA’s Performance Assessment 2009. Out of 40 models, the BMDS Operational Test Agency recommended in January 2009 full accreditation for only 6 models, partial accreditation for 9 models, and no accreditation for 25 models. Because MDA canceled the follow-on Performance Assessment 2008, the BMDS Operational Test Agency did not receive verification and validation data that would have been included in the modeling and simulation portion of its 2008 operational assessment. BMDS Operational Test Agency officials told us that MDA also does not adequately plan for the collection of flight test data and post-flight reconstruction to support anchoring MDA models and simulations, even though post-flight reconstruction is needed to validate that models and simulations are adequate representations of the real world for their intended purpose. MDA guidance emphasizes that one of the primary objectives of the MDA ground and flight test program is to anchor BMDS models and simulations. Additionally, this guidance requires MDA’s testing program to work with the MDA engineers to define a test program that anchors these models and simulations across the operating spectrum. According to BMDS Operational Test Agency officials, the first full post- flight reconstruction was conducted in December 2008. Despite the guidance delineating responsibilities for test data, MDA test plans currently do not include enough detail to allocate and synchronize resources in order to anchor models and simulations. MDA recently initiated a three-phase review of the entire BMDS test program. According to MDA, this three-phase review will emphasize the need for basing BMDS test planning and test design on critical factors that have not been proven to date and will drive target selection requirements. One outcome of the review will be to create integrated campaigns of ground and flight tests to efficiently collect data needed to validate the models and simulations. MDA intends to complete all three phases of the review by May 2009, after which MDA intends to have a date when all MDA models and simulations will be verified and validated. However, the current lack of flight test data for MDA’s and BMDS Operational Test Agency analysis prevents the timely validation of models and simulations that are used to build the 2009 end- to-end performance assessment. In fiscal year 2008, MDA met most of its delivery goals. However, it continued to pursue a concurrent development, manufacturing and fielding strategy in which assets are produced and fielded before they are fully demonstrated through testing and modeling. Although flight tests and modeling and simulation produced less validation of performance than planned, MDA continued manufacturing untested components and declaring capabilities ready for fielding. For example, 10 of the new configuration kill vehicles for the GBI will have been manufactured and delivered before being flight-tested. MDA also declared that it had fielded 9 of 22 BMDS capabilities planned for 2008 (postponing 13), but due to test cancellations and performance assessment delays, it had to change the basis of these declarations, often relying on previous, less realistic testing. MDA achieved four of the five delivery goals it set for fiscal year 2008 as shown in the table 8. The agency planned to deliver the Sea-based X-band radar and three additional GBIs for Block 1.0, 20 additional SM-3 missiles for its Block 2.0 capability, a C2BMC site for fielding and activation for its Blocks 3.1/3.2 and 5.0 capabilities, and an additional AN/TPY- 2 radar. Although partial capability for the Sea-based X-band radar will not be declared until at least fiscal year 2009, it was approved for Early Capability Delivery in fiscal year 2008. The agency delivered the Aegis BMD SM-3 missiles, the AN/TPY-2 radar, and the C2BMC site in fiscal year 2008 as planned, but was unable to deliver the GBIs because the GMD element encountered development challenges with components for the CE-II EKV. In addition, the Navy Commander, Operational Test and Evaluation Force declared the Aegis BMD 3.6 system as operationally suitable and effective in October 2008. This decision signifies that 18 Aegis BMD-equipped ships and 90 SM-3 missiles are ready for transition to the Navy. Despite developmental problems, test delays and MDA’s inability to complete all fiscal year 2008 Director’s test knowledge points, manufacturing, production, and fielding have proceeded close to schedule. In some cases fielding has gotten ahead of testing. For example, Aegis BMD expected to assess the ability of the SM-3 Block 1A missile to engage and intercept a long-range ballistic target to satisfy a Director’s test knowledge point. Even though that test has been delayed until the third quarter of fiscal year 2009, MDA purchased 20 SM-3 Block 1As in fiscal year 2008. Furthermore, MDA intended to assess, through flight tests, the CE-I EKV’s capability against scenarios that included complex target scenes with countermeasures. However, due to the frequent restructuring of its test plan and a target failure during its most recent flight test, the fielded configuration for GMD has not completed a test against countermeasures. According to MDA, no more CE-I flight tests have been approved, although the agency is considering additional flight testing of the CE-I EKV in the future. Moreover, earlier ground and flight testing, along with manufacturing discoveries prompted the GMD program to initiate a refurbishment program for the kill vehicles and the boosters. Refurbishment consists of: (1) reliability improvements to address high priority risks and to support the development and understanding of GBI reliability and (2) surveillance of aging through the examination of removed components. Consequently, the capability of the CE-I, including improvements designed to mitigate risk, as well as understand its capabilities and limitations against targets employing countermeasures may not be flight-tested, yet all 24 interceptors with this configuration are already emplaced and declared operational. More importantly, the GMD program continues to experience test delays, causing fielding to outpace flight tests as shown in figure 4. For example, the program has only been able to conduct two intercepts since 2006 for verifying the fielded configuration yet the production of interceptors continues. According to GMD’s September 2006 flight test plan, for fiscal years 2007 and 2008, and the first quarter of fiscal year 2009 it was going to conduct seven flight tests, including a test that would utilize 2 GBIs against a single target—known as a salvo test —and field 16 new GBIs. By January 2009 GMD had changed its plan, removing the salvo test and conducting two flight tests, yet it fielded 13 GBIs. Similarly, GMD had planned to conduct an intercept test to assess the enhanced version of the EKV called the Capability Enhancement II in the first quarter of fiscal year 2008, months before emplacing any interceptors with this configuration. However, developmental problems with the new configuration’s inertial measurement unit and the target delayed the first flight test with the CE-II configuration—FTG-06—until at least the fourth quarter of fiscal year 2009. Despite these delays, MDA expects to have emplaced five CE-II interceptors before this flight test. MDA indicated that these five interceptors will not be declared operational until the satisfactory completion of the test and the Program Change Board declares their status. However, MDA projects that 10 CE-II EKVs will have been manufactured and delivered before that first flight test demonstrates the CE-II capability. This amounts to over half of the CE-II EKV deliveries that are currently on contract. MDA did not emplace the three GBIs it needed to meet its fiscal year 2008 fielding goals. MDA will have to emplace twice as many GBIs than planned in fiscal year 2009 before Block 1.0 can be declared complete. As of January 2009, the agency had emplaced two and must emplace four more in order to complete Block 1.0 as planned. Major defense and acquisition programs must complete operational test and evaluation before entering full-rate production. Because MDA considers the assets it has fielded to be developmental, it has not advanced BMDS elements to DOD’s acquisition cycle or begun full-rate production. Therefore, MDA has not yet triggered the requirement for an operational test and evaluation prior to fielding. However, MDA’s concurrent approach to developing and fielding assets has led to testing problems and concerns about the performance of some fielded assets. After two flight test failures in 2005, MDA undertook a Mission Readiness Task Force to establish confidence in GMD’s ability to reliably hit its target, establish credibility in setting and meeting test event dates, build increasing levels of operationally realistic test procedures and scenarios, raise confidence in successful outcomes of flight missions, and conduct the next flight test as soon as practical within acceptable risk bounds. However, GMD accelerated the objectives for its test program after the first Mission Readiness Task Force flight test and the program continues to experience developmental problems with key interceptor components. MDA also separately established a refurbishment program designed to replace questionable interceptor parts and increase reliability of GBIs. Since 2006, we have reported that the performance of some fielded GBIs was uncertain. Despite MDA’s previous efforts to build confidence in its test program, MDA continues to pursue a risky approach for fielding BMDS assets under its new block structure. In March 2008, we reported that MDA’s new block structure did not address whether it would continue its practice of concurrently developing and fielding BMDS elements and components. However, in 2008 the agency continued to field assets without adequate knowledge. MDA emplaced GBIs during the year although its refurbishment program was barely underway, meaning that the risks of rework continue. To date, 26 GBIs have been emplaced—many of which may contain unreliable parts—and only a few have been refurbished since the initiation of the refurbishment program in 2007. According to program officials, some improvements have already been introduced into the manufacturing flow and demonstrated during flight testing. While it is always a concern when tests are eliminated or the complexity of a planned test is reduced, the concern is heightened for a system of systems such as the BMDS because of the complex interaction of components within an element, and between that element and the other elements within the BMDS. Consequently, the need to synchronize the development and testing of different capabilities is crucial before fielding begins. For example, for certain engagement scenarios, the ground-based interceptor will launch based on information provided by an entirely separate element such as an Aegis cruiser or destroyer. If a problem is discovered during these flight tests, post-flight reconstruction using models needs to be conducted, the root-cause must be determined, a solution or mitigation must be developed and implemented, and a new test to confirm the effectiveness of the solution or mitigation must be performed. When MDA determines that a capability can be considered for operational use, it does so through a formal declaration. MDA uses an incremental declaration process to designate BMDS capability for its blocks in three levels—early, partial and full. The first two levels allow these BMDS features to play a limited role in system operations before they have attained their full level of capability. Each capability designation in the delivery schedule represents upgraded capacity to support the overall function of BMDS in its mission as well as the level of MDA confidence in the system’s performance. Capability declarations are important because MDA uses them to assess progress toward block completion. MDA guidance calls for an orderly sequence of events that lead to declaring that a fielded capability has been achieved and is ready for consideration for operational use. MDA bases its declarations on, among other things, a combination of models and simulations—such as end-to-end performance assessments— and ground tests all anchored to flight test data. Because performance assessments analyze the BMDS as an entire system in a variety of ways, they provide more comprehensive information than flight tests alone. These events and assessments build on each other every year as MDA adds capabilities by improving hardware and software. MDA decision makers would then declare the achievement of capability goals for engagement sequence groups based on performance assessments. While in some instances, declarations of capability have been deferred, in other instances MDA has declared capabilities despite shortfalls in testing, modeling and simulation, and performance assessments. The agency declared the delivery of nine capabilities during fiscal year 2008 as shown in figure 5 below. It declared three early capabilities for Block 1.0 engagement sequence groups, three early as well as one full capability for Block 2.0 engagement sequence groups, and one early capability and one partial capability for Block 3.1/3.2 engagement sequence groups. GBI Launch-on COBRA DANE radar (Beale) GBI Ene-on ea-baed X-band radar GBI Launch-on ea-baed X-band radar SM- Ene-on hipboard Ae radar SM- Launch on remote hipboard Ae radar SM-2 Ene-on hipboard Ae radar THAAD Ene-on AN/TPY-2 radar (terminal mode) GBI Ene on COBRA DANE radar Mod 1 (Fylindale, UK; forward-baed (AN/TPY-2 radar)) GBI Launch on hipboard Ae radar Mod 1 (Fylindale, UK; ea-baed X-band radar) MDA had intended to use the results of a flight test (FTG-04), that was later canceled; a distributed ground test (GTD-03), that was delayed into fiscal year 2009; and the results of Performance Assessments 2007 and 2008 to determine if capabilities were ready for declaration in fiscal year 2008. Consequently, these shortfalls in knowledge led MDA to reduce the basis for declaring capability goals. Performance Assessment 2007— identified by MDA as a key source to assess capabilities during fiscal year 2008—achieved only limited accreditation. This less-than-full accreditation indicated that MDA could not rely on the assessment’s results to gauge end-to-end BMDS performance. Subsequently, MDA officials decided to cancel Performance Assessment 2008 because they needed time to address problems and prepare for Performance Assessment 2009. While MDA officials declared these capabilities during fiscal year 2008, they did so after mostly reducing the basis for the declarations. They reverted back in several cases to older ground and flight tests, though MDA in a few cases added some newer flight and ground tests as well. For example, MDA declared early Block 1.0 capability for three engagement sequence groups in fiscal year 2008 without the planned results from Performance Assessment 2007. In all cases, though MDA had intended to use the final results from comprehensive performance assessments, after revising the basis for declaring capability goals it eliminated them entirely. Specifically, MDA dropped some sources of data it expected to use, such as the canceled Performance Assessment 2008, and shifted from flight and ground tests planned to occur in fiscal year 2008 to older flight and ground tests. For example, in Block 2.0 MDA declared full capability during fiscal year 2008 for one engagement sequence group, Aegis BMDS engage on its shipboard radar, even though Performance Assessment 2008 had been canceled. MDA instead based its decision on integrated and distributed ground tests (GTI-02 and GTD-02) conducted in calendar year 2007 as well as prior flight tests during fiscal years 2006 through 2008. However, the BMDS Operational Testing Agency raised concerns about the comprehensiveness of the GTI-02 scenarios, specifically, the incorrect configuration of U.S. satellites and threat data. MDA also deferred 13 capability goals scheduled to occur in fiscal year 2008 to the end of fiscal year 2009, as shown in figure 6 below. MDA intended to declare all Block 1.0 engagement sequence groups as fully capable by the middle of fiscal year 2009. However, as MDA encountered test delays and technical challenges, it had to defer full capability declaration for these engagement sequence groups until the end of fiscal year 2009. For Block 2.0, MDA also deferred declaring full capability for one of the two planned full capability declarations for fiscal year 2008. This declaration is contingent upon the review of a ground test that has been rescheduled to the second quarter of fiscal year 2009 and a flight test rescheduled to the third quarter of fiscal year 2009. MDA also deferred one full and two early capability declarations for Block 3.1/3.2 beyond the end of fiscal year 2009. In response to the limitations of Performance Assessment 2007, the cancellation of Performance Assessment 2008 and FTG-04, and the delayed GTD-03 and FTG-05 flight tests, MDA is planning to rely on older ground and flight tests; a sensor flight test, FTX-03, instead of intercept flight tests; and the initial quick look review of Performance Assessment 2009 instead of the previously planned full analysis. Appendix IV provides a detailed layout for the reduced basis of capability declarations for fiscal years 2008 and 2009. Since MDA was only able to declare a few of the capabilities it planned for fiscal year 2008, the schedule for fiscal year 2009 and subsequent years will be compressed if the agency plans to maintain the schedule it has set for its blocks. For example, MDA may need to declare three times as many capabilities than originally planned for fiscal year 2009 in order to meet the 2009 capability declaration schedule. In addition, if the schedule cannot be maintained, MDA will likely have to make further adjustments to mitigate additional delays in BMDS capabilities. Increased reliance on integrated ground testing will provide less knowledge than a complete analysis of capabilities from a performance assessment. Integrated ground testing involves less robust conditions than distributed ground testing, which involves operational systems in the field. The MDA master fielding plan indicates that the agency originally intended to take a more comprehensive approach upon which to base capability declarations. Reliance on an upcoming Performance Assessment 2009 quick look for Block 1.0 completion is a particular concern because the knowledge it provides may be limited with respect to testing, according to BMDS Operational Test Agency officials. For example, officials told us that a quick look may indicate anomalies from a test but will not analyze their causes. In contrast, MDA originally planned to have a complete analysis from the Performance Assessment 2009 models, simulations, and tests. In March 2008, we reported that efforts were underway to improve BMDS management, transparency, accountability, and oversight including a new executive board outside of MDA and a new block structure along with other improvements within MDA. Since that time, the executive board that was established in 2007 has acted with increased oversight. MDA’s efforts, however, have not made the expected progress. In particular, MDA has decided to retain the option of deferring work from one block to another; cost baselines have not been established; test baselines remain relatively unstable; and requesting procurement funds for some assets, as directed by Congress, will not occur until fiscal year 2010. To accomplish its mission, in 2002 the Secretary of Defense gave MDA requirements, acquisition, and budget flexibilities and relief from some oversight mechanisms and reporting responsibilities. The flexibility granted to MDA has allowed concurrent development, testing, manufacturing, and fielding. MDA used this flexibility to quickly develop and field the first increment of capability in 2005. In August 2008, in response to Congressional direction to assess the current and future missions, roles, and structure of MDA, an independent study group agreed that there is a need to move MDA toward more normal acquisition processes. However, the group noted that the continuous evolution of the BMDS requires that the approach to setting requirements for, developing, and fielding increments of capability should remain as special authorities with oversight of the Missile Defense Executive Board (MDEB). Further, in regards to budget flexibilities, the independent group concluded that while these flexibilities may have been deemed necessary at the time, it should not have been expected that all the special authorities granted to MDA would continue or would have a need to continue in full force beyond achieving the President’s goal of deploying a set of initial capabilities. During 2008, the MDEB appeared to act with an increased level of authority in providing oversight of MDA and the BMDS. For example, the board took on a major role in making key decisions regarding the transition of elements to military services. We previously reported that MDA and the military services had been negotiating the transition of responsibilities for the sustainment of fielded BMDS elements, but this process had been proven to be arduous and time consuming. However, in 2008, with the influence of the MDEB, a lead military service designation was appointed for one BMDS asset—the Sea-based X-band radar. In March 2008, we reported that the MDEB could play a key role in the Joint Requirements Oversight Council’s proposal to return the BMDS to the Joint Capabilities Integration and Development System requirements process—a formal DOD procedure followed by most DOD programs that defines acquisition requirements and evaluation criteria for future defense programs. In responding to the proposal, the Acting Under Secretary of Defense for Acquisition, Technology, and Logistics recommended that the Deputy Secretary of Defense delay his approval of the Joint Staff’s proposal until the MDEB could review the proposal and provide a recommendation. According to Acquisition, Technology and Logistics officials, no decision has been made regarding returning the BMDS to the requirements process. However, the Deputy Secretary of Defense, in September 2008, appeared to strengthen the oversight role of the MDEB, clarifying the roles of the MDEB as well as MDA, the Office of the Secretary of Defense, Combatant Commands, and Military Departments. With respect to the role of the MDEB, he established a life cycle management process for the BMDS stating that the MDEB will recommend and oversee implementation of strategic policies and plans, program priorities, and investment options to protect our Nation and our allies from missile attack. One of the MDEB functions is to provide the Under Secretary of Defense for Acquisition, Technology, and Logistics—or Deputy Secretary of Defense, as necessary—a recommended strategic program plan and feasible funding strategy for approval. The Deputy Secretary further noted that, through the use of the BMDS Life Cycle Management Process outlined in the memo, the MDEB will oversee the annual preparation of the BMDS portfolio, including BMDS-required capabilities and a program plan to meet the requirements with Research, Development Test & Evaluation, procurement, operations and maintenance, and military construction resources in defense-wide accounts. To further increase BMDS transparency and oversight of the BMDS, the Under Secretary of Defense Acquisition, Technology, and Logistics plans to hold program reviews for several BMDS elements commensurate with the authority granted to the MDEB by the Deputy Secretary of Defense. According to Under Secretary of Defense for Acquisition, Technology, and Logistics officials, the MDEB conducted its first of such reviews in November 2008 of the THAAD program. This review covered production and the element’s contract schedule. Under Secretary of Defense for Acquisition, Technology, and Logistics officials told us that these reviews are designed to provide the Deputy Director Acquisition, Technology, and Logistics with comprehensive information that will be used as the basis for MDEB recommendations for the BMDS business case and baseline processes— a process which, according to these officials, is similar to the traditional Defense Acquisition Board process for reviewing other major acquisition programs. However, it is unclear whether the information provided to the MDEB will be comparable to that produced for other major acquisition program reviews as most of the information appears to be derived or presented by MDA as opposed to independent sources as required for traditional major defense acquisition programs. In 2007, MDA redefined its block structure to better communicate its plans and goals to Congress. The agency’s new structure is based on fielding capabilities that address particular threats instead of the biennial time periods previously used to develop and field the BMDS. Last year, we reported that MDA’s new block plans included many positive changes. However, MDA, with its submission of its Fiscal Year 2008 Statement of Goals, reversed some of the positive aspects of the new block structure. For example, we previously reported that the new block structure would improve the transparency of each block’s actual cost by disallowing the deferral of work from one block to another. Under its prior block structure, MDA deferred work from one block to another; but it did not track the cost of the deferred work so that it could be attributed to the block that it benefited. Because MDA did not track the cost of the deferred work, the agency was unable to adjust the cost of its blocks to accurately capture the cost of each. This weakened the link between budget funds and the work performed. Last year, MDA officials told us that under its new block approach, MDA would no longer transfer work under any circumstances to a different block. However, MDA officials recently said that they are retaining the option to move work from one block to another as long as it is accompanied by a rebaseline. This change allows the agency to continue the practice of moving work from one block to another, which thereby reduces the transparency of the new block structure and undermines any baselines that are established. In March 2007, we reported that the majority of MDA’s funding comes from the Research, Development, Test, and Evaluation appropriation account, another flexibility provided by law. In past years, Congress authorized MDA to pay for assets incrementally using research and development funds. This allowed MDA to fund the purchase of assets over multiple years. Congress recently restricted MDA’s authority and required MDA to purchase certain assets with procurement funds and directed that for any year after fiscal year 2009, MDA’s budget materials must delineate between funds needed for research, development, test, and evaluation, procurement, operations and maintenance, and military construction. Requiring MDA to request funding in these appropriation categories will mean that it will be required to follow the funding policies for each category. For example, using procurement funds will mean that MDA will be required to ensure that assets are fully funded in the year of their purchase, rather than incrementally funded over several years. Congress directed in the 2008 National Defense Authorization Act, for any year after fiscal year 2009, that MDA’s budget materials delineate between funds needed for research, development, test, and evaluation, procurement, operations and maintenance, and military construction. We have previously reported that using procurement funds will mean that MDA generally will be required to adhere to congressional policy that assets be fully funded in the year of their purchase, rather than incrementally funded over several years. The Congressional Research Service reported in 2006 that “incremental funding fell out of favor because opponents believed it could make the total procurement costs of weapons and equipment more difficult for Congress to understand and track, create a potential for DOD to start procurement of an item without necessarily stating its total cost to Congress, permit one Congress to ‘tie the hands’ of future Congresses, and increase weapon procurement costs by exposing weapons under construction to uneconomic start-up and stop costs.” In the 2008 National Defense Authorization Act, Congress also provided MDA with the authority to use procurement funds for fiscal years 2009 and 2010 to field its BMDS capabilities on an incremental funding basis, without any requirement for full funding. Congress has granted similar authority to other DOD programs. In the conference report accompanying the Act, Conferees cautioned DOD that additional authority will be considered on a limited case-by-case basis and noted that they expect that future missile defense programs will be funded in a manner more consistent with other DOD acquisition programs. MDA did not request any procurement funds for fiscal year 2009. During our audit, the agency had not yet released the 2010 budget request to include such funding categories. However, MDA officials told us that the agency plans to request procurement funds for some of its assets in its fiscal year 2010 request, but could not elaborate on its plans to do so. Given that data was unavailable, it is unclear for which assets procurement funds will be requested or the extent to which the request will meet the direction given by Congress. According to MDA officials, information regarding its plans to request procurement funding will not be released until spring 2009. Baselines represent starting points against which actual progress can be measured. They are thus used to provide indications of when a program is diverting from a plan. Baselines can be established to gauge progress in different areas, including cost, schedule and testing. Overall, the BMDS does not have baselines that are useful for oversight. With regard to cost, we have already discussed the lack of total and unit cost baselines for missile defense as well as the frequency of changes in contract baselines. MDA made some progress with developing a schedule baseline for its blocks and their associated capabilities. The agency’s annual Statement of Goals identifies its schedule baseline as the fiscal year dates for early, partial, and full capability deliveries of hardware and functionality for a block. Thus, while MDA has changed its schedule for making declarations, the effect of the change can be determined by comparison with the original schedule. MDA does not have test baselines for its blocks. The agency does however, have baselines for its test program, but revises them frequently. They are therefore not effective for oversight. The agency identified its Integrated Master Test Plan as the test baseline for the BMDS. However, as depicted in table 9, the agency has made a number of changes to the content of the baseline. The official approved test baseline changes every year and there are numerous more informal changes that happen more frequently. Most of the annual revisions to the test baseline occur either because MDA has changed the substance of test, changed the timing of tests, or added tests to the baseline. The Integrated Master Test Plan establishes the executable test program for the current fiscal year and extends through the following fiscal year. According to MDA, the test plan is updated quarterly based upon decisions from MDA leadership or formal decision-making forums such as the Program Control Board, and is also coordinated annually with external agencies such as the Office of the Director of Operational Test and Evaluation. However, as shown in table 9, there are several versions for a given quarter and as many as seven versions have been developed since the fiscal year 2008 baseline was established. It is unclear which Integrated Master Test Plan version MDA manages to at any given time. For example, in November 2008, we requested the latest version of the Integrated Master Test Plan and were told that the latest approved version was 8.4, which was revised in July 2008. However, the signature page for that version is from a prior version—version 8.1. Since there is no signature page referring to version 8.4, it appears that this version is unapproved though MDA officials told us that it was being used to manage the BMDS. Agency officials maintain that the document is used to manage tests and associated requirements for key test events. However, it is unclear how well the baseline is integrated with other key aspects of testing such as the acquisition of targets needed to execute tests. For example, in some instances, targets are placed on contract for two or more years in advance of the planned tests. Yet, the test baseline—the Integrated Master Test Plan—does not appear to include events beyond the following fiscal year that are key to the BMDS test program. As we reported in September 2008, MDA officials acknowledged that its target contracts did not capture all element testing requirements and target baselines were not always established before targets contracts were signed. In 2002, MDA was given unusual authorities to expedite the fielding of an initial BMDS capability. As this initial capability was fielded in 2005, it showed the benefits of these flexibilities. MDA has improved on this capability in the ensuing years, including 2008, the focus of this report. Today, the program is still operating at a fast pace, as production and fielding of assets outstrips the ability to test and validate them. A collateral effect of these flexibilities has been reduced visibility into actual versus planned progress. Some fundamental questions of an oversight nature are not yet answerable. For example, a comparison of actual versus planned costs at the system or asset level is not yet possible, nor is an assessment of the performance of the fielded system as a whole. Beginning in 2007, MDA began efforts to improve visibility into its actual performance, beginning with the new way of defining blocks, coupled with DOD’s creation of the MDEB. However, progress has been slow in some areas and value for money cannot be satisfactorily assessed. Delays are especially important in a program of this size, as a year delay in establishing cost baselines means another $8 billion to $10 billion may be spent in the meantime. With the transition to a new administration, the deployment and subsequent improvement of an initial capability, a new agency Director, and a new block structure for managing the BMDS, an opportunity exists to revisit and strengthen the processes by which MDA operates. Looking to the future, decision makers in Congress and DOD face multi-billion dollar investment decisions in allocating funds both within MDA and between MDA and other DOD programs. At this point, a better balance must still be struck between the information Congress and DOD need to conduct oversight of the BMDS and the flexibility MDA needs to manage across the portfolio of elements that collectively constitute the system’s capability. At this point, the balance does not provide sufficient information for effective oversight. In particular: Total cost and unit cost baselines have not been set and contract baselines are subject to frequent changes. Even if such baselines are set as planned, they will only capture about 26 percent of MDA’s work. Less testing is conducted than planned, thus delaying the validation of the models and simulations needed to assess the overall performance of the BMDS. Moreover, test plans do not hold and are revised often, in many cases due to the poor performance of target missiles. The current test plan is at risk given its ambitious scope. Manufacturing, production, and fielding are outpacing testing, modeling, and validation. Consequently, fielding decisions and capability declarations are being made with limited understanding of system effectiveness. We recommend that the Secretary of Defense direct the MDEB to assess how the transparency and accountability of MDA’s acquisitions can be strengthened to enhance oversight, such as by adopting relevant aspects of DOD’s normal requirements, acquisition and budgeting processes, without losing the beneficial features of MDA’s existing flexibility. In the near term we recommend that the Secretary of Defense direct MDA to undertake the following 10 actions: In the area of cost: 1. Complete total cost baselines before requesting additional funding for Blocks 2.0 and 3.0 and commit to a date when baselines for all blocks will be established. 2. Ensure that transfers of work from one block to another are transparent and reported as cost variances. 3. Provide additional unit costs reports, beyond flyaway unit costs, that incorporate both procurement and research and development funding so that there is a more comprehensive understanding of the progress of the acquisitions. In the area of testing and performance: 4. Expand the BMDS test baseline to include tests scheduled beyond the first succeeding year of the plan to ensure its synchronization with BMDS contracts. 5. Ensure that DOT&E is consulted before making significant changes to the test baseline so that the tests planned provide DOT&E with sufficient data to assess the performance of the BMDS elements. 6. Ensure that planned test objectives include concrete data requirements anchoring models and simulations to real-world tests, synchronized with flight and ground test plans and that the effects on models and simulations of test cancellations, delays or problems are clearly identified and reported. 7. Reassess the flight tests scheduled for the end of fiscal year 2009 to ensure that they can be reasonably conducted and analyzed given targets and other constraints. In the area of knowledge-based decisions: 8. Synchronize the development, manufacturing, and fielding schedules of BMDS assets with the testing and validation schedules to ensure that items are not manufactured for fielding before their performance has been validated through testing. 9. Conduct a flight test of the CE-I EKV against a complex target scene with countermeasures to complete MDA’s previous testing goal of understanding the performance capabilities of the first 24 fielded GBIs. 10. Strengthen the capability declarations by using the complete analysis from annual performance assessments as the basis for declaring engagement sequence groups as fully capable and block development as fully complete; otherwise, indicate the limitations of the capabilities and steps that MDA will take to reduce the risks. DOD provided written comments on a draft of this report. These comments are reprinted in appendix I. DOD also provided technical comments, which were incorporated as appropriate. DOD fully concurred with 10 of our 11 recommendations and partially concurred with our recommendation that the Secretary of Defense direct MDA to synchronize the development, manufacturing, and fielding schedules of BMDS assets with testing and validation schedules to ensure that items are not manufactured for fielding before their performance has been validated through testing. Yet, even DOD’s response to this recommendation appears to be, in substance, concurrence. DOD concurred with our recommendation that the Secretary of Defense direct MDA to ensure that transfers of work from one block to another are transparent and reported as cost variances. DOD noted in its response that MDA will report block baselines and variances annually to Congress in the BMDS Accountability Report. The Department further noted that for the purposes of unit cost reporting, MDA has defined a cost variance as a confirmed increase of 10 percent or more in block or unit costs when compared to the current cost baseline or 20 percent or more compared to the original cost baseline, stating that transfers of work creating such cost variances will be reported. The intent of our recommendation is to increase visibility into transfers of work between blocks regardless of the amount of the increase or the baseline status of the blocks. The trigger for reporting the variances selected by DOD will not necessarily provide that visibility. Given that only between 2 and 26 percent of BMDS block and capability development costs from fiscal year 2010 to 2013 will be baselined initially, visibility into transfers into blocks that are not yet baselined may not occur. Further, an increase may not be reported in the baselined block from which work is transferred because the transfer would actually yield a decrease in the cost of the baselined block. An increase would also not be reported in the receiving block if that block is not baselined or if the transfer did not increase costs above the threshold. MDA may need to consider a different approach to reporting that captures meaningful transfers of work into and out of blocks regardless of whether any of the blocks are baselined. MDA should work with Congress to determine what constitutes a meaningful or significant cost increase. DOD also concurred with our recommendation that the Secretary of Defense strengthen the capability declarations by using the complete analysis from annual performance assessments. In responding to our recommendation, DOD noted that if there is limited performance assessment data, the overall capability assessment will factor in the knowledge gained from ground tests and flight tests against the identified risks. While we recognize that MDA is not always able to complete all of its planned tests in a given time period, when MDA decides to change the planned basis for its capability declarations to a different or reduced set of data it is important for the agency to clearly report the limitations that affect the capability declaration as well as the mitigation steps it is taking. We are sending copies of this report to the Secretary of Defense and to the Director, MDA. In addition, the report will be available at no charge on the GAO Web site at http://www.gao.gov. If you, or your staff have any questions concerning this report, please contact me at (202) 512-4841. Contact Points for our offices of Congressional Relations and Public Affairs may be found on the last page of this report. The major contributors are listed in appendix VI. Based on our analysis of 14 Ballistic Missile Defense System (BMDS) elements’ prime contractor earned value management performance, we determined that collectively the contractors overran budgeted cost by $152.4 million and were behind schedule by approximately $107.4 million during the fiscal year. Our insight of the dollar gained or lost for each dollar invested is based on monthly earned value reports which are required of each BMDS program office’s prime contractor. These reports compare monthly progress to the cost or schedule performance baseline to reveal whether the work scheduled is being completed on time and if the work is being completed at the cost budgeted. For example, if the contractor was able to complete more work than scheduled and for less cost than budgeted, the contractor reports a positive schedule and cost variance. Alternatively, if the contractor was not able to complete the work in the scheduled time period and spent more than budgeted, the contractor reports both a negative schedule and cost variance. The results can also be mixed by, for example, completing the work under cost (a positive cost variance) but taking longer than scheduled to do so (a negative schedule variance). We also used contract performance report data to base predictions of likely overrun or underrun of each prime contractor’s budgeted cost at completion. Our predictions of final contract cost are based on the assumption that the contractor will continue to perform in the future as it has in the past. In addition, since they provide the basis for our projected overruns, we also provide the total budgeted contract cost at completion for each contract we assessed in this appendix. However, the budgeted costs at completion, in some cases, have grown significantly over time. For example, in one case the budgeted cost at completion increased by approximately five times its original value. Since our assessment does not reveal, as cost growth, the difference between the original and current budgeted costs at completion it would be inappropriate to compare the underruns or overruns for MDA programs with cost growth on major defense acquisition programs since those major defense acquisition programs have established their full scope of work as well as developed total cost baselines, while these have not been developed for MDA programs. The Aegis Ballistic Missile Defense (Aegis BMD) program manages two prime contractors for work on its two main components—the Aegis BMD Weapon System and the Standard Missile-3 (SM-3). We report on work under one of the two separate Aegis BMD SM-3 contract’s contract line item numbers (CLIN)on which we received sufficient performance data during fiscal year 2008. The first Aegis BMD SM-3 contract’s CLIN 9 was for the production of 20 Block 1A missiles which began in February 2007 and finished deliveries in August 2008. Deliveries were completed $7.5 million under budget on the contractor’s total budgeted cost of $179.0 million. The other Aegis BMD SM-3 contract’s CLIN 1 is for a fourth lot of 27 Block 1A missiles and began reporting performance data in August 2007 for work that is still ongoing. The weapon system contractor experienced cost growth and schedule delays while the SM-3 contractor for the ongoing CLIN 1 for 27 Block 1A missiles had mixed performance. Neither of these CLINs experienced a realignment during fiscal year 2008. The Aegis BMD weapon system contractor experienced cumulative cost growth and schedule delays throughout the year. The Aegis BMD weapon system contractor overran budgeted cost and schedule during the fiscal year by $7 million and $5.1 million respectively. Although cumulative cost performance remains positive at $16 thousand, cumulative schedule performance continued to decline to negative $8.4 million. The negative cumulative schedule variance is driven by late engineering data, delays to qualification efforts, and the need to return components experiencing issues back to the vendor which required more time than originally planned. See figure 7 for cumulative cost and schedule performance during the fiscal year. The program attributes the fiscal year cost and schedule overruns mainly to the additional time and testing needed to ensure that the weapon system fielded capability was what was originally promised to the warfighter. To account for some of the overruns, the program performed fewer risk reduction efforts for a future weapon system capability release. If the contractor continues to perform as it has during the fiscal year, we project that at contract completion in September 2010, the contractor will overrun its budgeted cost of $1.2 billion by between $1.9 million and $12.2 million. The Aegis BMD SM-3 contractor, producing another lot of 27 Block 1A missiles under its CLIN 1, ended the fiscal year by underrunning budgeted costs by $3.0 million. The Aegis BMD SM-3 contractor for CLIN 1 work also ended the year with a negative $7.6 million schedule variance, which means that the contractor was unable to accomplish $7.6 million worth of planned work. Since reporting began in August 2007, cumulative and fiscal year variances are nearly equal with cumulative cost variances at a positive $3.3 million and cumulative schedule variances at negative $7.0 million. See figure 8 for a graphic representation of the cumulative cost and schedule variances during fiscal year 2008. The contractor was able to accomplish fiscal year 2008 work for $3.0 million less than originally planned in part due to adjustments made in program management, labor efficiencies, reductions in vendor cost, and material transfers in the missile’s fourth stage component. The unaccomplished work in negative $7.6 million worth of fiscal year schedule variances is largely in the first, second, and fourth stages portion of work. In the first stage booster, the contractor attributes some of the negative schedule variance to more than a year delay in testing the first stage due to rework needed to correct errors in the original drawing packages. In addition, the contractor cites second stage component delivery delays as drivers for the negative schedule variance. Vendors were unable to deliver these components due to holdups in approving waivers, achieving recertification after test equipment failures, and property damage to facilities. Lastly, the contractor experienced delays in components for the fourth stage which also contributed to the unfavorable schedule variance. If the contractor continues to perform as it did through September 2008, our analysis predicts that, at completion in April 2010, the work under the contract could cost from $6.6 million less to $0.7 million more than the budgeted cost of $237.5 million. For fiscal year 2008, the Airborne Laser (ABL) contractor overran fiscal year budgeted costs by $10.6 million but had a positive fiscal year schedule variance of $2.2 million. Despite some gains in its schedule variance during the fiscal year, the program still maintains negative cumulative cost and schedule variances of $84.8 million and $23.6 million respectively. The contractor mostly attributes the negative cumulative variances in cost and schedule to late beam control/fire control hardware deliveries. Despite a replan in June 2007, the ABL contractor did not perform any type of realignment during fiscal year 2008. Figure 9 shows cumulative variances at the beginning of fiscal year 2008 along with a depiction of the contractor’s cost and schedule performance throughout the fiscal year. Technical issues with key components of the Beam Control Fire Control system that required new hardware or refurbishment of existing components as well as late deliveries of key laser system components are the primary drivers of the unfavorable fiscal year cost variance of $10.6 million. These issues have caused delays in integration and test activities for the overall ABL weapon system. Based on the contractor’s performance up through fiscal year 2008, we estimate that, at completion in February 2010, the contractor will overrun its budgeted cost of $3.6 billion by between $89.7 million and $95.4 million. Our analysis of the Command, Control, Battle Management, and Communications’ (C2BMC) cumulative contract performance indicates that the prime contractor’s performance declined during fiscal year 2008. The contractor overran its fiscal year 2008 budget by $9.8 million and did not perform $3.6 million of work on schedule. By September 2008, this resulted in an unfavorable cumulative cost variance of $24.3 million and an unfavorable cumulative schedule variance of $7.1 million. The main drivers for the negative cumulative cost variances were costs associated with unplanned work, increased technical complexity, and reduction to cost efficiency due to losing key staff. The contractor attributes the unfavorable cumulative schedule variances to software issues related to the global engagement manager and components of test training operations. Although the C2BMC contractor performed a replan in November 2006, the contractor did not perform any type of realignment during fiscal year 2008. Trends in cost and schedule performance during the fiscal year are depicted in figure 10. The negative fiscal year cost variance of $9.8 million is driven mainly by problems in the performance of work under Part 4 and Part 5 of the contract. The Part 4 effort, which began in December 2005, includes completing several spiral capabilities, upgrading spiral suites, and implementing initial global engagement capabilities at an operations center. The Part 5 effort began in December 2007 and covers operations and sustainment support for fielded C2BMC; the delivery of spiral hardware, software, and communications; as well as development, planning, and testing for other spiral capabilities. The contractor was able to use reserves to cover some of its Part 4 unfavorable fiscal year cost variances. The Part 5 fiscal year cost variance’s primary drivers are unexpected complexities with the network design, unplanned work that required more resources for developing the planner, and the extension of efforts past the completion date on the global engagement management portion of work. The unfavorable fiscal year schedule variance of $3.6 million is attributable to the Part 5 portion of work and primarily caused by an unexpected reallocation of resources off of the global engagement management portion of work to other areas, delays in requesting material procurement also for global engagement management, and a lagging schedule for building out a testing lab. If the contractor continues to perform as it has in the past, we predict that the contractor will overrun its budgeted cost of $1.0 billion at completion in December 2009 by between $37.1 million and $76.8 million. The government and the Ground-based Midcourse Defense (GMD) contractor began a contract restructuring during the fiscal year to rephase and rescope on-going efforts to refine capability requirements and to adjust program content as well as perform weapon system integration, perform flight test planning, and work to develop the two-stage booster among other tasks. The ongoing realignment includes a proposal to add between $350 million and $580 million to the cost of the work under contract and to add 39 months to the period of performance. The GMD contractor reports a cumulative negative cost variance of more than $1.0 billion that it attributes to technical challenges with its Exoatmospheric Kill Vehicle (EKV) as well as supplier component quality problems. The contractor also carries a total unfavorable cumulative schedule variance of $130.3 million, the bulk of which the contractor attributes to the technical issues connected with the Ground-based Interceptor (GBI), particularly the EKV. For example, during the fiscal year the program experienced difficulties in manufacturing the Capability Enhancement II (CE-II) EKVs. Although the CE-II EKVs are expected to provide better performance, the contractor produced the kill vehicles before completing developmental tests, discovered problems during manufacturing, incorporated a new design, and continued manufacturing them. Although these issues contributed unfavorable fiscal year cost variances of $42.7 million, the program was able to make up for these losses in other areas. The variances, depicted in figure 11 represent the GMD contractor’s cumulative cost and schedule performance over fiscal year 2008. The GMD contractor did have a favorable fiscal year cost variance of $53.9 million, which it attributed to labor efficiencies in the ground system as well as less field maintenance support required than planned, and labor efficiencies in the deployment and sustainment portion of the work under the contract. However, the GMD element’s underruns occurred partially because the contractors delayed or eliminated some planned work. For example, the GMD program did not accomplish the emplacement of three GBIs, or conduct either of its two planned flight tests. As a result, it employed less labor than originally intended. The program also reports an unfavorable fiscal year schedule variance of $77.4 million which it attributes to an administrative error that occurred in September 2007. This error incorrectly adjusted the baseline to the booster effort in September which was then updated in October. However, it should also be noted that Missile Defense Agency (MDA) officials believe that ongoing adjustments to the GMD element’s baseline have skewed recent variances to such a degree that they should not be used to predict future costs. We did perform analysis based on the contractor’s reported performance through fiscal year 2008, and our analysis estimates that at contract end planned for December 2011, the contractor could overrun its budgeted cost of $14.9 billion by between $950.2 million and $1.25 billion. Despite a replan in April 2007 and again in April 2008, the Kinetic Energy Interceptors (KEI) contractor continued to experience declining cost and schedule performance during the fiscal year. Although the contractor began the year with a positive cost variance, the contractor overran fiscal year 2008 budgeted costs by $8.3 million, ending the year with an unfavorable cumulative cost variance of $2.6 million. In addition, the program was unable to accomplish $8.5 million worth of work which added to an unfavorable cumulative schedule variance of $21.3 million. Cumulative cost and schedule variances were mainly driven by costs associated with delays to booster drawing releases, delays in procurement, and unexpected costs and rework related to issues with the second stage. Figure 12 depicts the cost and schedule performance for the KEI contractor during fiscal year 2008. The KEI contractor attributes its unfavorable fiscal year cost and schedule variances of $8.3 million and $8.5 million, respectively, to issues with its interceptor booster. Problems initially arose in fiscal year 2007 with a motor case failure during acceptance testing which led to unexpected redesigns. In October 2007, the program experienced several issues with the nozzle during a second stage ground test and also experienced a deviation in measured performance from pre-test predictions. These issues added costly redesigns and delays to its knowledge point, a booster flight test. The program performed a replan of its work in April 2008 because of these issues in order to realign the schedule with their booster flight test knowledge point which was delayed from August 2008 to April 2009. Since the replan, the booster flight test has been further delayed to the fourth quarter of fiscal year 2009. As a result of the replan, the program zeroed out some schedule variances from the baseline to reflect the program’s progress toward the newly defined schedule. Despite this replan in April, our analysis shows that the replan has not improved overall performance as cumulative cost and schedule variances continue their downward trend. We were unable to estimate whether the total work under the contract is likely to be completed within budgeted cost since trends cannot be developed until at least 15 percent of the work under the contract is completed. The Multiple Kill Vehicles (MKV) program began utilizing an indefinite delivery indefinite quantity contract in January 2004. Since then, the program has initiated eight task orders, five of which were open during fiscal year 2008—Task Orders 4 through 8. Task Order 4 provided insufficient data to complete full earned value analysis for the fiscal year. In addition, Task Order 5 was completed shortly after the fiscal year began, without providing enough data to show performance trends. Therefore we performed analysis for Task Orders 6, 7, and 8 as shown below. None of the task orders were realigned during the fiscal year. MKV Task Order 6 began in November 2006 for the component development and testing of a prototype carrier vehicle seeker (a long- range sensor). According to the task order, this seeker for the carrier vehicle will assign individual kill vehicles for target destruction. This task will culminate in a demonstration planned for fiscal year 2010. As shown in figure 13 below, performance data over the course of the fiscal year illustrates declining cost and schedule performance. Although it began the fiscal year with slightly positive cumulative cost and schedule variances, the program ended the year with slightly negative cumulative cost and schedule variances of $1.1 million and $0.6 million respectively. In addition, the contractor has unfavorable fiscal year cost and schedule variances of $1.4 million and $1.5 million, respectively. The program attributes its negative cumulative cost and schedule variances to increased work necessary to resolve software development issues, unplanned efforts as a result of late hardware arrivals, and a government-directed change in vendors for hardware resulting in additional design work. Based on our analysis and the assumption that the contractor will continue to perform as it has through fiscal year 2008, we predict that at its contract completion in May 2009, the contractor on Task Order 6 will overrun its budgeted cost of $19.3 million by between $1.6 million and $2.5 million. The MKV Task Order 7 is for the development and testing of engagement management algorithms and the test bed in which it will be demonstrated. These algorithms will be a critical capability of the carrier vehicle to manage the kill vehicle engagements relying on target information from the BMDS sensors and the carrier vehicle long-range sensor. The contractor on this task order performed positively during the fiscal year, both in terms of its cumulative and fiscal year cost and schedule variances. The program had a favorable fiscal year cost variance of $1.4 million and a positive fiscal year schedule variance of $11 thousand, adding to its favorable cumulative cost and schedule variances of $1.7 million and $0.1 million, respectively. The program attributes its cumulative cost underruns to several reasons including a programmatic decision to proceed with one approach for organizing kill vehicles in attack formation rather than funding several different approaches. In addition, the contractor experienced cost savings with greater efficiencies than expected in the kill vehicle portion of the work under the contract and less manpower than planned in other portions of the work under the contract. If the contractor continues to perform as it has in the past, we estimate that at completion in May 2010 the work under the contract could cost between $3.2 million and $3.9 million less than the expected $43.9 million budgeted for the work under the contract. See figure 14 below for an illustration of cumulative cost and schedule performance during fiscal year 2008. MKV Task Order 8 was awarded in January 2007 and began reporting full performance data in July 2007. The task order is for the development and testing of a hover test bed and hover test vehicle. This hover test bed will allow the program to integrate and test key components of the system in a repeatable ground-based free flight environment as their technologies reach maturity. The program experienced a continuing schedule performance decline as seen in figure 15. Although the contractor began the year with a positive cumulative cost variance, overruns during the fiscal year of $10.7 million led the program to a total cumulative cost overrun of $10.3 million. The element’s fiscal year schedule variance was slightly negative at an unfavorable $15 thousand, leaving its cumulative schedule variance largely unchanged at a favorable $0.3 million. The program attributes the cumulative cost variances to increased labor, procurement, and material costs as well as increased hardware and engineering drawings, and management oversight to resolve subcontractor inefficiencies. In addition, the program increased expenditures to resolve technical and schedule issues associated with the development of avionics subsystems. The planned date for the task order’s main effort—completing the hover test—was delayed 2 months from its original date to December 2008 in part because of technical issues associated with the test vehicle’s power unit and a software anomaly. These issues were resolved prior to the hover test being conducted. Based on its prior performance, the MKV contractor could overrun the budgeted cost of $48.0 million for the work under the contract at completion in January 2009 by between $5.7 million and $13.8 million. As of September 2008, the Sensor’s contractor had overrun its fiscal year budget by $2.2 million and was behind in completing $27.4 million worth of work. Considering prior years’ performance, the contractor is performing under budget with a favorable cumulative cost variance of $22.0 million. However, the contractor has a cumulative unfavorable schedule variance of $9.6 million. The contractor reports the cumulative schedule variance is driven by delays in the manufacturing of the sixth radar and a software capability release that is 2 to 3 months behind schedule. Additionally, the contractor reports that its favorable cumulative cost variance is attributable to efficiencies in the second radar’s manufacturing, design, development, and software. The Sensors contractor has not performed a realignment of its work since contract start in April 2003. See figure 16 for trends in the contractor’s cost and schedule performance during the fiscal year. The contractor reports that its unfavorable fiscal year schedule variance of $27.4 million is due to a decrease of previously earned positive schedule variances reaped from the manufacturing efficiencies leveraged from the Terminal High Altitude Area Defense radar hardware design. In addition, late delivery of components also contributed to the negative fiscal year schedule variances. The negative fiscal year cost variance of $2.2 million is largely due to a contract change related to its incentive fee. Our analysis predicts that if the contractor continues to perform as it has through fiscal year 2008, the work under the contract could cost from $25 million less to $9.1 million more than the budgeted cost of $1.1 billion at completion currently planned for December 2010. After a replan of work in October 2007, the Space Tracking and Surveillance System (STSS) contractor experienced an unfavorable cost variance of $87.9 million during the fiscal year. The replan was undertaken in order to extend the period of performance and delay the launch date of its demonstrator satellite. Despite fiscal year cost overruns, the contractor was able to make gains on the cumulative schedule variance by accomplishing $1.9 million more worth of work than was originally planned. Cumulatively, the program has both unfavorable cost and schedule variances at $319.3 million and $17.8 million, respectively. The program attributes cumulative cost variances and schedule variances to continual launch date schedule slippages. In addition, problems in the space segment portion of work also added to the cumulative cost variances. Figure 17 shows both cost and schedule trends during fiscal year 2008. Program cost variances during the fiscal year were driven primarily by technical issues with hardware installed on the second space vehicle. These issues included an overheating flight communications box, a leak on the propulsion side of the satellite, and problems with the spacecraft processor that failed to send a critical command to the onboard computer. To resolve the issues with the processor, the program office initially recommended the removal of the entire computer from the spacecraft. However, after extensive research and testing, the program manager determined that the event with the spacecraft is an unverifiable failure with a low probability of occurrence and low mission impact and decided not to remove the computer from the spacecraft to resolve the issue. We estimate that if the contractor continues to perform as it has through fiscal year 2008, the work under the contract at completion in September 2011 could exceed its budgeted cost of $1.6 billion by between $621.7 million and $1.2 billion. In June 2008, a delivery order under the Targets and Countermeasures’ element that is developing a new family of targets—the Flexible Target Family (FTF)—performed a rebaseline as a result of experiencing manufacturing delays to several components. The majority of the delays were from qualification failures, subsequent redesigns, and requalification efforts. The rebaseline was to realign the work under the contract to reflect realistic hardware delivery dates. This rebaseline did not affect cost variances, but did rebaseline major milestone delivery dates and, as a result, set some of the previously existing schedule variances to zero. The Targets and Countermeasures contractor made gains with a favorable $23.2 million fiscal year schedule variance due in part to the rebaseline in June 2008. However, the contractor ended the year with an unfavorable cumulative schedule variance of $6.4 million which was primarily driven by delays in the completion of the FTF qualification program. The program also ended the year with a cumulative cost variance of $52.8 million which the contractor attributed to costs associated with the FTF’s avionics components integration and qualification issues, and more effort than expected required on motors for one of the targets in the program. See figure 18 below for an illustration of cumulative cost and schedule variances during the course of the fiscal year. The contractor attributes its unfavorable fiscal year cost variances of $35.7 million to the increased cost of completing the first four FTF 72-inch targets. Delays in completing component qualification extended the period of performance which invariably led to higher costs. In addition, the contractor cites cost increases to the failure of one of its targets in July 2008 that added mission assurance and testing cost to the follow-on mission using the same target configuration. We estimate that if the contractor continues to perform as it has in the past, it will overrun its budgeted cost of $1.1 billion at contract’s end in December 2009 by between $63.7 million and $75.9 million. The Terminal High Altitude Area Defense (THAAD) program experienced target issues during fiscal year 2008. The THAAD program performed a realignment in May 2008 to extend the flight test program after experiencing several delayed target deliveries. Because of the cost impact of these delayed targets, the program will increase its value of the work under its contract by approximately $80 million. The THAAD program performed a similar realignment in December 2006 as a result of delayed target deliveries as well. As a result of this realignment, the program extended its flight test program and added an estimated $121 million to the value of work under its contract. The THAAD contractor experienced downward trends in its cost and schedule performance during fiscal year 2008. The program overran its budgeted costs for the fiscal year by $33.5 million. It was also unable to accomplish $7.4 million worth of work during the fiscal year. Both of these unfavorable variances added to the negative cumulative cost and schedule variances of $228.7 million and $16.5 million, respectively, as shown in figure 19. The THAAD prime contractor’s fiscal year cost overrun of $33.5 million was primarily caused by the radar, missile, and launcher portions of work. Design problems delayed the prime power unit design review and slowed parts production, causing the radar’s negative cost trend. In addition, the missile’s negative cost trend for this same period was driven by design complexity, ongoing rework/retest of subsystems, unexpected qualification discoveries, and unfavorable labor variances at key subcontractors. Lastly, the launcher variances were driven by hardware and software complexities and higher-than-expected costs for transitioning a portion of this effort to a different facility for production. The contractor reports that its unfavorable fiscal year schedule variance of $7.4 million is primarily driven by the radar and missile components. The radar’s negative schedule variance is associated with vendor delays in delivering trailers for both of the system’s prime power units. The late delivery of the trailers has subsequently delayed delivery of the prime power units. Missile rework due to qualification test discoveries also negatively affected schedule performance. If the contractor continues to perform as it has through fiscal year 2008, we project that at the contract’s completion currently scheduled for September 2009, the contractor could overrun its budgeted cost of $4.6 billion by between $252 million to $274 million. On May 23, 2008, the Senate Armed Services Committee requested that we review the reasons behind the cancellation of a GMD flight test designated FTG-04. Initially, on May 1, 2008, the Director, MDA decided to delay this test due to problems discovered in a telemetry device, the Pulse Code Modulation Encoder (PCME). This device does not affect operational performance, but rather is a critical component needed to transmit flight test data only. The PCME problems were due in large part to manufacturing defects, which the manufacturers and MDA concluded likely affected all the PCMEs. However, on May 8, the Director of MDA instead decided to cancel this flight test entirely, resulting in one less GMD end-to-end intercept flight test. MDA told us that delaying the flight test until the PCMEs could be repaired would cause delays in future tests since various test assets were shared. MDA officials therefore decided to cancel FTG-04 and transfer some test objectives to other tests, including a new non-intercept flight test, FTX-03, and an already planned intercept flight test, FTG-05. Also, for some remaining objectives not captured in FTG-05 and FTX-03, MDA stated that it planned a third intercept test, FTG-X. We were asked to investigate this test cancellation and answer the following questions: Why did the MDA change its initial decision to delay FTG-04 until November 2008 and decide to cancel FTG-04 instead and what deliberative process did MDA follow in deciding to cancel FTG-04? When and how, if ever, will each of the specific test objectives previously planned for FTG-04 be accomplished? What are the implications of canceling this flight test on the ensuing test program, on demonstrating the capability of the GMD system, and on other programmatic decisions? MDA initially delayed the FTG-04 flight test because of defects in the PCME, a telemetry component in the Exoatmospheric Kill Vehicle (EKV) only needed to gather test data. Although the PCME does not affect operational performance, it is needed for test assets to determine if design and operational issues have been resolved. The FTG-04 had four prior delays and was originally scheduled for the first quarter of fiscal year 2007. In responding to these delays, multiple tests over several years were affected. Several defects contributed to the problem, the first three of which are presumed to affect all PCMEs manufactured up to that point and all 24 fielded Test Bed/Capability Enhancement (CE) I EKVs: The PCMEs experienced gold embrittlement due to lack of pretinning. Insufficient oscillator stand-off height increased thermal stress. Circuit board deflection caused by three washers missing from the board. In addition to these manufacturing defects, there were stress fractures in the solder of three PCMEs caused by the removal and replacement of a chip on the device. This chip was removed because a clock on a chip was asynchronous with another component’s clock. It was estimated that there was an 18 to 48 percent chance of the loss of telemetry data at some point during a flight test due to the asynchronous chip problem. Again, all 24 fielded Test Bed/CE-I EKVs have the chip with this problem. This chip does not affect operational performance, but rather is a critical component needed to transmit flight test data only. See table 10 for timeline of events related to this cancellation. The contractor, Boeing, and the subcontractors, Raytheon and the manufacturer of the component, L-3, took actions to mitigate the problem. They eliminated the gold embrittlement problem by sending the oscillator out for pretinning, they designed custom washers for two already produced PCMEs and raised three bosses for new PCMEs to eliminate the need for washers, and they tightened tolerances on the board to eliminate the deflection issue. These first three PCME manufacturing improvements were finalized on May 16, 2008. They also made changes to correct the chip with the asynchronous clock problem in all newly manufactured PCMEs. None of the previously fielded GBIs will be refurbished with improved PCMEs needed for flight tests, but the GBIs emplaced starting in October 2008 and thereafter have the improved PCME. On May 1, 2008, MDA’s Program Change Board considered five options. 1. Execute FTG-04 as scheduled, using payload (32) “as is” 2. Continue diagnostic testing of payload 32, but if decision was made that it was not ready, substitute payload 33, leading to a delay in the test schedule 3. Refurbish payload 32, but if it did not improve, substitute payload 4. Immediately replace payload 32 with 33 without further testing 5. Immediately return payload 32 for repair The Director, MDA chose option 5, delaying the FTG-04 into the November to December 2008 timeframe, but keeping the program on track to provide this intercept data as planned. MDA consulted the test community, Director, Operational Test and Evaluation (DOT&E) and the BMDS Operational Test Agency, on this initial decision to delay the test and both agreed with this decision. According to MDA, the Director also asked for options for a sensor test in the summer of 2008. On May 8, 2008, MDA’s Program Change Board reconvened to consider three options for a sensor test (FTX-03) and canceling instead of delaying FTG-04: 1. Conduct FTX-03, with a baseline like the planned FTG-04, but without a live intercept attempt. 2. Conduct FTX-03 with a baseline like the FTG-05, an intercept flight test to be conducted in December 2008. 3. Similar to option 2, but with more sensor data collected. The Director MDA changed the May 1 decision to delay, refurbish and fly the planned FTG-04 test and chose instead to cancel FTG-04 and pursue the modified option 3 above. Choosing option 3 resulted in restructuring the intercept test into a test designed to assess multiple sensor integration capability. This new test benefited sensor modeling and simulation as post-flight reconstruction could occur now on two missions. According to MDA, it canceled the FTG-04 at the May 8, 2008 meeting instead of delaying it, in part, because rescheduling FTG-04 would have caused a major delay in another test, the Distributed Ground Test-03 (GTD-03). GTD-03 and FTG-04 required many of the same assets, so conducting FTG-04 would have delayed GTD-03 and thus the delivery of this new capability by four months. Ground tests assess the increased BMDS capability to be fielded next and GTD-03 was to provide the means by which a more realistic simulation of threats and scenarios and the means by which new software capability could be declared ready to move into the operational baseline. MDA consulted with BMDS Operational Test Agency officials on this decision and they supported it. DOT&E was not consulted on this decision and expressed concern that the elimination of any intercept test reduced the opportunity to gather additional data that might have increased confidence in models and simulations. DOT&E has repeatedly expressed concerns over the lack of test data needed to validate MDA’s models and simulations. According to MDA, all FTG-04 test objectives were allocated to other flight tests. However, partly due to differences in how MDA describes test objectives, it is unclear whether all planned FTG-04 test objectives will be accomplished in follow-on tests. The loss of a primary objective, an intercept of a complex target scene, will slow MDA’s efforts to build confidence in the EKV’s ability to consistently achieve intercepts, unless an additional intercept is scheduled. In August 2008, MDA informed Congress that it planned to conduct a new intercept test called FTG-X in fiscal year 2009. However, in January 2009 MDA stated that the FTG-X intercept test was never formally approved and is no longer planned. In addition, some test objectives related to modeling and simulations have been redefined so it is unclear whether they will be fully tested. Models and simulations are critical to understanding and assessing the performance of the BMDS because flight tests are limited by their cost, complexity, and range safety constraints. Modeling and simulation is therefore the primary way to fully assess the overall performance of the BMDS and its various components. According to DOT&E, cancellation of FTG-04 reduced interceptor and EKV data available for modeling, leaving only two intercepts (FTG-3a and FTG-05) that have provided complete sets of information. In October 2008, MDA stated that modification of FTG-04 into a sensor test eliminated a second opportunity to anchor the models of EKV-fielded software. Test objectives in MDA planning documents describe modeling and simulation objectives at a high level. However, it is difficult to determine whether modeling and simulation objectives are addressed in the near term because the objectives are defined differently for each test. For example, the FTX-03 and FTG-05 objectives do not distinguish between primary and secondary objectives while the FTG-04 does. One objective that seems to be absent in the FTG-05 and FTX-03 is to collect data to support validation and anchoring of system-level (vs. element-level) simulations, MDA stated that the exclusion from the test objectives was inadvertent and it will be addressed by the tests. BMDS Operational Test Agency objectives related to the GBI engagement were not met, although the test agency officials indicate the majority of their non-intercept sensor related objectives for FTG-04 were met in the FTX-03 test. However, BMDS Operational Test Agency officials state that some of their intercept objectives may be addressed through a combination of previous intercept test, FTG-03a, and recently conducted FTG-05. Finally, several warfighter objectives for FTG-04, related to tactics, techniques, and procedures, will be met through the ground tests instead because, according to the warfighter representative at the BMDS Operational Test Agency, flight tests do not offer the best opportunity to assess this kind of objective. The cancellation has increased the strain on the ensuing test program. GMD’s current plans call for two intercept attempts in fiscal year 2009— FTG-05, which was conducted in December 2008, and FTG-06—and one booster verification test. This is an ambitious schedule as GMD has been able to conduct only one intercept flight test per year—FTG-02 in September 2006, FTG-03a in September 2007 and FTG-05 in December 2008. MDA had planned to conduct five intercept tests with varying stresses to assess the EKV capability between February 2007 and December 2008. Flight test failures and test plan revisions caused MDA to only carry out two intercept tests in that period—FTG-03a and FTG-05— both of which resulted in an intercept. In addition, the number of future flight tests planned has been reduced. MDA has not funded or scheduled an intercept replacement for FTG-04. In January 2008 MDA decided to merge two intercept tests—FTG-06 and FTG-07—into one single intercept attempt. This merger removes another opportunity to gather end-game EKV performance data needed to assess capability. In January 2008 MDA also decided to accelerate a two-stage verification non-intercept test required to assess the European component. The cancellation of FTG-04 removed one chance to obtain end-game performance data needed to develop GMD models and to assess the capability of the CE-I EKV. The repetition of intercept-related objectives is important to build confidence in the intercept capability. These models are the primary way to fully assess the overall system performance, since flight tests are limited by their cost, complexity and range safety concerns. MDA planned to test the CE-I EKV against a dynamic target scene with countermeasures in both FTG-04 and FTG-05. FTG-04 was canceled and an FTG-05 target anomaly affected this objective. According to MDA, no more CE-I EKV flight tests have been approved, although it is considering whether to conduct an intercept test using a CE-I EKV in the future. GMD developed some mitigations to various developmental issues, but realistic flight testing is needed to anchor the models and to determine the effectiveness of these mitigations. The test cancellation and target problems have reduced the knowledge that MDA expected to use for its upcoming end-to-end performance assessment. Performance assessments are annual system-level assessments to test, evaluate, and characterize the operational capability of the BMDS as of the end of the calendar year. Currently, MDA has only completed one—Performance Assessment 2007. Furthermore, acting on a joint recommendation between MDA and the Operational Test Agency, MDA officials canceled their 2008 performance assessment efforts in April 2008 because of developmental risks associated with modeling and simulations. Instead, MDA is focusing on testing and models for Performance Assessment 2009. However, the planned performance information available for Performance Assessment 2009 will be reduced. The FTG-04 cancellation reduced one set of data that was expected to be available. In addition, both FTX-03 and FTG-05 will be used to anchor data for Performance Assessment 2009, but target anomalies in each test precluded the completion of all planned test objectives. Neither target presented the complexity needed for advanced algorithm development. Manufacturing and emplacement continue unabated by reductions and delays in tests. Twenty-four CE-I GBIs have been fielded and the new CE-II GBIs are now being fielded without important knowledge about the systems capabilities expected to be gained through tests. The first CE-II GBI emplacement occurred prior to any flight testing of this configuration. The first flight test is FTG-06 currently scheduled to occur no earlier than the fourth quarter of fiscal year 2009. According to MDA, these CE-II GBIs will not be declared operational until after the successful completion of FTG-06. FTG-04 was also identified as a key source of data supporting a number of capabilities declarations. The cancellation of FTG-04, plus other testing delays, prompted MDA to defer some capabilities and to declare others based on previous tests. The cancellation of the FTG-04 flight test increases the risk to the GMD program and to the overall BMDS capability, since the lack of adequate intercept data adversely affects confidence that the system could perform as intended in a real-world situation. The GMD program has reduced its plans to assess operational performance of the fielded configuration between February 2007 and December 2008 from five to two intercept tests, leaving gaps in knowledge about the repeatability of the performance of fielded assets. In addition, the opportunity to obtain additional intercept data vital to the anchoring of models and simulations has been lost, unless the FTG-X flight test is conducted, adding to an existing concern expressed by DOT&E. Despite test reductions and effects on assessing system-level performance, production and fielding of assets continues as planned. The two tables below list test events supporting MDA capability declarations during fiscal year 2008 for certain engagement sequence groups in Blocks 1.0 through 3.0 (see table 11), as well as for the full completion of Bock 1.0 by the end of fiscal year 2009 (see table 12). Both tables illustrate that MDA reduced the basis for declaring certain engagement sequence groups as early or fully capable. The basis for declaring an early, partial, or full capability includes flight and ground tests as well as performance assessments. To examine the progress MDA made in fiscal year 2008 toward its cost, schedule, testing, and performance goals, we examined the efforts of 10 BMDS elements that MDA is developing and fielding. The elements included in our review collectively accounted for 80 percent of MDA’s fiscal year 2008 research and development budget requests. In assessing each element, we examined the BMDS Fiscal Year 2008 Statement of Goals, Program Execution Reviews, test plans and reports, production plans, Contract Performance Reports, MDA briefings, and earned value management data. We developed data collection instruments that were completed by MDA and each element program office. The instruments gathered detailed information on planned and completed program activities including tests, design reviews, prime contracts, estimates of element performance, and challenges facing the elements. In addition, we discussed fiscal year 2008 progress and performance with officials in MDA’s Agency Operations Office, each element program office, as well as the Office of DOD’s Director, Operational Test and Evaluation, and DOD’s Operational Test Agency. To assess each element’s progress toward its cost goals, we reviewed Contract Performance Reports and, when available, the Defense Contract Management Agency’s analyses of these reports. We applied established earned value management techniques to data captured in Contract Performance Reports to determine trends and used established earned value management formulas to project the likely costs of prime contracts at completion. To evaluate the sufficiency of MDA’s modeling and simulation practices, we reviewed DOD and MDA policies, memos, flight and test plans related to modeling and simulations, the Acquisition Modeling and Simulation Master plan, as well as verification, validation and accreditation plans and reports for various elements, and MDA white papers discussing modeling and simulation techniques. We also interviewed officials in element program offices to discuss modeling and simulation plans and procedures particular to each. In assessing MDA’s accountability, transparency, and management controls, we interviewed officials from the Office of the Under Secretary of Defense’s Office for Acquisition, Technology, and Logistics, as well officials in the MDA Agency Operations Directorate. We also reviewed an Institute for Defense Analysis study, two Congressional Research Service reports, a Congressional Budget Office report, U.S. Code, DOD acquisition system policy, various DOD directives, the Missile Defense Executive Board charter, and various MDA statements and documents related to the agency’s block structure. To ensure that MDA-generated data used in our assessment are reliable, we evaluated the agency’s management control processes. We discussed these processes with MDA senior management. In addition, we confirmed the accuracy of MDA-generated data with multiple sources within MDA and, when possible, with independent experts. To assess the validity and reliability of prime contractors’ earned value management systems and reports, we interviewed officials and analyzed audit reports prepared by the Defense Contract Audit Agency. Finally, we assessed MDA’s internal accounting and administrative management controls by reviewing MDA’s Federal Manager’s Financial Integrity Report for Fiscal Years 2003, 2004, 2005, 2006, 2007, and 2008. Our work was performed primarily at MDA headquarters in Arlington, Virginia. At this location, we met with officials from the Aegis Ballistic Missile Defense Program Office; Airborne Laser Program Office; Command, Control, Battle Management, and Communications Program Office; MDA’s Agency Operations Office; DOD’s Office of the Director, Operational Test and Evaluation; and the Office of the Under Secretary of Defense for Acquisition, Technology and Logistics. In addition, in Huntsville, Alabama, we met with officials from the Ground-based Midcourse Defense Program Office, the Sensors Program Office, the Terminal High Altitude Area Defense Project Office, the Kinetic Energy Interceptors Program Office, the BMDS Kill Vehicles Program Office, the Targets and Countermeasures Program Office, and the Office of the Director for BMDS Tests. We also met with Space Tracking and Surveillance System officials in El Segundo, California. In December 2007, the conference report accompanying the National Defense Authorization Act for Fiscal Year 2008 noted the importance of DOD and MDA providing information to GAO in a timely and responsive manner to facilitate the review of ballistic missile defense programs. During the course this audit, we experienced significant delays in obtaining information from MDA. During the audit, MDA did not provide GAO staff with expeditious access to requested documents which delayed some audit analysis and contributed to extra staff-hours. Of the documents we requested, we received approximately 19 percent within the 10-15 business day protocols that were agreed upon with MDA. Pre-existing documentation took MDA on average about 50 business days to provide and many pre-existing documents took over 100 business days to be provided to GAO. Notwithstanding these delays, we were able to obtain the information needed to satisfy our objectives in accordance with generally accepted government auditing standards. We conducted this performance audit from May 2008 to March 2009 in accordance with generally accepted government auditing standards. Those standards require that we plan and perform the audit to obtain sufficient, appropriate evidence to provide a reasonable basis for our findings and conclusions based on our audit objectives. We believe that the evidence obtained provides a reasonable basis for our findings and conclusions based on our audit objectives. In addition to the contact named above, David Best, Assistant Director; LaTonya Miller; Beverly Breen; Ivy Hübler; Tom Mahalek; Steven Stern; Claire Cyrnak; Isabella Johnson; Meredith Allen Kimmett; Kenneth E. Patton; Karen Richey; and Alyssa Weir made key contributions to this report. | The Missile Defense Agency (MDA) has spent about $56 billion and will spend about $50 billion more through 2013 to develop a Ballistic Missile Defense System (BMDS). GAO was directed to assess the annual progress MDA made in developing the BMDS as well as improvements in accountability and transparency in agency operations, management processes, and the new block strategy. To accomplish this, GAO reviewed contractor cost, schedule, and performance; tests completed; and the assets fielded during 2008. GAO also reviewed pertinent sections of the U.S. Code, acquisition policy, and the activities of the new Missile Defense Executive Board (MDEB). An appendix on the effect the cancellation of a Ground-based Midcourse Defense flight test had on BMDS development is also included. Cost: MDA has not yet established baselines for total costs or unit costs, both fundamental markers most programs use to measure progress. Consequently, for the sixth year, GAO has not been able to assess MDA's actual costs against a baseline of either total costs or unit costs. MDA planned to establish such baselines in 2008 in response to past GAO recommendations, but has delayed this until 2009. GAO was able to assess the cost performance on individual contracts, and project an overrun at completion of between $2 billion and $3 billion. However, because in some cases the budgeted costs at completion--the basis for our projection--has changed significantly over time as adjustments were made, this projection does not capture as cost growth the difference between the original and current budgeted costs at completion. In one case, these costs increased by approximately five times its original value. Performance and Testing: While MDA completed several key tests that demonstrated enhanced performance of the BMDS, all elements of the system had test delays and shortfalls. Overall, testing achieved less than planned. For example, none of the six Director's test knowledge points established by MDA for 2008 were achieved. Poor performing target missiles have been a persistent problem. Testing shortfalls have slowed the validation of models and simulations, which are needed to assess the system's overall performance. Consequently, the performance of the BMDS as a whole can not yet be determined. Schedule: Although fewer tests have been conducted than planned, the production and fielding of assets has proceeded closer to schedule. Except for no ground-based interceptors being delivered, all other radars, standard missiles, and software were delivered as planned. However, some deliveries, such as enhanced Exoatmospheric Kill Vehicles, will now precede test results. In most cases, MDA has also reduced the bases it planned to use to declare when capabilities are operational in the field. Thus, fielding decisions are being made with a reduced understanding of system effectiveness. Transparency, Accountability, and Oversight: Improvement in this area has been limited. The Missile Defense Executive Board (MDEB) has acted with increased authority in providing oversight of MDA and the BMDS. However, transparency and accountability into MDA's work is limited by the management fluidity afforded through the lack of cost baselines, an unstable test baseline, continued use of development funds to produce assets for fielding, and renewed potential for transferring work from one predefined block to another. A better balance must still be struck between the information Congress and the Department of Defense need to conduct oversight of the BMDS and the flexibility MDA needs to manage across the portfolio of assets that collectively constitute the system's capability. At this point, the balance does not provide sufficient information for effective oversight. |
GAO’s body of work related to prior workforce reductions at DOD and other organizations demonstrates the importance of strategic workforce planning, including a consideration of costs, to help ensure that DOD has a fully capable workforce to carry out its mission. According to GAO’s Standards for Internal Control, management should ensure that skill needs are continually assessed and that the organization is able to obtain a workforce that has the required skills that match those necessary to achieve organizational goals. Section 322 of the National Defense Authorization Act for Fiscal Year 1991 directed DOD to establish guidelines for reductions in the number of civilian workers employed by industrial or commercial type activities. The act also directed certain DOD agencies or components to submit 5 year master plans for those workers, providing information on workload, demographics, and employee furloughs and involuntary separations, with the materials submitted to Congress in support of the budget request for fiscal year 1991. Subsequently, in 1992, we reported that DOD intended to undertake a multiyear downsizing effort aimed at reducing the civilian workforce by nearly 229,000 positions, or to 20 percent below its fiscal year 1987 levels. However, in 2000, we reported that DOD’s approach to prior force reductions was not oriented toward shaping the makeup of the workforce, resulting in significant imbalances in terms of shape, skills, and retirement eligibility. GAO, Defense Force Management: Expanded Focus in Monitoring Civilian Force Reductions Is Needed, GAO/T-NSIAD-92-19 (Washington, D.C.: March 18, 1992); and Defense Force Management: Challenges Facing DOD as It Continues to Downsize Its Workforce, GAO/NSIAD-93-123 (Washington, D.C.: February 12, 1993). Realignment round and the impacts of Operations Desert Shield and Desert Storm. We concluded that broader assessments were needed to determine the magnitude of civilian workforce reductions and their potential impact on given areas and regions, as well as the impact of hiring constraints on the ability of all DOD civilian organizations to efficiently and effectively accomplish their missions. We also have reported that the approaches DOD has relied on to accomplish past civilian workforce downsizing have sometimes had unintended consequences, such as workforce skills imbalances. For instance, DOD’s approach to past civilian downsizing relied primarily on voluntary attrition and retirements and varying freezes on hiring authority to achieve force reductions, as well as the use of existing authorities for early retirements to encourage voluntary separations at activities facing major reductions-in-force. The National Defense Authorization Act for Fiscal Year 1993 authorized a number of transition assistance programs for civilian employees, including financial separation incentives— ”buyouts”—to induce the voluntary separation of civilian employees. DOD credited the use of these separation incentives, early retirement authority, and various job placement opportunities in its avoidance of nearly 200,000 involuntary demotions and separations. The tools available to DOD to manage its civilian downsizing helped mitigate some adverse effects of force reductions. However, DOD’s approach to civilian workforce reductions was less oriented toward shaping the makeup of the workforce than was the approach it used to manage its military downsizing and resulted in significant imbalances in terms of shape, skills, and retirement eligibility. We also reported that, while managing force reductions for its uniformed military, DOD followed a policy of trying to achieve and maintain a degree of balance between its accessions and losses in order to “shape” its uniformed forces in terms of rank, years of service, and specialties. In contrast, we did not see as much attention devoted to planning and managing civilian workforce reductions. Moreover, the Acquisition 2005 Task Force’s final reportinstance, that this was especially true of the civilian acquisition workforce, which from September 1989 to September 1999 was reduced by almost 47 percent. This rate of reduction substantially exceeded that of the rest of the DOD workforce. Eleven consecutive years of downsizing produced serious imbalances in the skills and experience of the highly talented and specialized civilian acquisition workforce, putting DOD on the verge of a retirement-driven talent drain. Our work on the downsizing conducted by other organizations adds further perspective on some challenges associated with certain strategies and the need to conduct effective planning when downsizing a workforce. of downsizing undertaken by 17 private In 1995, we conducted a review companies, 5 states, and 3 foreign governments, generally selected because they were reputed to have downsized successfully. We reported that a number of factors may constrain organizations’ downsizing strategies, such as public sentiment, budget limitations, legislative mandates to maintain certain programs, and personnel laws. Moreover, we found that using attrition as a sole downsizing tool can result in skills imbalances in an organization’s workforce because the employees who leave are not necessarily those the organization determined to be excess. Further, we also found that attrition is often not sufficient to reduce employment levels in the short term. In addition, some workforce reduction strategies have been found to slow the hiring, promotion, and transfer process and create skills imbalances. However, we found that one key theme emerged from such downsizing efforts. Specifically, most organizations found that workforce planning had been essential in identifying positions to be eliminated and pinpointing specific employees for potential separation. In organizations where planning did not occur or was not effectively implemented, difficulties arose in the downsizing. For example, we reported that a lack of effective planning for skills retention can lead to a loss of critical staff, and that an organization that simply reduces the number of employees without changing work processes will likely have staffing growth recur eventually. We have also identified the potential cost implications of downsizing in our prior work. In 1995, we reported that the savings realized from government downsizing efforts are difficult to estimate. Payroll savings attributed to workforce reductions would not be the amount of actual savings to the federal government from the personnel reductions because of other costs associated with such efforts—for example, separation incentives— or, in the case of reductions-in-force, severance pay. In addition, the ultimate savings would depend on what happened to the work previously performed by the eliminated personnel. For example, if some of the work was contracted out to private companies, contract costs should be considered in determining whether net savings resulted from workforce reductions. In 2001, we concluded that, considering the enormous changes that DOD’s civilian workforce had undergone and the external pressures and demands faced by the department, taking a strategic approach to human capital would be crucial to organizational results. As I will discuss further, this is no less true today than it was in 2001. I turn now to opportunities we have identified for DOD to enhance its strategic human capital planning. Since the end of the Cold War, the civilian workforce has undergone substantial change, due primarily to downsizing, base realignments and closures, competitive sourcing initiatives, and DOD’s changing mission. For example, between fiscal years 1989 and 2002, DOD’s civilian workforce shrank from 1,075,437 to 670,166—about a 38 percent reduction. According to the department, as of January 2012, DOD’s total civilian workforce had grown to include about 783,000 civilians. As I have noted, the achievement of DOD’s mission is dependent in large part on the skills and expertise of its civilian workforce, and today’s current and long-term fiscal outlook underscore the importance of a strategic and efficient approach to human capital management. The ability of federal agencies to achieve their missions and carry out their responsibilities depends in large part on whether they can sustain a workforce that possesses the necessary education, knowledge, skills, and competencies. Our work has shown that successful public and private organizations use strategic management approaches to prepare their workforces to meet present and future mission requirements. Preparing a strategic human capital plan encourages agency managers and stakeholders to systematically consider what is to be done, how it will be done, and how to gauge progress and results. While the department has made progress adopting some of these approaches, we remain concerned that some missing key elements of strategic workforce planning will hinder DOD’s ability to most effectively and efficiently achieve its mission. As we have reported in the past, federal agencies have used varying approaches to develop and present their strategic workforce plans. To facilitate effective workforce planning, we and the Office of Personnel Management have identified six leading principles such workforce plans should incorporate, including: aligning workforce planning with strategic planning and budget involving managers, employees, and other stakeholders in planning; identifying critical skills and competencies and analyzing workforce gaps; employing workforce strategies to fill the gaps; building the capabilities needed to support workforce strategies through steps to ensure the effective use of human capital flexibilities; and monitoring and evaluating progress toward achieving workforce planning and strategic goals. The application of these principles will vary depending on the particular circumstances the agency faces. For example, an agency that is faced with the need for a long lead time to train employees hired to replace those retiring and an increasing workload may focus its efforts on estimating and managing retirements. Another agency with a future workload that could rise or fall sharply may focus on identifying skills to manage a combined workforce of federal employees and contractors. Over the past few years, Congress has enacted a number of provisions requiring DOD to conduct human capital planning efforts for its overall civilian, senior leader, and acquisition workforces and provided various tools to help manage the department’s use of contractors, who augment DOD’s total civilian workforce. For example, the National Defense Authorization Act for Fiscal Year 2006 directed DOD to create and periodically update a strategic human capital plan that addressed, among other things, the existing critical skills and competencies of the civilian workforce as well as projected needs, gaps in the existing or projected civilian workforce, and projected workforce trends. Subsequent acts established additional requirements for the human capital plan, including requirements to assess issues related to funding of its civilian workforce. We have closely monitored DOD’s efforts to address the aforementioned requirements. In our September 2010 review of DOD’s 2009 update to its human capital strategic plan we found that, although DOD had demonstrated some progress in addressing the legislative requirements related to its Civilian Human Capital Strategic Workforce Plan, several key elements continued to be missing from the process—including such elements as competency gap analyses and monitoring of progress. Our work found that DOD’s plan addressed the requirement to assess critical skills. Specifically, the overall civilian workforce plan identified 22 mission- critical occupations that, according to the department, represent the results of its assessment of critical skills. According to DOD, mission- critical occupations are those occupations that are key to current and future mission requirements, as well as those that present a challenge regarding recruitment and retention rates and for which succession planning is needed. Examples of mission-critical occupations include (1) contracting, (2) accounting, and (3) information technology management. However, as noted, DOD’s plan lacked such key elements as competency gap analysis and monitoring of progress. Our prior work identified competency gap analyses and monitoring progress as two key elements in the strategic workforce planning process. Competency gap analyses enable an agency to develop specific strategies to address workforce needs and monitoring progress demonstrates the contribution of workforce planning to achieving program goals. For example, at the time of our review, because the plan discussed competency gap analyses for only 3 of the 22 mission-critical occupations and did not discuss competency gaps for the other 19 mission-critical occupations, we determined that the requirement was only partially addressed. Moreover, DOD was in the initial stages of assessing competency gaps for its senior leader workforce, but it had not completed the analysis needed to identify gaps. Without including analyses of gaps in critical skills and competencies as part of its strategic workforce planning efforts, DOD and the components may not be able to design and fund the best strategies to fill their talent needs through recruiting and hiring or to make appropriate investments to develop and retain the best possible workforce. Further, DOD leadership may not have information necessary to make informed decisions about future workforce reductions, should further reductions to its workforces become necessary. We currently have ongoing work assessing DOD’s 2010 Strategic Workforce Plan, which the department released in March 2012. The results of this review are expected to be released in September 2012. In light of the challenges DOD has faced in its strategic workforce planning, we support the department’s participation in efforts being made across the federal government to address governmentwide critical skills gaps. Currently, the Office of Personnel Management and DOD are leading a working group comprised of members of the Chief Human Capital Officers Council tasked with (1) identifying mission-critical occupations and functional groups, (2) developing strategies to address gaps in these occupations and groups, and (3) implementing and monitoring these strategies. Our reviews of DOD’s acquisition, information technology, and financial management workforces—which include a number of DOD’s identified mission-critical occupations—amplifies some of our overarching observations related to strategic workforce planning. In fiscal year 2011 alone, DOD obligated about $375 billion to acquire goods and services to meet its mission and support its operations in the United States and abroad. As noted, our prior work found that the significant reductions to the acquisition workforce in the 1990s produced serious imbalances in the skills and experience of this highly talented and specialized workforce. The lack of an adequate number of trained acquisition and contract oversight personnel has, at times, contributed to unmet expectations and placed DOD at risk of potentially paying more than necessary. Our February 2011 high-risk report noted that DOD needs to ensure that its acquisition workforce is adequately sized, trained, and equipped to meet department needs. We further reported in November 2011 that the department has focused much-needed attention on rebuilding its acquisition workforce and made some progress in terms of growing the workforce, identifying the skills and competencies it needed, and used such information to help update its training curriculum. While DOD has acknowledged that rebuilding its acquisition workforce is a strategic priority, our most recent review of the Defense Acquisition Workforce Development Fund found that DOD continues to face challenges in strategic workforce planning for its acquisition workforce. Specifically, we found that DOD lacks an overarching strategy to clearly align this fund with its acquisition workforce plan. The department has also not developed outcome-related metrics, such as the extent to which the fund is helping DOD address its workforce skills and competencies gaps. Moreover, we remain concerned that the acquisition workforce continues to face challenges in terms of the age and retirement eligibility of its members. According to the most recent reported data from the Federal Acquisition Institute, as of December 2011, the average age of the acquisition workforce ranged from 47 years to 51.7 years, with at least 36 percent of the workforce becoming eligible to retire over the next 10 years. We have also identified a number of challenges associated with DOD’s workforce planning for its financial management and information technology workforces. With regard to the financial management workforce, we reported in July 2011 that DOD’s financial management has been on GAO’s high-risk list since 1995 and, despite several reform initiatives, remains on the list today. Specifically, we noted that effective financial management in DOD will require a knowledgeable and skilled workforce that includes individuals who are trained and certified in accounting. DOD accounting personnel are responsible for accounting for funds received through congressional appropriations, the sale of goods and services by working capital fund businesses, revenue generated through nonappropriated fund activities, and the sales of military systems and equipment to foreign governments or international organizations. According to DOD’s fiscal year 2012 budget request, the Defense Finance and Accounting Service processed approximately 198 million payment-related transactions and disbursed over $578 billion in fiscal year 2010. However, we also reported in July 2011 that DOD’s strategic workforce plan lacked a competency gap analysis for its financial management workforce, thus limiting the information DOD has on its needs and gaps in that area and the department’s ability to develop an effective financial management recruitment, retention, and investment strategy to address other financial management challenges. With regard to DOD’s information technology workforce, we reported2011 that, as threats to federal information technology infrastructure and systems continue to grow in number and sophistication, the ability to secure these infrastructure and systems will depend on the knowledge, skills, and abilities of the federal and contractor workforce that implements and maintains these systems. We noted that DOD’s information assurance workforce plan—which addresses information technology—incorporates critical skills, competencies, categories, and specialties of the information assurance workforce, but only partially describes strategies to address gaps in human capital approaches and critical skills competencies. DOD’s workforce is comprised of military personnel, civilians, and contractors. DOD has acknowledged, however, that with approximately 30 percent of its workforce eligible to retire by March 31, 2015, and the need to reduce its reliance on contractors to augment the current workforce, it faces a number of significant challenges. Our September 2010 review of DOD’s strategic workforce plan found that the department had issued a directive stating that missions should be accomplished using the least costly mix of personnel (military, civilian, and contractors) consistent with military requirements and other needs. However, the department’s workforce plan did not provide an assessment of the appropriate mix of military, civilian, and contractor personnel capabilities. accompanying a proposed bill for the More recently, the House Report National Defense Authorization Act for Fiscal Year 2013 directs GAO to assess what measures DOD is taking to appropriately balance its current and future workforce structure against its requirements. Specifically, we plan for our review to include: (1) the process by which DOD identified its civilian workforce requirements, taking into consideration the withdrawal from Iraq and impending withdrawal from Afghanistan; and (2) the analysis done by DOD to identify core or critical functions, including which of those functions would be most appropriately performed by military, civilian, or contractor personnel. Our report is due to the Armed Services Committees of the House and Senate by March 15, 2013. H.R. Rep. No. 112-479, at 196-197 (2012), which accompanies H.R. 4310, 112th Cong. (2012). In conclusion, DOD has a large, diverse federal civilian workforce that is key to maintaining our national security. However, as we have noted, DOD’s workforce also includes military and contractor personnel and changes made to one of these groups may impact the others. As such, we are currently assessing the measures the department is taking to appropriately balance its current and future workforce structure and its requirements. Chairman Forbes, Ranking Member Bordallo, this concludes my prepared remarks. I would be happy to respond to any questions that you or other Members of the Subcommittee may have at this time. For future questions about this statement, please contact Brenda S. Farrell, Director, Defense Capabilities and Management, at (202) 512-3604 or [email protected]. In addition, contact points for our Offices of Congressional Relations and Public Affairs may be found on the last page of this statement. Individuals who made key contributions to this statement include Margaret Best, Assistant Director; Spencer Tacktill; Jennifer Weber; Erik Wilkins-McKee; Nicole Willems; and John Van Schaik. In addition, Penny Berrier, Mark Bird, Timothy DiNapoli, Gayle Fischer, Steven Lozano, Belva Martin, Carol Petersen, and Rebecca Shea made contributions to this report. Defense Acquisition Workforce: Improved Processes, Guidance, and Planning Needed to Enhance Use of Workforce Funds. GAO-12-747R. Washington, D.C.: June 20, 2012. Defense Acquisitions: Further Actions Needed to Improve Accountability for DOD’s Inventory of Contracted Services. GAO-12-357. Washington, D.C.: April 6, 2012. Defense Workforce: DOD Needs to Better Oversee In-sourcing Data and Align In-sourcing Efforts with Strategic Workforce Plans. GAO-12-319. Washington, D.C.: February 9, 2012. Streamlining Government: Key Practices from Select Efficiency Initiatives Should Be Shared Governmentwide. GAO-11-908. Washington, D.C.: September 30, 2011. DOD Financial Management: Numerous Challenges Must Be Addressed to Improve Reliability of Financial Information. GAO-11-835T. Washington, D.C.: July 27, 2011. DOD Civilian Personnel: Competency Gap Analyses and Other Actions Needed to Enhance DOD’s Strategic Workforce Plans. GAO-11-827T. Washington, D.C.: July 14, 2011. High Risk Series: An Update. GAO-11-278. Washington, D.C.: February 16, 2011. Human Capital: Further Actions Needed to Enhance DOD’s Civilian Strategic Workforce Plan. GAO-10-814R. Washington, D.C.: September 27, 2010. Workforce Planning: Interior, EPA, and the Forest Service Should Strengthen Linkages to Their Strategic Plans and Improve Evaluation. GAO-10-413. Washington, D.C.: March 31, 2010. Human Capital: Opportunities Exist to Build on Recent Progress to Strengthen DOD’s Civilian Human Capital Strategic Plan. GAO-09-235. Washington, D.C.: February 10, 2009. High Risk Series: An Update. GAO-07-310. Washington, D.C.: January 31, 2007. Human Capital: Agencies Are Using Buyouts and Early Outs with Increasing Frequency to Help Reshape Their Workforces. GAO-06-324. Washington, D.C.: March 31, 2006. DOD Civilian Personnel: Comprehensive Strategic Workforce Plans Needed. GAO-04-753. Washington, D.C.: June 30, 2004. Human Capital: Major Human Capital Challenges at the Departments of Defense and State. GAO-01-565T. Washington, D.C.: March 29, 2001. High Risk Series: An Update. GAO-01-263. Washington, D.C.: January 1, 2001. Human Capital: Strategic Approach Should Guide DOD Civilian Workforce Management. GAO/T-GGD/NSIAD-00-120. Washington, D.C.: March 9, 2000. Human Capital: A Self Assessment Checklist for Agency Leaders. GAO/GGD-99-179. Washington, D.C.: September 1999. Acquisition Management: Workforce Reductions and Contractor Oversight. GAO/NSIAD-98-127. Washington, D.C.: July 31, 1998. Workforce Reductions: Downsizing Strategies Used in Select Organizations. GAO/GGD-95-54. Washington, D.C.: March 13, 1995. Defense Civilian Downsizing: Challenges Remain Even With Availability of Financial Separation Incentives. GAO/NSIAD-93-194. Washington, D.C.: May 14, 1993. Defense Force Management: Challenges Facing DOD As It Continues to Downsize Its Civilian Workforce. GAO/NSIAD-93-123. Washington, D.C.: February 12, 1993. Defense Force Management: Expanded Focus in Monitoring Civilian Force Reductions Is Needed. GAO/T-NSIAD-92-19. Washington, D.C.: March 18, 1992. Defense Force Management: DOD Management of Civilian Force Reductions. GAO/T-NSIAD-92-10. Washington, D.C.: February 20, 1992. Defense Force Management: Limited Baseline for Monitoring Civilian Force Reductions. GAO/NSIAD-92-42. Washington, D.C.: February 5, 1992. This is a work of the U.S. government and is not subject to copyright protection in the United States. The published product may be reproduced and distributed in its entirety without further permission from GAO. However, because this work may contain copyrighted images or other material, permission from the copyright holder may be necessary if you wish to reproduce this material separately. | DODs workforce of 783,000 civilians performs a wide variety of duties, including some traditionally performed by military personnel, such as mission-essential logistics support and maintenance, as well as providing federal civilian experts to Afghanistan and other theaters of operations. With the long-term fiscal challenges facing the nation, reductions to the civilian workforce may be considered to achieve cost savings. Human capital has remained a critical missing link in reforming and modernizing the federal governments management practices, even as legislation and other actions since 1990 have been put in place to address major management areas. In the past, GAO has observed that the federal government has often acted as if people were costs to be cut rather than assets to be valued. DOD previously experienced significant downsizing in the 1990s where it did not focus on reshaping the civilian workforce in a strategic manner. Particularly as decision makers consider proposals to reduce the civilian workforce, it will be critical to DODs mission for the department to have the right number of federal civilian personnel with the right skills. This testimony discusses DODs 1) prior experience with civilian workforce downsizing, and 2) current strategic human capital planning efforts. This testimony is based on GAO reviews issued from March 1992 through June 2012. Prior Department of Defense (DOD) civilian workforce downsizing efforts in the 1990s were not oriented toward shaping the makeup of the workforce, resulting in significant imbalances in terms of shape, skills, and retirement eligibility. Specifically, in a series of reviews GAO found that DODs efforts in the 1990s to reduce its federal civilian workforce to levels below that of 1987 were hampered by incomplete data and lack of a clear strategy for avoiding skill imbalances and other adverse effects of downsizing. For instance, in 1992, GAO found that DOD used incomplete and inconsistent data related to workers, workload, and projected force reductions. Further, the approaches DOD has relied on to accomplish downsizing have sometimes had unintended consequences. The use of voluntary attrition, hiring freezes, and financial separation incentives allowed DOD to mitigate some adverse effects of civilian workforce reductions, but were less oriented toward shaping the makeup of the workforce than was the approach the department used to manage its military downsizing. For DOD, this was especially true of the civilian acquisition workforce. The department, which in 2011 obligated about $375 billion to acquire goods and services, was put on the verge of a retirement-driven talent drain in this workforce after 11 consecutive years of downsizing, according to a DOD report. Finally, GAO has found that the use of strategies such as financial separation incentives makes it difficult to document or estimate the actual cost savings of government downsizing efforts, especially in cases where the work previously performed by the eliminated personnel continues to be required. For example, if the work continues to be required, it may need to be contracted out to private companies and contract costs should be considered in determining whether net savings resulted from workforce reductions. DOD has taken positive steps towards identifying its critical skills, but there are opportunities to enhance the departments current strategic workforce plans. GAO and the Office of Personnel Management have identified leading principles to incorporate into effective workforce plans, such as the need to identify and address critical skills and competencies. DOD has been required to have a civilian strategic workforce plan since 2006. Currently, DOD is required to develop a strategic workforce plan that includes, among other things, an assessment of the skills, competencies and gaps, projected workforce trends, and needed funding of its civilian workforce. GAO has found improvements in DODs efforts to strategically manage its civilian workforce. For instance, GAO reported in 2010 that DODs 2009 strategic workforce plan assessed critical skills and identified 22 mission-critical occupations, such as acquisition and financial management. However, DODs plan only discussed competency gap analyses for 3 of its 22 mission-critical occupations, which GAO has reported is key to enabling an agency to develop specific strategies to address workforce needs. For example, GAO found that DOD had not conducted a competency gap analysis for its financial management workforce, and GAO remains concerned that DOD lacks critical information it needs to effectively plan for its workforce requirements. GAO is currently reviewing DODs latest strategic workforce plan, which was released in March 2012. The results of this review are expected to be released in September 2012. |
The advantages of wireless technology for federal agencies include increased flexibility, easier installation, and easier scalability than wired technologies. If a federal agency has installed a wireless infrastructure, users with wireless-enabled devices can more easily connect to the agency’s network throughout its facilities. In addition, agency employees traveling with wireless-enabled devices may be able to connect to an agency network via any one of the many public Internet access points or hot spots. Installation can be easier and less costly because the network can be established without having to pull cables through walls or ceilings or modify the physical network infrastructure. Wireless networks can also be easily scaled from small peer-to-peer networks to very large enterprise networks. For example, an agency can greatly expand the size of its wireless network and the number of users it can serve by increasing the number of access points. The following wireless technologies are commonly used by federal agencies: wireless local area network (WLAN)—a group of wireless networking nodes within a limited geographic area that serve as an extension to existing wired local area networks; wireless personal area network—used to establish small-scale wireless networks such as those using Bluetooth®, which is an open standard for short-range communication; and wireless cellular networks—a telecommunications network managed by a service provider that supports smartphones, which offer the ability to provide data such as e-mail and Web browsing wirelessly over cellular networks, and cellular data cards, which provide Internet connectivity to laptop computers. WLANs are generally composed of two basic elements: access points and other wireless-enabled client devices, such as laptop computers. These elements rely on radio transmitters and receivers to communicate with each other. Access points are physically wired to a conventional network and provide a means for wireless devices to connect to them. WLANs that are based on the Institute of Electrical and Electronics Engineers (IEEE) 802.11 standards are also known as Wi-Fi. WLANs are characterized by one of the following two basic structures, referred to as infrastructure mode and ad hoc mode: Infrastructure mode. By deploying one or more access points that broadcast overlapping signals, an organization can achieve broad wireless network coverage. Infrastructure mode enables a laptop or other mobile device to be moved about freely while maintaining access to the resources of the wired network (see fig. 1). Ad hoc mode. This type of wireless structure allows wireless devices that are near one another to easily interconnect. In ad hoc mode, wireless- enabled devices can share network functionality without the use of an access point or a wired network connection (see fig. 2). After approval of the initial IEEE 802.11 standard in 1997, IEEE released several 802.11 amendments to increase WLAN network speeds to be more comparable to that of wired networks. The 802.11 standard and these subsequent amendments include security features known collectively as wired equivalent privacy (WEP). However, configurations that use WEP have significant security flaws. To address these flaws, IEEE released the 802.11i security standard in 2004, which specifies security components that work together with 802.11 transmission standards. The IEEE 802.11i security standard supports wireless connections that provide moderate to high levels of assurance against WLAN security threats through the use of different cryptographic techniques. While IEEE was developing 802.11i, the Wi-Fi Alliance developed the Wi- Fi Protected Access (WPA) security certification as an interim means to improve security over WEP. The protocols used under the WPA certification address vulnerabilities of WEP, but the certification does not require support for strong encryption. In conjunction with the ratification of the 802.11i security standard in 2004, the Wi-Fi Alliance introduced WPA2—the interoperability certification for 802.11i. The WPA2 certification extends the security capabilities offered by WPA to include all requirements of the 802.11i standard. Both WPA and WPA2 offer two modes of operation: Personal and Enterprise. WPA2-Personal protects unauthorized network access by using a preshared password as a key for network setup and access, while WPA2-Enterprise verifies network users through an authentication server. In most cases, WPA2-Enterprise is recommended to eliminate the continuous process of generating, deploying, and replacing outdated passwords. Although WPA2-Enterprise-certified products provide more security protections than WEP and WPA, recent reports revealed that wireless networks protected with WPA2-Enterprise encryption can also be susceptible to attacks. Most recently, in 2009, IEEE ratified the 802.11w-2009 standard, which further increases the overall security of 802.11–based networks. Specifically, 802.11w-2009 provides improved protection for WLANs by defining additional encryption security features to help prevent incidents such as denial of service attacks against WLANs. Wireless personal area networks provide wireless connectivity to devices such as telephone headsets or computer keyboards within close proximity. Bluetooth is commonly used to establish these types of networks. Several versions of the Bluetooth standard have been adopted by the Bluetooth Special Interest Group. Each Bluetooth device must operate in one of the four security modes defined by the Bluetooth standard. Each version of Bluetooth supports some, but not all, of these modes. Wireless Cellular Networks Cellular networks are managed by service providers who provide coverage based on dividing a large geographical service area into smaller areas of coverage called cells. As a mobile phone moves from one cell to another, a cellular arrangement requires active connections to be monitored and effectively passed along between cells to maintain the connection. In addition to cellular phones, cellular networks support smartphones and cellular data cards. Smartphones offer more functionality than basic cellular phones, including e-mail and other office productivity applications and have extended expansion capabilities through peripheral card slots and other built-in wireless communications such as Bluetooth and Wi-Fi. Cellular data cards allow laptop users to connect to the Internet anywhere cellular service is available. However, cellular data cards can only access the Internet if the user is within the service provider’s network coverage area. Agencies reported significant use of WLANs to extend working mobility for employees and contractors. For example, 18 agencies reported using WLANs in a variety of ways. Five agencies reported having wireless networks available for headquarters along with field offices or components. Twelve other agencies reported that components have different wireless practices than headquarters. For example, one major agency reported no WLANs at its headquarters, but it has components that use them. Further, several agencies use wireless networks for more limited purposes than connecting to the core agency network. Specifically, five agencies reported offering WLANs that connect directly to the Internet for use in conference rooms or other public spaces. Another agency reported using wireless access points to provide Internet connectivity at outdoor construction sites. Personal area networks using Bluetooth technology were also reported by many agencies. Specifically, 14 agencies reported using Bluetooth devices. Ten agencies reported permitting cellular phone users to connect wireless headsets, and four agencies reported permitting wireless keyboards or mice. Agencies also reported extensive use of smartphones and cellular data cards. All 24 agencies we queried reported using smartphones, primarily the BlackBerry® brand. Agencies’ smartphone management structures included: management through a central server located at the department level or at the component level and one component or office providing smartphone management to another office. Seventeen agencies reported using cellular data cards to provide Internet connectivity to user laptops. These cards and services are typically provided by commercial telecommunications carriers. Without proper safeguards, computer systems are vulnerable to individuals and groups with malicious intent who can intrude and use their access to obtain sensitive information, commit fraud, disrupt operations, or launch attacks against other computer systems and networks. The risk to these systems is well-founded for a number of reasons, including the dramatic increase in reports of security incidents, the ease of obtaining and using hacking tools, and steady advances in the sophistication and effectiveness of attack technology. Table 1 provides a compilation of threats to wireless and wired networks as identified by the National Institute of Standards and Technology (NIST). Wireless networks also face challenges that are unique to their environment. A significant difference between wireless and wired networks is the relative ease of intercepting WLAN transmissions. For WLANs, attackers only need to be in range of wireless transmissions and do not have to gain physical access to the network or remotely compromise systems on the network. WLANs also have to protect against the deployment of unauthorized wireless devices, such as access points, that are configured to appear as part of an agency’s wireless network infrastructure. In implementing wireless networks, federal agencies need to address these challenges to maintain the confidentiality, integrity, and availability of the information. Bluetooth-enabled devices are susceptible to general networking threats and are also threatened by more specific Bluetooth-related attacks such as bluesnarfing, which enables attackers to gain access to a Bluetooth- enabled device by exploiting a software flaw in older devices. Smartphones are also susceptible to general networking threats and face additional security risks. Those risks include those caused by their size and portability, as well as the availability of different wireless interfaces and associated services. For example, the size and portability of smartphones can result in the loss of physical control of a device that could reveal sensitive data to an unauthorized user. Recent articles released by the media reinforce the need for federal agencies to secure their wireless networks and devices. Examples of reported incidents and risks include the following: A retail company admitted in 2007 that hackers located and tested wireless networks for vulnerabilities and installed programs on these networks to steal the credit card information of more than 45 million consumers. An assessment of wireless vulnerability conducted in 2008 at 27 airports that had wireless networks found that personal information could be leaked because only 3 percent of hot spot users used a virtual private network (VPN) to encrypt their data. In 2009, a counterintelligence official described how smartphones could have been tagged, tracked, monitored, and exploited at the 2008 Beijing Olympics. The malicious software could have also posed a threat to e-mail servers in the United States. The following scenarios (figs. 3-5) provide examples of well-known attacks used to exploit vulnerabilities in wireless technologies. These scenarios do not represent all possible attacks on wireless technology vulnerabilities. In a dual-connect scenario (see fig. 3), the attacker exploits insecure laptop configurations to gain unauthorized access to an organization’s core network. An ttcker with nning tool cn identify wireless network nme nd deploy roge wireless ccess point with the same nme as one of the previously connected wireless network. With authorized ccess to gency network, ttcker iable of detroying, modifying, or copying enitive informtion. 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The Federal Information Security Management Act (FISMA) of 2002 requires each agency to develop, document, and implement an agencywide information security program to provide security for the data and information systems that support the agency’s operations and assets. Significant amounts of agency data are stored on and transmitted through wireless devices and networks. Wireless technologies are often important parts of the information systems that support the agency’s operations and assets. Accordingly, wireless technologies are typically encompassed by agency information security programs required under FISMA. FISMA also assigns additional information security responsibilities for the Office of Management and Budget (OMB) and NIST. FISMA assigns OMB specific responsibilities, including overseeing the implementation of policies, standards, and guidelines on information security, including ensuring timely agency adoption of and compliance with standards; requiring agencies to identify and provide information security protections commensurate with the risk and magnitude of the harm resulting from the unauthorized access, use, disclosure, disruption, modification, or destruction of information collected or maintained by or on behalf of an agency, or information systems used or operated by or on behalf of an agency; overseeing agency compliance with FISMA requirements; reviewing at least annually, and approving or disapproving, agency information security programs; and annual reporting to Congress on agency compliance with the requirements of FISMA, including significant deficiencies in agency information security practices and planned remedial action to address such deficiencies. In a July 2010 memo, OMB directed the Department of Homeland Security (DHS) to exercise primary responsibility within the executive branch for the operational aspects of federal agency cybersecurity with respect to the federal information systems that fall within FISMA. According to the memo, DHS is to oversee the implementation of and reporting on information security policies and guidance in federal agencies, oversee agency compliance with FISMA, and annually review agency cybersecurity programs. OMB will continue to report annually to Congress on the progress of agencies’ compliance with FISMA. According to the Director of Federal Network Security—the DHS official responsible for many of DHS’s newly assigned FISMA-related activities— DHS is beginning its oversight activities through the annual FISMA reporting process that federal agencies are required to follow. The official stated that the department does not currently have any wireless-security- specific activities under way, but that the department is planning future activities that may address wireless security, including compliance audits and an architecture document. Under FISMA, NIST is responsible for developing standards and guidelines that include minimum information security requirements. Table 2 describes NIST Special Publications (SP) that include guidelines intended to secure wireless technologies. NIST is also responsible for administering the United States Configuration Baseline, which is an initiative to create security configuration baselines for information technology (IT) products deployed across federal agencies. In addition to NIST guidelines, other federal agencies have developed guidance for securing wireless technologies. For example, the Department of Defense’s Defense Information Systems Agency (DISA) has created a series of security technical implementation guides that address general purpose or multiuse technologies. These guides serve as configuration standards for the Department of Defense’s wireless devices and systems. In addition, DISA has made these guides available for other federal agencies to provide them with a baseline level of security. In 2005, we reported that federal agencies lacked key controls for securing wireless networks. We recommended that the Director of OMB instruct federal agencies to ensure that wireless network security is incorporated into their agencywide information security programs, in accordance with FISMA. Specifically, we recommended that agencywide security programs should include the following security controls. Robust policies for authorizing the use of the wireless networks, identifying requirements, and establishing security controls for wireless- enabled devices in accordance with NIST guidelines. Security configuration requirements for wireless devices that include security tools, such as encryption, authentication, VPN, and firewalls; placement and strength of wireless access points to minimize signal physical protection of wireless-enabled devices. Comprehensive monitoring programs, including the use of tools such as site surveys and intrusion detection systems to ensure compliance with configuration requirements; ensure only authorized access and use of wireless networks; and identify unauthorized wireless-enabled devices and activities in the agency’s facilities. Wireless security training for employees and contractors. In response to our recommendations, OMB has instructed federal agencies to ensure network security is incorporated into their agencywide network security program through the use of NIST guidelines. In addition, OMB’s annual FISMA reporting requirements state that agencies must follow NIST standards and guidelines for non-national security programs and information systems. Since our report was issued, NIST has released guidelines that address the items identified in our recommendations. These guidelines include NIST SP 800-48, Guide to Securing Legacy IEEE 802.11 Wireless Networks; NIST SP 800-53, Recommended Security Controls for Federal Information Systems and Organizations; and NIST SP 800-97, Establishing Wireless Robust Security Networks: A Guide to IEEE 802.11i (see table 3). Leading practices for deploying and monitoring secure wireless networks include comprehensive policies, configuration controls, training, and other practices as described in table 4. Many of these practices are consistent with the key information security controls required for an effective information security program identified in our previous reports and reflect wireless-specific aspects of those controls. Furthermore, experts identified several emerging technologies, such as broadband wireless, third-party device management, and IEEE 802.11n-2009/802.11w-2009, as potentially important in securing wireless networks in the future. Comprehensive information security policies that address the security of wireless networks and mobile devices can help agencies mitigate risks. FISMA recognizes that the development of policies and procedures is essential to cost effectively reducing the risks associated with IT, including wireless IT, to an acceptable level. In addition, experts noted that sound policy is the basis for all effective security measures. Policies should cover areas such as roles and responsibilities, WLAN infrastructure security, WLAN client device security, and security assessments. By establishing policies that address these areas, agencies can create a framework for applying practices, tools, and training to help support the security of wireless networks. In addition to these policies, federal guidelines and experts also emphasized key safeguards to address wireless security concerns that have surfaced since our 2005 report. These practices include prohibiting the use of WEP and implementing WPA2 with enterprise authentication, establishing usage restrictions and implementation guidance for wireless access, and implementing access controls for mobile devices that connect to an agency’s wireless networks. Organizations should establish policies requiring procurement of wireless products that have been WPA2-Enterprise certified and Federal Information Processing Standards (FIPS)-validated. NIST guidelines state, and experts agree, that only these devices are capable of fully implementing the IEEE 802.11i robust security network protections, which include enhanced user and message authentication mechanisms, cryptographic key management, and robust enciphering and data integrity mechanisms. Wireless technologies that rely on older wireless security protocols, such as WEP and WPA, can be more easily exploited to circumvent or adversely impact access control and authentication, confidentiality, integrity, and availability since they do not require strong encryption algorithms. Agencies should establish and enforce usage restrictions and implementation guidance for wireless access. According to NIST guidelines, security policies should identify which users are authorized to connect wirelessly to an organization’s networks and the types of information allowed to be transmitted across wireless networks. In addition, wireless access to information systems should only be permitted by using authentication and encryption. NIST guidelines also instruct agencies to identify the acceptable methods of remote access. Specifically, an agency’s policies should describe which wireless-enabled devices can connect to the agency’s networks remotely and the types of external networks permitted. For example, policies should specify if users connecting remotely through public hot spots to an agency’s networks are authorized to use only agency-issued mobile devices. Both NIST guidelines and experts identified establishing access controls for mobile devices, which includes those taken to locations the agency deems to be a significant risk, and prohibiting dual connection as a key practice for securely deploying and monitoring wireless networks. Our previous reports have also emphasized the importance of such access controls to limit, prevent, or detect inappropriate access to computer resources (data, equipment, and facilities), in order to protect them from unauthorized use, modification, disclosure, and loss. Specifically, NIST guidelines state that agencies need to establish and enforce usage restrictions and implementation guidance for agency-issued mobile devices taken to locations the agency deems to be a significant risk. For example, agencies may issue specially configured mobile devices to individuals before traveling to risky locations, such as certain countries, which are in accordance with agency policies and procedures. Upon return from travel, agency-defined inspection and preventative measures can be applied to the mobile device such as re-imaging the hard disk drive on laptops. According to one expert’s account, by developing access control requirements for global use of devices (i.e., managing devices that travel internationally), organizations can avoid compromises of devices or information that have occurred at organizations without these practices. Another component of establishing access controls for mobile devices that NIST and experts identified was restricting the access rights of devices (and individuals) to an organization’s network. Enforcing requirements such as usage restrictions, configuration management, and device identification and authentication, and disabling unnecessary hardware can prevent incidents of employees inadvertently connecting their devices to malicious entities and compromising the confidentiality, integrity, and availability of the organization’s network. Federal guidelines underscore, and experts agree with, the need for a risk- based approach for deploying wireless networks and technologies. A risk- based approach attempts to ensure that risks to the organization are identified and prioritized so that available resources can be most effectively used in defending against the most significant threats, such as unauthorized access points or devices on the network, and to prevent the incurrence of undue risk. Security experts agreed that a centralized wireless management structure that is integrated with the management of the existing wired network can provide a more effective means to manage the wireless infrastructure and the information security program as a whole. A centralized structure can provide a coherent, consistent approach to managing the entire wireless network. For example, configuration changes can be centrally monitored, and with centralized reporting, management can have improved visibility and oversight of the organization’s entire wireless network. Using tools that allow centralized management of WLANs can provide a management focal point and reduce the number of attack points in the network. A centralized structure can also facilitate the development and implementation of standardized guidance, which allows organizations to consistently apply information security policies. Organizations can authorize the use of specific products, coordinate the installation of WLANs, and issue other such directives to provide a holistic approach for deploying and monitoring wireless activities. Such implementation can be centralized at the enterprise or component level, based on the business needs of the organization. In conjunction with a centralized management structure, experts agreed the importance of integrating wireless management with management of the wired network. By extending established information security controls, such as intrusion detection systems and monitoring, from the wired to the wireless network, an organization is better positioned to both understand and defend its overall information security posture. Experts agreed that a decentralized wireless management structure can result in disparate, ad hoc networks that operate and are managed separately. The existence of multiple networks that are independently managed can impede effective implementation and monitoring of security controls and inhibit sufficient oversight of the wireless network. Although centralized wireless management can have many benefits, the level of centralization needs to be determined by business need and a risk- based approach. Centralization can be performed by agency components or departmentwide and should be balanced against the costs of centralization. Existing federal guidelines recognize the benefits that centralized management of network services and information security can provide for federal agencies. For example, NIST guidelines state that centralized security management is an important consideration for managing mobile devices since it facilitates the configuration control and management processes that support compliance with an organization’s security policy. Additionally, we previously reported that establishing a central management focal point for information security is essential to spotting trends, identifying problem areas, and determining whether policies and administrative issues are handled in a consistent manner. Establishing configuration requirements for wireless networks and devices can help ensure they are deployed in a secure manner in accordance with agency policies. For example, NIST SP 800-48 states that agencies should configure their wireless networks in accordance with established security policies and requirements. Establishing settings or configuration requirements for wireless access points can guide their placement and signal strength to minimize signal leakage and exposure to attacks. In addition to access points, client devices should also be configured to enhance the wireless network security posture. According to NIST, securing the infrastructure without properly securing the client devices renders the entire wireless network insecure. Solutions such as enterprise servers can periodically communicate with managed mobile devices to ensure security and other configuration settings are correct and in compliance with policy. NIST guidelines and experts stated that training employees and contractors in an organization’s wireless policies is a fundamental part of ensuring that wireless networks are configured, operated, and used in a secure and appropriate manner. For security policies to be effective, those expected to comply with them must be aware of the policies. Additionally, FISMA mandates that agencies provide security awareness training for their personnel, including contractors and other users of information systems that support the operations and assets of the agency. NIST recommends that the security awareness training include the risks of wireless security and how to protect against those risks. In addition, NIST guidelines and experts agree that an agency’s security training should include mobile device security that addresses (1) maintaining physical control over mobile devices, (2) protecting sensitive data on mobile devices with encryption, (3) disabling wireless interfaces on mobile devices when not needed, and (4) the procedures for reporting lost or stolen mobile devices. FISMA also requires agency chief information officers to ensure that personnel with significant information security responsibilities receive training with respect to their responsibilities. A VPN can provide a secure communications mechanism for sensitive data transferred across multiple, public networks. For wireless technologies, VPNs are useful because they provide a way to secure WLANs that may be insecure, such as those at public hot spots, in homes, or other locations. According to NIST guidelines, federal agencies should consider using VPNs to protect the confidentiality of WLAN communications during remote access and telework and should configure the VPNs to use FIPS- 140-2-validated encryption. Experts agreed on the use of VPNs as an integral security measure for an increasingly mobile workforce. Continuous monitoring is a means for an organization to ensure that security controls remain effective despite the planned and unplanned changes that can occur to an information system. OMB policy and NIST guidelines require agencies to implement a continuous monitoring approach for all information systems, including those using wireless technologies. According to NIST guidelines, agencies are required to monitor for unauthorized wireless access to information systems and should base their determination of the scope and frequency of such monitoring on an assessment of risk to the agency, the operational environment, the agency’s requirements, and specific threat information. Continuous monitoring allows an organization to defend its security posture in a dynamic environment where threats, vulnerabilities, and technologies are constantly changing. Experts also noted the importance of continuously monitoring the wireless network for rogue access points and client devices. Documenting and implementing an approach to wireless monitoring that uses a risk-based approach helps to ensure that the scope and frequency of monitoring is appropriate for the threats facing the agency. As previously mentioned, centralized management tools can provide continuous monitoring capabilities for improved visibility and oversight of the organization’s entire wireless network. Both experts and NIST guidelines highlighted the importance of using a wireless intrusion detection system to continuously monitor an agency’s wireless networks to detect and respond to malicious activities on the network before they inflict damage. These types of systems enable an organization’s operations or security staff to determine whether unauthorized users or devices are attempting to access, have already accessed, or have compromised a WLAN. A wireless intrusion prevention system builds on the functionality of a wireless intrusion detection system by also automatically taking countermeasures against these unauthorized users or devices. These systems are able to monitor wireless data as it passes from wireless to wired networks. They can also detect misconfigured WLAN clients, rogue access points, ad hoc networks, and other possible violations of an organization’s WLAN policy. In addition, these systems can position an organization to proactively assess its wireless network at regular intervals. However, a wireless intrusion detection or prevention system is a significant expense, and it may not be appropriate in all cases. For example, an agency may determine that a smaller agency location with lower risk systems may not warrant the expense that installing a wireless intrusion detection or prevention system may entail. Other tools exist to detect rogue wireless client devices, such as handheld scanners and network authentication mechanisms, but these may not be as effective or easy to monitor as an intrusion detection system. Consistent with NIST guidelines, an organization should use a risk-based business case to determine the appropriate use of continuous monitoring solutions. Experts and NIST guidelines both noted the importance of regular security assessments for checking the security posture of wireless networks and for determining corrective actions needed to ensure the wireless networks remain secure. Regular assessments help to determine whether wireless devices are transmitting correctly and are on the correct channels. Experts noted the importance of consistently and regularly performing security assessments in tandem with continuously monitoring the wireless network. In addition, organizations should maintain an inventory of access points deployed and their mobile devices to help identify rogue devices when conducting assessments. Assessments can help organizations to determine whether controls are appropriately designed and operating effectively to achieve the organization’s control objectives. Several current and emerging technologies are important to consider for secure deployment of wireless technologies as follows: Long-Term Evolution—Long-Term Evolution is a fourth-generation wireless broadband technology that experts stated is expected to improve the speed and quality of service and provide scalable bandwidth capacity. It is also expected to improve security through enhanced encryption to prevent eavesdropping and user identity confidentiality to prevent tracking of specific users. One expert noted that most of the public safety broadband environments used for emergency communications at the state and local levels will adopt Long-Term Evolution and highlighted the importance of its effective implementation by government entities. WiMAX—Another form of broadband wireless technology known as WiMAX (Worldwide Interoperability for Microwave Access ) is intended for wireless metropolitan area networking and is an effort to provide seamless mobile access in much the same way as wide-area cellular networks with higher transmission speeds. Security advantages of WiMAX include mutual device/user authentication, improved traffic encryption, and options for securing data within the core network. Third-party device management—The technological capabilities of a third-party vendor may provide a means for organizations to establish security for mobile devices. According to experts, a vendor that specializes in wireless security may be more up-to-date on security vulnerabilities and better equipped to assess the security of wireless networks than an agency’s own staff. Capabilities provided by a vendor can include incident management, triggers if a device is taken overseas, remote trouble shooting, and usage trends, among others. IEEE 802.11n-2009/802.11w-2009 technologies—Two additions to the 802.11 family of WLAN technologies–802.11n-2009 and 802.11w-2009–are expected to improve the performance and security of WLANs. The technologies specified in 802.11n-2009 increase WLAN speed, improve reliability, and extend the range of wireless transmissions. The 802.11w- 2009 encryption standard builds on the 802.11i framework to protect against certain types of attacks on WLANs. Agencies have taken several steps to address the security of their wireless networks; however, these steps have not been fully and comprehensively applied across the government. Specifically, application was inconsistent among the agencies for most of the following leading practices: Most agencies developed policies that reflected NIST guidelines and leading practices, but gaps existed in these policies, particularly with respect to dual-connected laptops and use of mobile devices on international travel. All agencies required a risk-based approach for management of wireless technologies. Many agencies used a decentralized structure for management of wireless, limiting the potential standardization that centralized management can provide, and guidance on centralization is limited. The five agencies where we did detailed testing generally securely configured wireless access points, but they had numerous weaknesses in laptop and smartphone configurations. Gaps in governmentwide guidance on configuration contributed to these weaknesses. Most agencies were missing key elements related to wireless security in their security awareness training. Twenty agencies required encryption, and eight of these agencies specified that a VPN must be used during remote access; four agencies did not require encryption. Many agencies had insufficient practices for monitoring or conducting security assessments. Furthermore, federal guidance in this area lacks specificity. Existing governmentwide guidance and oversight efforts do not fully address agency implementation of the leading practices. Until agencies fully address these practices, they will not have sufficient assurance that the risks to sensitive wireless systems, and sensitive data transmitted across or processed by those systems, are adequately safeguarded from inadvertent or deliberate misuse, fraudulent use, improper disclosure, or destruction. Also, until OMB and DHS ensure they have effective means for oversight of federal agencies’ efforts to secure wireless networks they may lack full visibility of the vulnerability of these networks to attack. Almost all agencies required wireless networks to employ encryption, but not all agencies required secure forms of encryption. Specifically, 23 of 24 agencies specified in their policies that agency wireless networks are required to employ encryption. However, 7 of the 23 agencies did not require secure forms of encryption. Specifically, 2 agencies’ policies required the use of WEP, an older wireless encryption method that is vulnerable to attack; one agency required the use of WPA, which is not compliant with federal requirements for encryption; and 4 other agencies did not specify any type of encryption or require the use of FIPS 140-2 compliant encryption. In addition, 1 agency did not have any documented requirements for wireless transmissions to be encrypted, even though that agency has a wireless network deployed at its headquarters. In certain cases, agency policies had been developed several years ago. Agencies had also not always updated their policies to reflect their implementations of WLANs or federal requirements for wireless encryption. Agencies that do not require the use of strong, FIPS-validated encryption algorithms on their wireless networks have limited assurance that sensitive agency information is being adequately protected from unauthorized disclosure or modification. Twenty-three of the 24 agencies provided specific guidance to agency personnel on the types of information that may be transmitted using wireless networks or on how sensitive information is to be protected when transmitted wirelessly. All 24 of the agencies in our review had also developed policies establishing usage restrictions and implementation guidance for wireless networks; although policies for 3 agencies were in draft and had not yet been approved. Examples of usage restrictions in agency policies included the following: requiring that administration of wireless infrastructure devices (such as access points) be conducted using the wired network, prohibiting the use of ad hoc wireless networks, and allowing access to agency wireless networks only via a VPN. Agencies’ policies frequently contained wireless implementation guidance such as the following: physically securing wireless infrastructure devices, adjusting the transmission power of access points to ensure adequate coverage while minimizing signal leakage, maintaining audit logs on wireless access points, changing default service set identifiers and not using identifiers that would identify the agency, enabling media access control address filtering, and segregating wireless network traffic from the wired network using firewalls or other methods. Almost all agencies had established some type of access control policy for mobile devices. Specifically, all 24 agencies developed policies for PDAs, such as smartphones, although 2 agencies’ policies had not been finalized. Although 23 of the 24 agencies had developed implementation guidance for laptop computers, the policies of 4 of these agencies did not specifically address wireless functionality on laptops. In addition, 1 of the 24 agencies did not document laptop policies at all. Fewer agencies had developed access control policies regarding dual connection of laptops. NIST guidelines recommend that client devices, such as laptop computers, should be configured not to allow the simultaneous use of more than one network interface. Although most agencies had established policies for wireless-enabled laptops, many did not address the risk of dual connections of laptops in their policies. As described earlier, the security of an agency network could be compromised when a laptop is connected to an external wireless network, and to an agency’s wired network simultaneously, leaving it vulnerable to attack and providing unauthorized access to the wired network. Turning off or disabling the wireless capability when a laptop is connected to a wired network mitigates this risk. Of the 24 agencies in our review, 8 did not have documented policies requiring the wireless capability to be turned off or disabled when the agency’s laptop is connected to a wired network. One agency with a decentralized wireless management structure had a high level overall wireless policy, but allowed its components to determine whether to augment it with more detailed policies, including policies prohibiting multiple network connections. Other agency officials incorrectly thought that the dual connection issue was addressed by governmentwide guidance such as the Federal Desktop Core Configuration (FDCC). Although the baseline FDCC standard disables wireless connectivity, in March 2010, we reported that many agencies have chosen to deviate from the standard and enable wireless functionality on their workstations. No other setting or combination of settings within the FDCC standard prevents multiple network connections. We also previously reported that OMB had not specified any guidance for agencies to use when considering the risks of deviating from the FDCC standard; OMB has therefore not specified any such guidance for agencies regarding permitting the use of wireless technologies. We recommended that OMB clarify its policies regarding FDCC deviations to include guidance for agencies to use when assessing the risks of deviations. Until OMB provides guidance to agencies regarding the risks associated with enabling wireless on agency laptops, including the risk of dually connected laptops, agencies may not document and implement policies prohibiting dual connections, increasing the risk that an attacker would be able to gain unauthorized access into an agency’s network and destroy, modify, or copy sensitive information. Further, until agencies fully document and implement policies prohibiting dual connections, an increased risk exists that an attacker would be able to gain unauthorized access into an agency’s network and destroy, modify, or copy sensitive information. Similarly, many agencies also did not have documented policies governing international travel with mobile devices. As noted earlier, according to NIST, a leading practice for client and mobile devices is to issue specially configured laptops, PDAs, and other mobile devices to individuals traveling to locations considered to be high risk and to apply preventative measures to devices being returned from such locations. However, only 12 of the 24 agencies had documented policies for safeguarding PDAs taken internationally, and policies for 4 agencies were in draft. Policies of 5 agencies required specially configured devices to be issued for such travel, although policies of 10 agencies required preventative measures to be applied to the devices after they were returned from travel and before being connected to agency networks. In addition, just 9 of the 24 agencies had documented policies for laptops taken internationally; including 2 agencies that had draft policies. Only 4 of the 9 agencies required that a specially configured laptop be used for travel, although 8 agencies required preventative measures to be applied after the devices were returned from travel. Several agency officials stated that they were aware of the risks posed to mobile devices during international travel, but that agencies had not yet developed policies to address these risks. NIST issued its updated guidelines on this practice in August 2009, and many agencies had not yet updated their security policies to reflect the new guidelines. By not having documented policies, agencies may be at increased risk that sensitive information could be compromised while a device is in another country, or that malware obtained during an international trip could be inadvertently introduced onto agency networks, placing sensitive data and systems at risk. All of the agencies in our review required in their policies that decisions related to management of wireless technologies be based on risk. Fifteen agencies had policies that specifically required a risk-based approach to wireless management; the remaining 9 agencies had policies that, while not specific to wireless, required a risk-based approach to all management of IT. Twenty-two of the 24 agencies had documented policies specifying that new wireless technologies require approval from an appropriate official or governing body before they could be implemented, although one agency’s policy was still in draft. The remaining 2 agencies, while not specifying wireless, required all new technologies to be approved. Although a centralized wireless management structure can provide a more effective means of managing wireless networks, many agencies reported not using a centralized approach. Eleven agencies indicated that they did have a centralized wireless management structure, and 3 indicated using both a centralized and decentralized structure, depending on agency component. Ten agencies employed a decentralized wireless management structure. As previously mentioned, a decentralized wireless management structure can result in disparate, ad hoc networks that are independently managed, which can impede effective implementation and monitoring of security controls and inhibit sufficient oversight of the wireless network. The following examples describe 2 agencies that are implementing a centralized management approach and identify the benefits and limitations of their implementation efforts. One agency where we performed detailed testing had deployed a centrally monitored and managed wireless intrusion detection system that was integrated with the agency’s national wired networks and operated centrally by its cybersecurity management center. This system had several positive aspects such as eliminating the need for trained personnel in every location, easy integration with other automated tools, and a console that provided a summary view of security events and detected devices. Additionally, it provided a central means to monitor configurations of wireless devices, discover rogue access points, and detect intrusion attempts. However, this system also had limitations. According to agency officials, the center did not always manage the installation and configurations of wireless devices at the facilities being monitored. As a result, the agency could not take full advantage of the improved visibility and oversight of the agency’s entire wireless network that centralized management can offer. Another agency was deploying a centrally managed WLAN nationwide to hundreds of facilities. According to agency officials, the WLAN would provide a platform for numerous systems and devices to be operated in a highly mobile environment. The centrally managed WLAN has the potential to simplify and provide more control over WLAN management. For instance, configuration policies created in templates can be forwarded to all controllers connected to the network and then on to the wireless access points. It can also provide a graphical display of the WLAN and its performance. Agencies had decentralized approaches to wireless management for several reasons. Several agencies managed IT in a decentralized manner, delegating responsibility to agency components based on their business needs. Other agencies were just beginning to consider use of WLANs, or had only deployed WLANs in a limited manner. Technological advances have also made centralized management of wireless more feasible than in the past. Furthermore, while existing federal guidelines recognizes the benefits that centralized management of information security can provide for federal agencies; existing NIST guidelines on wireless security do not provide detail on the appropriate ways agencies can centralize their management of wireless technologies based on business need. Until agencies effectively implement a centralized wireless management structure, they will have limited visibility and control over WLANs and a limited ability to integrate wireless management controls with the existing wired network to provide continuity and robustness to their organization’s overall information security program. At the five agencies where we conducted detailed testing, the access points used to provide WLANs were generally configured in a secure manner. However, we identified weaknesses in laptop or firewall configurations at these agencies as the following examples illustrate: None of the five agencies had fully implemented controls to prevent laptops from connecting to a wireless network while also being connected to the agency’s internal wired network. As described earlier, when a laptop is connected to a wireless network and to an agency’s wired network simultaneously, an attacker could exploit this dual connection to gain unauthorized access to the agency’s network, placing sensitive information and systems at risk. In certain cases, agency officials were unaware that the potential for a dual connection existed. In other cases, officials were aware of the risk, but were unsure of the appropriate controls that could mitigate this risk, or were concerned that these controls might interfere with needed functionality of the device. In general, workstations using Microsoft Windows require an additional third-party application or other specialized configuration to disable wireless connectivity. Although NIST guidelines recommend that client devices, such as laptop computers, be configured to not allow the simultaneous use of more than one network interface, existing NIST guidelines on wireless networks do not provide specific technical information on steps that agencies should take to implement this control. One of the five agencies had configured a laptop to allow nonprivileged users to enable Bluetooth and to connect to other personal Bluetooth devices. Furthermore, Bluetooth was configured to default to “discovery” mode, making the laptops visible to other Bluetooth devices. As a result, an attacker with a Bluetooth device within range could connect to the agency’s laptop, providing a means of unauthorized access to sensitive information on the laptop itself, as well as to the agency’s network. Two agencies allowed general users to have administrative privileges on their laptops, thus reducing the effectiveness of established security controls on those machines and increasing the risk that users could install unapproved and potentially malicious software, which could allow sensitive information to be viewed, modified, or deleted. At one agency, a firewall segmented a guest wireless network from the agency’s internal network. However, the firewall was configured to allow all traffic that used Internet protocol version 6 (IPv6) to flow between the networks without controls. As a result, any user—whether malicious or not—connected to the guest wireless network using the IPv6 protocol could traverse the guest network without any authentication or access controls and could potentially gain unauthorized access to the internal network, placing sensitive agency information and systems at risk of unauthorized disclosure, modification, misuse, or destruction. Many agencies also did not enforce secure configurations on their BlackBerry smartphones. DISA has developed a configuration checklist to help its administrators securely configure its BlackBerry Enterprise Servers, which are servers that allow agencies to centrally control security policy for BlackBerry smartphones. These guidelines have also been made available to other organizations, including federal agencies, as part of a NIST program providing secure configurations for computing devices. Although not mandatory, the guidelines provide a starting point for securely configuring BlackBerry smartphones. However, 18 of the 24 agencies had server configurations that were less secure than the DISA guidelines. For example: Fourteen agencies allowed BlackBerry passwords of insufficient length. DISA recommends that passwords on BlackBerry smartphones be a minimum of eight characters in length. Seven agencies did not require the use of complex passwords. DISA recommends that this value be configured to require passwords to contain, at a minimum, at least one alphabetic character and one numeric character. Eleven agencies did not set a sufficient security timeout period. DISA recommends that this value be set to 15 minutes or less. Ten agencies did not configure a setting that prevents applications from opening internal and external connections simultaneously, exposing the device to malware. Several agency officials stated that the DISA checklist was not mandatory for federal agencies; however, no other federal configuration standard for BlackBerry smartphones currently exists. Due to their portability and capacity to collect and store significant amounts of sensitive information, smartphones such as the BlackBerry are susceptible to security threats such as loss, theft, unauthorized access, malware, electronic eavesdropping, and tracking. Without securely configuring their BlackBerry Enterprise Servers, agencies are at an increased risk that their BlackBerry smartphones could be compromised, resulting in tampered, lost, or stolen data. Many agencies did include key information on the risks of wireless technologies and how to mitigate such risks in their training programs. Specifically, 18 agencies provided training on the inherent lack of security of wireless technology and gave information on how employees and contractors could protect information that is transmitted wirelessly. However, 6 agencies did not address wireless security in their annual training. In addition, although most agencies included information on mobile devices in their security awareness training, most agencies did not include key elements in accordance with NIST guidelines. Specifically, only 2 of the 24 agencies included in their training that users should disable the wireless interfaces on their mobile devices when not needed. In addition, training at 14 agencies did not address physical control over mobile devices; 5 did not describe the procedures for reporting lost or stolen mobile devices; and 5 did not include information on encrypting sensitive data on mobile devices. Finally, 1 agency did not address mobile device security in its annual training. Awareness about wireless security challenges can assist employees in complying with policies and procedures to reduce agency information security risks. Without such training, employees and contractors may practice behaviors that threaten the safety of the agency’s data. Policies on remote access are important to the security of wireless devices because a frequent use of wireless technologies is for access to agency networks from remote locations, such as a home or hotel WLAN. Twenty of the 24 agencies required remote access sessions to be encrypted, and 8 of these agencies specified that a VPN must be used. However, 4 of the 24 agencies did not require remote access to be encrypted using a VPN or other encryption method. Without having policies requiring remote access sessions to employ adequate encryption, agencies will not be able to ensure that sensitive information is protected from unauthorized access, use, disclosure, or modification when users connect to agency information systems remotely. All 24 agencies in our review reported some form of monitoring for the existence of unauthorized or “rogue” wireless networks. Sixteen agencies reported that they continuously monitored 24 hours a day at one or more agency facilities. However, we found significant weaknesses in agency policies for wireless monitoring. Only 18 agencies required any type of monitoring for unauthorized access points in their policies, sometimes as rarely as once per year. In addition, two agencies used outdated scanning tools that could miss key wireless activities. Six agencies lacked any requirements for wireless monitoring. This lack of requirements, combined with the ease of setting up wireless networks, creates a situation in which wireless networks can be operating in these agencies without authorization or the required security configurations. At the five agencies where we performed detailed testing, we found that the approach that several locations took toward monitoring and assessments for 802.11 wireless activity had significant weaknesses. Five agency locations did not have routine procedures for performing wireless assessments for unauthorized devices and networks. Two of these locations had not performed wireless scans in the past 2 years; two other agency locations did not document the results of scans. One agency where we performed detailed testing had deployed a centrally monitored and managed wireless intrusion detection system at one of its locations. However, according to agency officials, because of the costs of the system, it was not deployed to all locations. At the location we visited that did not have the system deployed, there was no alternate approach to wireless monitoring, posing the risk of undetected wireless access points, intrusions, and loss of sensitive, proprietary data. Further, while three other agencies also used a wireless intrusion detection system at some locations to continuously monitor for unauthorized devices and networks, the monitoring at these locations was ineffective. Specifically, the systems at each location had not been tailored to ignore known false positives. As a result, the systems generated large numbers of alerts for rogue access points, most of which were false. Local network administrators therefore had no way to determine which alerts were actual security events, hindering their ability to take advantage of the security aspects of the system. Although NIST guidelines recommend that agencies use wireless monitoring, it does not specify criteria for selecting tools to ensure they provide comprehensive monitoring capabilities, nor does it suggest appropriate frequencies for recurring assessments or recommendations for when continuous monitoring may be appropriate. Regular monitoring and security assessments are key practices for ensuring the security of wireless networks and devices. Even at agencies that have no wireless networks deployed, wireless-enabled devices that are deployed on the network, such as laptop computers, can provide a potential means for an attacker to gain unauthorized access to the network, putting critical agency systems and information at risk of unauthorized modification, misuse, disclosure, or destruction. Until regular monitoring and assessment policies and practices are implemented, these networks are at increased vulnerability to attack. The annual FISMA reporting process administered by OMB (and recently devolved from OMB to DHS by an OMB memorandum), which serves as a means of oversight of federal agency information security, does not fully address implementation of leading practices in wireless security. As of October 2010, the fiscal year 2010 draft reporting metrics do contain measures related to automated configuration management, vulnerability management, and incident management. However, they do not include specific metrics related to wireless security issues identified in this report, such as measures to address the risk of dual-connected laptops, policies related to international travel with mobile devices, the extent to which agencies have centralized their management of wireless devices, and agency practices for monitoring and assessment of wireless networks. Furthermore, although the DHS official responsible for the agency’s newly assigned governmentwide FISMA compliance activities stated that the agency plans additional activities that may address aspects of wireless security governmentwide, the scope and time frames for these activities have not yet been finalized. Until OMB and DHS ensure they have effective means for oversight of federal agencies’ efforts to secure wireless networks, they lack full visibility of the vulnerability of these networks to attack. Federal agencies are making significant use of wireless networks and devices, including WLANs, laptop computers, and smartphones. Several leading practices exist to secure these technologies, including developing comprehensive policies, employing a centralized approach to management, establishing secure network and device configurations, and having effective training and monitoring in place. Agencies have taken several steps to address the security of their wireless networks and devices, including development of security policies, centralized management, training, and monitoring; however, these steps have not been fully and comprehensively applied across the government. Gaps exist in policies, network management was not always centralized, and numerous weaknesses existed in configurations of laptops and smartphones. Particular issues are the risk of dual-connected laptops and risks related to mobile devices being taken on international travel In addition, many agencies had insufficient policies and practices for monitoring or conducting assessments of wireless technologies. Until OMB, DHS, NIST, and individual agencies take steps to fully implement leading security practices, federal wireless networks will remain at increased vulnerability to attack, and information on these networks is subject to unauthorized access, use, disclosure, or modification. To improve governmentwide oversight of wireless security practices, we recommend that the Director of OMB, in consultation with the Secretary of Homeland Security, implement the following two recommendations: include metrics related to wireless security as part of the FISMA reporting process, and develop the scope and specific time frames for additional activities that address wireless security as part of their reviews of agency cybersecurity programs. We also recommend that the Secretary of Commerce instruct the Director of NIST to develop and issue guidelines in the following four areas: technical steps agencies can take to mitigate the risk of dual connected laptops, governmentwide secure configurations for wireless functionality on laptops and for smartphones such as BlackBerries, appropriate ways agencies can centralize their management of wireless technologies based on business need, and criteria for selection of tools and recommendations on appropriate frequencies of wireless security assessments and recommendations for when continuous monitoring of wireless networks may be appropriate. In addition, in a separate report with limited distribution, we are making 134 recommendations to 24 major federal agencies to address weaknesses in wireless-related information security controls, including policies, procedures, and technical configurations. We provided a draft of this report to the Director of OMB and the Secretary of Commerce for their review and comment. However, OMB did not provide comments on the report. In written comments on a draft of this report, the Secretary of Commerce stated that the department concurred with our recommendations that NIST develop additional guidance related to wireless security. The Secretary also suggested that we use the term “NIST guidelines” rather than “NIST guidance” throughout the report, in addition to other technical comments. We have incorporated these comments in the report where appropriate. We are sending copies of this report to the appropriate congressional committees, the Director of OMB, the Secretary of DHS, the Secretary of Commerce, and other interested congressional parties. The report also is available at no charge on the GAO Web site at http://www.gao.gov. If you or your staff members have any questions about this report, please contact Gregory Wilshusen at (202) 512-6244 or Dr. Nabajyoti Barkakati at (202) 512-4499, or by e-mail at [email protected] and [email protected]. Contact points for our Offices of Congressional Relations and Public Affairs may be found on the last page of this report. Key contributors to this report are listed in appendix III. The objectives of our review were to (1) identify leading practices and state-of-the-art technologies for deploying and monitoring secure wireless networks and (2) assess agency efforts to secure wireless networks, including vulnerability to attack. The scope of our review included the 24 major federal agencies covered by the Chief Financial Officers Act. To identify leading practices for deploying and monitoring secure wireless networks, we first identified subject matter experts, including leading organizations and individuals, by reviewing information security-related Web sites and professional literature. In addition, we identified organizations that received recognition based on an industry magazine’s rankings for top wireless or other information security-related products. We also solicited suggestions on subject matter experts from individuals working in the field of wireless security at major information technology (IT) and telecommunications companies and federal government agencies, such as the National Institute of Standards and Technology (NIST), National Security Agency, and Committee on National Security Systems, because they were in a position to evaluate and compare wireless security practices at numerous organizations. We contacted approximately 10 organizations and individuals that met the above criteria; 8, including 5 organizations and three individuals, agreed to be interviewed and provide input on the practices we identified. The organizations were prominent and nationally known, and the individuals were recognized as experts in the information security community. The participants included a wireless services provider, a global technology products and services provider, a global telecommunications provider, a nonprofit industry organization, a standards laboratory, a government information security consortium, a defense agency, and a wireless security consultant. Then, to determine the specific leading practices, we obtained information, primarily through analysis of publications, guidance, checklists, presentations, and other documentation, and interviews with subject matter experts. We supplemented the information gathered with information obtained from our professional literature review. We then analyzed the information obtained to identify common wireless security leading practices and validated the practices we identified with the subject matter experts. To assess agency efforts to secure wireless networks, we obtained and analyzed documents such as departmental and component policies, plans, configuration documents, and training materials to determine the extent of wireless technologies used and the security controls implemented at each of the 24 major federal agencies. We also obtained information through structured interviews with officials responsible for wireless security policies and practices for each of the 24 agencies. For each of these agencies, we used a laptop equipped with an antenna that served as a mobile scanning device and walked or drove around the perimeters of publicly accessible areas of their headquarters facilities in the Washington, D.C., area to collect data to determine wireless technologies that were deployed in the buildings. We also conducted scans of multiple agency facilities in another major metropolitan area outside of the Washington, D.C., region. This area was chosen based on the following criteria: contained regional offices for the multiple major federal agencies in locations that were sufficiently dispersed to not have too many 802.11 signals within a narrow proximity; and had several regional offices with additional field offices nearby. Based on the initial data collected from scans at the headquarters and field locations, we chose 5 of the 24 agencies at which to complete additional detailed wireless security testing, specifically, the Departments of Agriculture, Commerce, Transportation, and Veterans Affairs, and the Social Security Administration. These agencies were selected based on several criteria, including the amount of usage of wireless technologies, the level of centralization of IT management, and potential security issues revealed by the initial scan results. More in-depth testing at these agencies included a review of the configurations of client devices, wireless infrastructure, and monitoring practices. We inspected client devices to determine if security controls had been implemented to protect the local network. We also examined each agency’s network infrastructure to determine if access points were encrypted and configured to deny unauthorized access. Finally, we determined if the agencies monitored the IEEE 802.11 wireless spectrum. We conducted this performance audit from January 2010 to November 2010, in accordance with generally accepted government auditing standards. Those standards require that we plan and perform the audit to obtain sufficient, appropriate evidence to provide a reasonable basis for our findings and conclusions based on our audit objectives. We believe that the evidence obtained provides a reasonable basis for our findings and conclusions based on our audit objectives. In addition to the individuals named above, Lon Chin and Vijay D’Souza (Assistant Directors), Monica Anatalio, Mark Canter, William Cook, Neil Doherty, Rebecca Eyler, Nancy Glover, Matthew Grote, Min Hyun, Javier Irizarry, Franklin Jackson, Vernetta Marquis, Sean Mays, Lee McCracken, and Michael Stevens made key contributions to this report. | Over the past several years, federal agencies have rapidly adopted the use of wireless technologies for their information systems. In a 2005 report, GAO recommended that the Office of Management and Budget (OMB), in its role overseeing governmentwide information security, take several steps to help agencies better secure their wireless networks. GAO was asked to update its prior report by (1) identifying leading practices and state-of-the-art technologies for deploying and monitoring secure wireless networks and (2) assessing agency efforts to secure wireless networks, including their vulnerability to attack. To do so, GAO reviewed publications, guidance, and other documentation and interviewed subject matter experts in wireless security. GAO also analyzed policies and plans and interviewed agency officials on wireless security at 24 major federal agencies and conducted additional detailed testing at these 5 agencies: the Departments of Agriculture, Commerce, Transportation, and Veterans Affairs, and the Social Security Administration. GAO identified a range of leading security practices for deploying and monitoring secure wireless networks and technologies that can help secure these networks. The leading practices include the following: (1) comprehensive policies requiring secure encryption and establishing usage restrictions, implementation practices, and access controls; (2) a risk-based approach for wireless deployment and monitoring; (3) a centralized wireless management structure that is integrated with the management of the existing wired network; (4) configuration requirements for wireless networks and devices; (5) incorporation of wireless and mobile device security in training; (6) use of encryption, such as a virtual private network for remote access; (7) continuous monitoring for rogue access points and clients; and (8) regular assessments to ensure wireless networks are secure. Agencies have taken steps to secure their wireless networks, but more can be done to improve security and to limit vulnerability to attack. Specifically, application was inconsistent among the agencies for most of the following leading practices: (1) Most agencies developed policies to support federal guidelines and leading practices, but gaps existed, particularly with respect to dual-connected laptops and mobile devices taken on international travel. (2) All agencies required a risk-based approach for management of wireless technologies. (3) Many agencies used a decentralized structure for management of wireless, limiting the standardization that centralized management can provide. (4) The five agencies where GAO performed detailed testing generally securely configured wireless access points but had numerous weaknesses in laptop and smartphone configurations. (5) Most agencies were missing key elements related to wireless security in their security awareness training. (6) Twenty agencies required encryption, and eight of these agencies specified that a virtual private network must be used; four agencies did not require encryption for remote access. (7) Many agencies had insufficient practices for monitoring or conducting security assessments of their wireless networks. Existing governmentwide guidelines and oversight efforts do not fully address agency implementation of leading wireless security practices. Until agencies take steps to better implement these leading practices, and OMB takes steps to improve governmentwide oversight, wireless networks will remain at an increased vulnerability to attack. |
For information on the composition of the SPR, see DOE, Office of the Assistant Secretary for Fossil Energy, Strategic Petroleum Reserve: Annual Report for Calendar Year 2006. difference were to persist over the duration of the new fill period, DOE would save about $1.2 billion in nominal terms by filling the SPR with 100 million barrels of heavy oil. The savings could be even larger if DOE included more than 10 percent heavy oils in the SPR. Including heavier oil would have the additional benefit of making the composition of SPR oil more compatible with U.S. refineries. In recent years, many refiners in the United States have upgraded their facilities so they can process heavy oil. Our analysis of DOE’s Energy Information Administration (EIA) data shows that, of the approximately 5.6 billion barrels of oil that U.S. refiners accepted in 2006, approximately 40 percent was heavier than that stored in the SPR. Refineries that process heavy oil cannot operate at normal capacity if they run lighter oils. For instance, DOE’s December 2005 study found that the types of oil currently stored in the SPR would not be fully compatible with 36 of the 74 refineries considered vulnerable to supply disruptions. DOE estimated that if these 36 refineries had to use SPR oil, U.S. refining throughput would decrease by 735,000 barrels per day, or 5 percent, substantially reducing the effectiveness of the SPR during an oil disruption, especially if the disruption involved heavy oil. To improve the compatibility of SPR oil with refineries in the United States, the DOE study concluded that the SPR should contain about 10 percent heavy oil. However, our August 2006 report found that DOE may have underestimated how much heavy oil should be in the SPR to maximize compatibility with refiners. We also found DOE may have underestimated the potential impact of heavy oil disruptions on gasoline production. Several refiners who process heavy oil told us that they would be unable to maintain normal levels of gasoline production if forced to rely on SPR oil as currently constituted. For example, an official from one refinery stated that if it exclusively used SPR oil in its heavy crude unit, it would produce 11 percent less gasoline and 35 percent less diesel. Representatives from other refineries told us they might need to shut down portions of their facilities if they could not obtain heavy oil. For these reasons, we recommended that DOE conduct a new review of the optimal oil mix in the SPR and determine the maximum volume of heavy oil that could be effectively put in the reserve. In addition, we recommended that DOE consider filling the SPR by acquiring a steady dollar value of oil over time, rather than a steady volume of oil over time as has occurred in recent years. This “dollar-cost- averaging” approach would allow DOE to take advantage of fluctuations in oil prices and ensure that more oil would be acquired when prices are low and less when prices are high. In our 2006 report, we found that if DOE had used this approach from October 2001 through August 2005, it could have saved approximately $590 million in fill costs. We also ran simulations to estimate potential future cost savings from using a dollar- cost-averaging approach over 5 years and found that DOE could save money regardless of the price of oil as long as there is price volatility, and that the savings would be generally greater if oil prices were more volatile. We also recommended that DOE consider allowing oil companies participating in the royalty-in-kind program more flexibility to defer their deliveries to the SPR at times when filling would significantly tighten the market or when prices are expected to decline. In return for these deferrals, companies would provide additional barrels of oil when they resumed deliveries. DOE has already approved some delivery deferrals at companies’ requests, such as during the winter 2002-2003 oil workers’ strike in Venezuela. From October 2001 through August 2005, DOE received an additional 4.6 million barrels of oil for the SPR valued at approximately $110 million as payment for these delivery deferrals. However, DOE has denied some deferral requests and experts have noted that there is room to expand the use of deferrals. Experts noted DOE would need to exercise its authority to deny deferrals at times when it is in the national interest. Nonetheless, given that the SPR currently holds roughly 56 days of net imports, we believe there is sufficient inventory for some flexibility in allowing deferrals. In updating us on the status of recommendations we made to DOE in our August 2006 report, DOE indicated that its November 8, 2006, rule on SPR acquisition procedures addressed our recommendations on dollar-cost- averaging and deferrals. However, the new acquisition rule does not specifically address our recommendations to study both how to implement a dollar-cost-averaging strategy and how to provide industry with more deferral flexibility. In subsequent comment, DOE noted that the November 8, 2006, acquisition procedures do not address dollar-cost-averaging, but they do address flexibility of purchasing and scheduling in volatile markets. As to our recommendation on the optimal mix of oil in the SPR, DOE indicated that, due to the planned SPR expansion, such determinations should wait until it prepares a new study of U.S. Gulf Coast heavy sour crude refining requirements. We believe the SPR expansion offers DOE an ideal opportunity to change the SPR’s oil mix to include heavier oils that are less costly to acquire and better match U.S. refining capacity. We look forward to DOE completing its new study of U.S. Gulf Coast heavy crude refining requirements and believe such a study will find that DOE should include at least 10 percent heavy oils in the SPR. There are several reasons that purchasing oil—as DOE did until 1994— may be more cost-effective than filling the SPR using the current royalty- in-kind program. For instance, there may be fewer bidders for the royalty oil under the current exchange system than a direct cash purchase system, which in turn may limit competition and the exchange deals that DOE can negotiate. In the exchange process, a single company must be able to and interested in both accepting oil at the designated market centers and delivering other oil with specific characteristics to the SPR. This may limit the number of companies interested in bidding on exchange contracts. In contrast, if DOE purchased oil, many additional companies may be interested in selling their oil, increasing competition and lowering prices. In 2007, the then Deputy Assistant Secretary for Petroleum Reserves, who directed activities of the SPR, told us that he agrees with this reasoning. The inherent limits of exchanging versus direct purchases are compounded by the fact that DOE and Interior have not systematically analyzed where to send royalty oil in a way that maximizes the value of the exchanges. The value of exchanges is a function of both the costs to deliver oil to market centers and the deals that DOE can negotiate at particular market centers. The informal process that DOE and Interior currently use to identify market centers does not systematically analyze the tradeoffs between these two factors to identify market centers that optimize net value to the government. In addition, royalty-in-kind exchanges add a layer of administrative complexity to the task of filling the SPR, increasing the potential for waste or inefficiency. In a January 2008 report, the DOE Inspector General concluded that DOE does not have an effective control system over receipts of royalty oil from Interior at the market centers. Specifically, the Inspector General found that DOE did not have adequate controls to ensure that the volumes of oil that contractors reported to have received from Interior at the market centers matched scheduled deliveries. As a result, DOE did not have assurance that it received all of the oil that Interior shipped, raising concerns that DOE may not have received its full entitled deliveries to the SPR. If DOE purchased all of its oil, it would no longer need to exchange oil at designated market centers and would not need to coordinate with Interior. Moreover, rather than diverting a fraction of the oil collected through the royalty-in-kind program to fill the SPR, Interior could sell that fraction in competitive sales, as it currently does for the other oil it receives through the royalty-in-kind program. A senior Interior official said that selling the royalty oil would be simpler for Interior to administer than the current exchanges. Further, DOE’s method for evaluating bids is more robust for cash purchases than royalty-in-kind exchanges, increasing the likelihood that cash purchases are more cost-effective. In November 2006, DOE issued a final rule that describes how DOE will evaluate offers when it is purchasing oil and when it is exchanging royalty oil for other oil for the SPR. This rule provides DOE with considerable flexibility in the degree of analysis it can conduct when evaluating offers, and, in practice, DOE’s method for evaluating bids for cash purchases has been more robust than it has for exchanges. For example, in April 2007, DOE solicited two different types of bids—one to purchase oil for the SPR in cash and one to exchange royalty oil for other oil to fill the SPR. In deciding whether to purchase oil, DOE evaluated the bids it received in the context of overall market trends. It concluded that the offers it received from sellers were priced too high, in part because the price of oil was generally high and because the prices of the specific type of oil DOE sought to purchase were unusually high relative to other oil types. As a result, DOE rejected offers to purchase oil when the spot price for Light Louisiana Sweet (LLS)—a commonly used benchmark for Gulf Coast oil—was about $69 per barrel and decided to delay purchasing any oil until at least the end of the summer driving season. In contrast, DOE’s method for evaluating bids for exchanging royalty oil focused on whether the oil DOE would receive would be at least the same value as the oil it would exchange. It did not include an analysis of whether overall market conditions indicated that it would be more profitable for the federal government to stop or delay exchanges and have Interior sell the royalty oil for cash instead. In this case, in the same month, DOE entered into royalty oil exchange contracts when the spot price of LLS was about $67 a barrel, effectively committing the government to pay—through foregone revenues to the U.S. Treasury— roughly the same price for oil that DOE concluded was too high to purchase. Moreover, in November, it awarded additional exchange contracts when the spot price of LLS had reached $96 a barrel. It should also be noted that the current exchange method is less transparent than direct purchases because the primarily cash-based federal budget does not account for noncash transactions. Interior estimates that the royalty-in-kind program cost the federal government in total foregone revenue $4.6 billion from fiscal year 2000 through fiscal year 2007. This foregone revenue was not reflected in the federal budget since no federal cash flows were involved. Congressional budget decisionmakers therefore have not had the opportunity to consider whether the value of the transferred oil could be reallocated to other competing resource needs. Importantly, the royalty-in-kind effort to fill the SPR creates, essentially, a “blind spot” where neither DOE nor Interior, the two agencies responsible for running the joint program, systematically examines whether exchanges of millions of barrels of royalty oil have been a cost-effective approach to filling the reserve. DOE does conduct a prospective analysis to estimate whether the value of the oil it will receive in the exchanges will be at least as valuable as the royalty oil it will exchange. However, DOE enters into exchange agreements that can last 6 months, and DOE’s initial estimates of the values of the different oil types may not hold over the duration of the contracts. DOE has not analyzed any of the completed exchanges to determine whether those exchanges performed as well as expected. Similarly, when evaluating the performance of the royalty-in-kind program overall, Interior does not analyze whether the royalty oil transfers to DOE are a cost-effective means to fill the reserve. The 60.7 million barrels of oil that Interior transferred to DOE from fiscal year 2004 to 2005 accounted for 58 percent of all the royalty-in-kind oil that Interior collected during that time. While Interior reports to Congress each year on the financial performance of its royalty-in-kind program, these reports have not included a measure of the cost-effectiveness of using royalty oil to fill the SPR. Because the SPR has reached sufficient size to address near-term supply disruptions, decisions about future fill practices can be made in a more flexible, cost-effective manner without unduly hurting our ability to respond to such disruptions. With oil prices recently exceeding $100 a barrel, there should be greater interest in finding ways to reduce fill costs. If it is to reach its goal of filling the expanded SPR by 2018, DOE will have to, in some combination, purchase or receive through royalty-in-kind transfers roughly 300 million barrels of oil. Our work shows that substantial cost savings could be achieved through increased purchasing of heavy oil, a dollar-cost-averaging purchasing strategy, more flexibility in the timing of oil purchases and deliveries, and greater attention paid to the opportunity costs of filling the SPR with royalty oil. Based on our past estimates of the cost savings potential of dollar cost averaging and the significantly lower cost of heavier oils, DOE could save well over 10 percent of the costs of filling the SPR to the currently authorized level—an amount that is likely well in excess of $1 billion. During this era of dire national long-term fiscal challenges, it is all the more important that DOE make fill decisions in a cost-effective manner. Mr. Chairman, this concludes my prepared statement. I would be pleased to respond to any questions that you or other members of the Committee may have at this time. For further information about this testimony, please contact me, Frank Rusco, at 202-512-3841 or [email protected]. Contact points for our Offices of Congressional Relations and Public Affairs may be found on the last page of this statement. Contributors to this testimony include Ben Bolitzer, Chase Huntley, Heather Hill, Jon Ludwigson, Tim Minelli, Michelle Munn, Alison O’Neill, G. Greg Peterson, and Barbara Timmerman. This is a work of the U.S. government and is not subject to copyright protection in the United States. It may be reproduced and distributed in its entirety without further permission from GAO. However, because this work may contain copyrighted images or other material, permission from the copyright holder may be necessary if you wish to reproduce this material separately. | The Strategic Petroleum Reserve (SPR) was created in 1975 to help insulate the U.S. economy from oil supply disruptions and currently holds about 700 million barrels of crude oil. The Energy Policy Act of 2005 directed the Department of Energy (DOE) to increase the SPR storage capacity from 727 million barrels to 1 billion barrels, which it plans to accomplish by 2018. Since 1999, oil for the SPR has generally been obtained through the royalty-in-kind program, whereby the government receives oil instead of cash for payment of royalties on leases of federal property. The Department of Interior's Minerals Management Service (MMS) collects the royalty oil and transfers it to DOE, which then trades it for oil suitable for the SPR. As DOE begins to expand the SPR, past experiences can help inform future efforts to fill the reserve in the most cost-effective manner. In that context, GAO's testimony today will focus on: (1) factors GAO recommends DOE consider when filling the SPR, and (2) the cost-effectiveness of using oil received through the royalty-in-kind program to fill the SPR. To address these issues, GAO relied on its 2006 report on the SPR, as well as its ongoing review of the royalty-in-kind program, where GAO interviewed officials at both DOE and MMS, and reviewed DOE's SPR policies and procedures. DOE provided comments on a draft of this testimony, which were incorporated where appropriate. To decrease the cost of filling the SPR and improve its efficiency, GAO recommended in previous work that DOE should include at least 10 percent heavy crude oils in the SPR. If DOE bought 100 million barrels of heavy crude oil during its expansion of the SPR it could save over $1 billion in nominal terms, assuming a price differential of $12 between the price of light crude oil and the lower price of heavy crude oil, the average differential over the last five years. Having heavy crude oil in the SPR would also make the SPR more compatible with many U.S. refineries, helping these refineries run more efficiently in the event that a supply disruption triggers use of the SPR. DOE indicated that, due to the planned SPR expansion, determinations of the amount of heavy oil to include in the SPR should wait until it prepares a new study of U.S. Gulf Coast refining requirements. In addition, we recommended that DOE consider acquiring a steady dollar value--rather than a steady volume--of oil over time when filling the SPR. This "dollar-cost-averaging" approach would allow DOE to acquire more oil when prices are low and less when prices are high. GAO found that if DOE had used this purchasing approach from October 2001 through August 2005, it would have saved approximately $590 million, or over 10 percent, in fill costs. GAO's simulations indicate that DOE could save money using this approach for future SPR fills, regardless of whether oil prices are trending up or down as long as there is price volatility. GAO also recommended that DOE consider giving companies participating in the royalty-in-kind program additional flexibility to defer oil deliveries in exchange for providing additional barrels of oil. DOE has granted limited deferrals in the past, and expanding their use could further decrease SPR fill costs. While DOE indicated that its November 2006 rule on SPR acquisition procedures addressed our recommendations, this rule does not specifically address how to implement a dollar-cost-averaging strategy. Purchasing oil to fill the SPR--as DOE did until 1994--is likely to be more cost-effective than exchanging oil from the royalty-in-kind program for other oil to fill the SPR. The latter method adds administrative complexity to the task of filling the SPR, increasing the potential for waste and inefficiency. A January 2008 DOE Inspector General report found that DOE is unable to ensure that it receives all of the royalty oil that MMS provides. In addition, we found that DOE's method for evaluating bids has been more robust for cash purchases than royalty-in-kind exchanges, increasing the likelihood that cash purchases are more cost-effective. For example, in April 2007, DOE solicited two different types of bids--one to purchase oil for the SPR in cash and one to exchange royalty oil for other oil to fill the SPR. DOE rejected offers to purchase oil when the spot price was about $69 per barrel, yet in the same month, DOE exchanged royalty-in-kind oil for other oil to put in the SPR at about the same price. Because the government would have otherwise sold this royalty-in-kind oil, DOE committed the government to pay, through foregone revenues to the U.S. Treasury, roughly the same price per barrel that DOE concluded was too high to purchase directly. |
The Postal Service is a corporation-like organization that was created by the government to provide postal services and to help bind the nation through the personal, educational, literary, and business correspondence of the people. Over the years, the government has created a number of corporations or corporation-like organizations to fulfill a variety of public functions or purposes of a predominately business nature. Historically, such organizations have been created on an individual need basis with the characteristics and functions of each being tailored to its specific mission. In general, these organizations can be identified under certain categories, such as wholly-owned government corporations, mixed-ownership government corporations, government-sponsored enterprises (GSE), or government-created private corporations. Grouping these government-created corporations and corporation-like organizations into these categories can be helpful because such organizations share certain common characteristics. However, for comparative purposes, it should be noted that even within these categories, the organizations are structured and governed in a variety of ways. Therefore, for purposes of this report, we found it more helpful to review each organization in our study individually without regard to any particular category under which it may be identified. Appendix I contains additional information about government-created corporations and corporation-like organizations. The Postal Reorganization Act of 1970 (1970 Act) created the Postal Service, designated it as an independent establishment of the executive branch, and created a Board of Governors to be its governing body. The Postal Service is not identified as falling under any particular category of government corporation or government-created corporation-like organization. The Postal Service has reported that it is not a government corporation; however, it is frequently considered by others to be one and has been previously included in major government corporation studies done over the last several years. According to the Postal Service, its Board of Governors is comparable to the board of directors of a private sector corporation. The Board of Governors directs the exercise of the powers of the Postal Service, directs and controls its expenditures, reviews its practices, and conducts long-range planning. It sets policy; participates in establishing postage rates; and takes up matters, such as mail delivery standards and capital investments and facilities projects exceeding $10 million. It also determines the pay of the Postmaster General (PMG) and approves the pay of other Postal Service officers. By statute, the Postal Service is to maintain compensation and benefits for all officers and employees on a standard of comparability with the private sector. However, no officer or employee can receive pay in excess of the rate for level I of the Executive Schedule—currently $148,400. The Board consists of 11 members, including (1) 9 Governors appointed by the president, with the advice and consent of the Senate, to 9 year staggered terms; (2) the PMG, who is appointed by the Governors; and (3) the Deputy Postmaster General (DPMG), who is appointed by the Governors and the PMG. By law, Governors are chosen to represent the public interest and cannot be representatives of special interests. They serve part time and may be removed only for cause. Not more than five of the nine Governors may belong to the same political party. No other qualifications or restrictions are specified in law. The 1970 Act provided for each Governor to receive an annual salary of $10,000, plus $300 a day and travel expenses for not more than 30 days of meetings each year. The act providing appropriations to the Postal Service for fiscal year 1997 increased the Governors’ annual salaries to $30,000 per year, but the $300 daily meeting allowance remained unchanged. To identify current and former members’ areas of concern, including specific issues and their suggested legislative changes, we (1) interviewed all 11 members of the current Board (including the PMG and DPMG); and (2) interviewed 2 former Governors appointed after December 1, 1985, whom we were able to contact. We also interviewed the PMG’s predecessor and the PMG serving at the time of the 1970 Postal Service reorganization. The latter also served as the first Chairman of the Board of Governors. Appendix II lists the interviewees included in our study, position(s) held, and date(s) of appointment. We sent each interviewee a list of questions, judgmentally grouped into broad areas, prior to our interview. This list guided our interviews (see app. III). We asked each interviewee if he or she had any issues or concerns within each of the broad areas. If the interviewees had concerns, we asked them to elaborate and identify any specific legislative action(s) they believed Congress might want to consider. We also offered interviewees an opportunity to discuss any other concerns related to the Board. For each broad area discussed, we tallied the number of interviewees who believed legislative changes were either needed or not needed. If interviewees did not definitely answer yes or no, we did not include their answers in our tallies. To compare the characteristics of the boards of other government-created organizations with those of the Postal Service Board, we developed and sent a matrix to 11 boards, including the Postal Service Board. The matrix covered 73 characteristics, grouped in such broad categories as (1) the board’s mission and responsibilities, (2) the board’s authority, (3) board members’ compensation, and (4) board composition. In developing and refining our matrix and interview questions, we researched and reviewed available information on the structure and characteristics of public and private corporate boards, reviewed prior work we had done on government corporations, and consulted with knowledgeable individuals on Postal Service Board activities. Except for the Postal Service, we judgmentally selected the government-created organizations included in our study in order to have a mix of the various types. We selected two government-sponsored enterprises, two wholly-owned government corporations, two mixed-ownership government corporations, and two federally created private corporations. In making these selections, we used our recent report on government corporations, as well as other prior work we had done, to identify organizations of various types. To provide a broader range of organizations for comparison purposes, we also selected two foreign postal administrations—Canada Post and Australia Post. We selected these organizations primarily because of our previous work in this area. These organizations were described in a recent Price Waterhouse report as among the most “progressive postal administrations.” In this report, we highlight differences between the Postal Service and the other government-created organizations as they apply to the four issues most frequently cited by current and former Board members as needing legislative attention. Some of the other issues raised by the interviewees, however, were outside the scope of our matrix. Therefore, we did not have sufficient information to make comparisons with the other government-created organizations on all of the issues raised by the interviewees. Appendix IV contains selected details from the matrices. We did not verify the boards’ responses to our matrix. However, we did ask each of the boards that completed our matrix to review their respective sections of appendix IV for accuracy. To provide the Subcommittee with additional information on governance issues that might be helpful in its deliberations on postal reform, we reviewed a broad range of available literature affecting both public and private boards. The result of our literature research is included in our discussions of governance issues. We conducted our review at postal headquarters in Washington, D.C., between July 1996 and April 1997 in accordance with generally accepted government auditing standards. We requested comments on a draft of this report from the PMG and the Chairman of the USPS Board of Governors. Their comments are discussed at the end of this letter and included as appendixes V and VI, respectively. A majority of the current and former members of the Postal Service Board of Governors whom we interviewed believed legislative attention may be warranted in three areas—the Board’s authority, Board members’ compensation, and Board members’ qualifications. Although there was no consensus among the members on the specific issues within each area of concern, several issues were mentioned frequently, and a number of legislative changes were offered for consideration. The most frequently cited issues were (1) the limitations on the Board’s authority to establish postage rates; (2) the inability of the Board to pay the PMG more than the rate for level I of the Executive Schedule—currently $148,400; (3) the Board’s lack of pay comparability with the private sector; and (4) qualification requirements that are too general to ensure that Board appointees possess the kind of experience necessary to oversee a major government business. The issue most frequently cited by current and former Postal Service Board members as needing legislative attention was the limitations on the Board’s authority to establish postage rates. Ten of the 15 interviewees believed that the current ratemaking process adversely affects the Postal Service’s ability to compete with its private sector competitors. They were concerned that the current ratemaking process is too restrictive and therefore limits the Postal Service’s ability to quickly adjust postage rates in a highly competitive and rapidly changing marketplace. Three of the remaining five interviewees did not comment specifically on this issue, and two said the current ratemaking process should not be changed. Under the current ratemaking process, the Postal Service, through its Board of Governors, is to propose changes to the Postal Rate Commission (PRC)—an independent regulatory agency established in the executive branch—and request that it issue a recommended decision. PRC, after holding public hearings and reviewing data provided by the Postal Service, is to provide the Postal Service Board of Governors with its recommended decision concerning proposed rate changes. By law, this process can take up to 10 months. After receiving a recommendation from PRC, the Governors can approve, reject, or allow the recommended rates to take effect under protest; or, under certain circumstances, the Governors can modify a PRC decision. However, before the Governors can modify any PRC-recommended rates, they are required to return the rate case to PRC for reconsideration. After PRC renders a further rate decision, the nine Governors can modify that decision only by a unanimous vote—a task that some members said was almost impossible to achieve because, in their experience, the Governors seldom agree unanimously on any issue. In fact, there has been only one instance—in 1980—where the Governors modified a PRC recommendation for First-Class postage. Interviewees suggesting legislative attention in this area offered a number of changes for consideration. Two suggestions were mentioned most frequently. One suggestion was to use administrative law judges to hear rate cases and make recommendations to the Board—rather than going through PRC. The members believed this change would streamline the ratemaking process and still give due consideration to the views of the mailing community. The other suggestion was that the Board be given the authority to override a PRC recommended rate decision with something less than a unanimous vote. For example, suggestions were made that the unanimous vote requirement be changed to either a majority or a two-thirds majority vote. Other legislative changes offered for consideration included (1) giving the Board authority to raise rates within legislatively established parameters (e.g., allow the Board to raise postage rates annually up to the increase in a designated index, such as the Consumer Price Index); (2) restricting PRC’s ratemaking role to monopoly mail—and a related suggestion allowing the Postal Service to establish private sector-type subsidiary companies that would compete directly with private carriers of nonmonopoly mail; and (3) legislatively requiring that PRC render its rate decisions in much less time than the 10 months currently allowed by law. One interviewee, however, said the law should not be changed to require faster decisions from PRC because, given current complex ratemaking requirements, it is unreasonable to expect faster decisions. The two interviewees who said the current ratemaking process should not be changed agreed that the current ratemaking process negatively affected the Postal Service’s ability to compete with private sector carriers. However, they believed a better way of addressing the ratemaking issue was to create a PRC-type body to regulate private sector carriers’ rates rather than change the ratemaking process within the Postal Service. Our survey of nine other government-created organizations showed some similarity between the ratemaking processes of the Postal Service and the processes reported by two other organizations—Australia Post and Canada Post. No similarities were apparent at the other seven organizations. According to Australia Post, its Board of Directors sets prices for all products and services. The board must notify the Minister for Communications and the Arts of any intention to alter the price of the standard postal rate and the Minister has the opportunity to disallow it. Although it has no direct authority over the price, the Australian Competition and Consumer Council has the opportunity to consider any proposal and make its views known to the Minister as part of his/her consideration of proposed price alterations. According to Canada Post, its Board of Directors oversees virtually all ratemaking decisions. This includes decisions for such products as basic domestic and international single-piece letters, international printed matter, and some registered mail products. Once new postage rate regulations are proposed, interested parties are given a 60-day period during which they can provide written comments on the rate change. For various reasons, the ratemaking process at the Postal Service contrasts sharply with the reported ratemaking processes at Fannie Mae, Freddie Mac, AMTRAK, FDIC, and TVA. Each of these organizations is permitted to set prices in a manner very much like any private sector corporation—i.e., independent of a third-party review or approval. Ratemaking processes at the RTB and the CPB are not comparable to the Postal Service’s ratemaking process. At the RTB, its Board of Directors makes loans at legislatively established rates. At the CPB, there are no products or services sold and, therefore, no ratemaking procedures. Proposed legislation introduced in Congress in January 1997 to reform the Postal Service, H.R. 22, proposes significant changes to the ratemaking process and to the long-standing relationship between the Postal Service and PRC. Current law requires that the Postal Service file a request with PRC for changes in rates for services offered. H.R. 22 would change that requirement. It would divide postal products into two categories, noncompetitive mail and competitive mail. Noncompetitive mail would include those products, such as First-Class Mail, for which there are few alternatives to the Postal Service. For products in the noncompetitive mail category, the Service would establish rates using a price cap based on the Gross Domestic Product Chain-Type Price Index modified by an adjustment factor, which PRC would determine every 5 years. Once the cap was established, the Postal Service would generally be able to adjust prices annually without filing a request for change with PRC. Competitive mail, such as Express Mail, would include those products facing full competition within the marketplace. The Postal Service could price competitive products as it saw fit, without filing a request for change with PRC. However, Postal Service pricing of competitive mail would be subject to the constraints of the antitrust laws as well as requirements that rates cover the Service’s costs and make a reasonable contribution to overhead. PRC would conduct annual audits of the Postal Service to ensure it was acting in compliance with the law with respect to both noncompetitive and competitive products. Adoption of the ratemaking proposals in H.R. 22 would increase the ratemaking similarities between the Postal Service and Canada Post and Australia Post. In testimony before your Subcommittee on the Postal Service on July 10, 1996, the PRC Chairman noted that proposed legislation to reform the Postal Service included several proposals that would increase the Postal Service’s flexibility to price its products. He also noted that under the proposed ratemaking process, provisions for multiple reconsideration and judicial reviews of rate decisions would be eliminated. Generally, the Board has adjusted rates every 3 years or so against a backdrop of an extensive body of public input. Under H.R. 22, the Board could be adjusting many rates as often as annually. The PRC Chairman said that the current system of multiple checks and balances is, in some instances, too much of a good thing. At the same time, however, he cautioned about going too far in the opposite direction. Ratemaking issues were again discussed at a hearing before your Subcommittee on the Postal Service on April 9, 1997. Witnesses included economists who helped formulate and design price cap plans for telecommunications and utility regulatory entities, as well as experts in antitrust laws, telecommunication regulation, postal arbitration, and contracts. Differences in opinion among these witnesses as to how well price caps would work for the Postal Service indicate that the debate over the Postal Service’s pricing system and the roles of the Board of Governors and PRC have not yet been resolved among all interested parties. The issue of ratemaking is a central part of the ongoing congressional deliberations related to the proposed postal reform legislation (H.R. 22). The second most frequently cited issue was the Board’s inability to pay the PMG more than the rate for level I of the Executive Schedule—currently $148,400. Eight of the 15 interviewees said the Board should be given more flexibility to compensate the PMG so that pay could be more comparable with the private sector. One interviewee strongly disagreed that compensation changes were needed, and the other six interviewees had no comment on the issue. The eight interviewees who believed the Board should have more flexibility to compensate the PMG were concerned that because of the pay cap, the Board might have a difficult time filling future PMG vacancies with highly qualified candidates. They were concerned that many highly qualified candidates might not even consider the position of PMG because of more financially lucrative positions in the private sector. These eight interviewees suggested legislative consideration be given to removing the pay cap on the PMG’s pay. As an alternative, one of the eight interviewees said legislative consideration should be given to allowing the Board to award the PMG performance-based bonuses over and above the legislated pay cap. The one interviewee with an opposing view did not believe the Board would have a difficult time attracting highly qualified candidates to the PMG position at the current salary. That interviewee said people are attracted to the position because of its status and the desire to serve the public—not because they are seeking a highly paid position. Our survey of nine other government-created organizations showed that the PMG’s pay is in line with the reported pay received by the top officials in those organizations where pay is legislatively capped. Five of the nine organizations had legislative pay caps similar to the Postal Service’s. Those organizations were TVA, RTB, FDIC, AMTRAK, and the CPB. However, two organizations—Fannie Mae and Freddie Mac—were not subject to legislative pay caps. According to information provided by Fannie Mae and Freddie Mac, the chief executive officers (CEO) at these two organizations were paid substantially more than the PMG. Data provided show that in 1995, the CEOs at Fannie Mae and Freddie Mac were each paid more than $1 million, compared to the $148,400 paid the PMG. Our ability to make pay comparisons with the CEOs at Canada Post and Australia Post was limited because both organizations said they consider this information to be private. Information provided by Canada Post shows its CEO’s pay is set by Canada’s Governor in Council and was in the neighborhood of $200,000 (U.S.) in 1995. Australia Post did not provide specific information on its CEO’s pay but said the pay is set at a level that takes into account both public and private sector considerations. Executive compensation is, has been, and will likely continue to be, a hotly debated issue in both the public and private sectors. Recent literature on executive compensation in the private sector shows the issue to be sharply focused on the amount of compensation paid executives in comparison to the health of the company, returns to investors, and wages paid nonmanagerial employees. For example, Business Week reported in April 1997 that the average pay increase for top executives in U.S. companies last year was 54 percent, compared with an average increase of 3 percent for U.S. factory workers. It also reported that the average CEO in the United States was paid 209 times more than the average U.S. factory worker. According to the literature, the spread in pay between these two groups has continued to widen since the 1980s. As time passes, however, more and more private sector executives are reportedly seeing their compensation challenged by stockholders and employee unions who perceive the pay of some executives to be exorbitant. Other attempts are also being made to bring the issues surrounding executive pay to the forefront. For example, the American Federation of Labor-Congress of Industrial Organizations (AFL-CIO) launched an Internet site in April 1997 to give the public ready access to information on executive compensation for the Fortune 500 companies. Executive pay issues also exist within the public sector. The Senior Executives Association has cited lifting the 3-year freeze on Executive Level pay as one of its top priorities. Over time, the spread in pay between executives and other employees has narrowed. Along with the pay compression issue, Congress and the administration have become increasingly concerned about executive compensation in some government-created organizations and have been taking steps to address some of those concerns. For example, in October 1995, the President signed Executive Order 12976 requiring that certain bonuses paid executives of designated government corporations be preapproved by the Office of Management and Budget. Additionally, since 1992, Fannie Mae and Freddie Mac have been prohibited from providing compensation to any executive officer that is not reasonable and comparable with compensation for employment in other similar organizations (including other publicly held financial institutions or major financial services companies) involving similar duties and responsibilities. Also, a significant portion of potential compensation for executive officers must be based on the performance of the enterprises. Further, Fannie Mae and Freddie Mac are prohibited from entering into any severance agreement or contract with an executive officer, unless the Director of the Office of Federal Housing Enterprise Oversight of the Department of Housing and Urban Development approves the agreement or contract in advance. Although 12 of the 15 interviewees believed Board members’ pay was another area warranting legislative attention, there was substantial disagreement on the specific issues and possible legislative remedies. Some interviewees thought Board members’ pay should be increased, while others thought compensation should not be increased because Board service should be considered public service. Others thought the daily meeting attendance fee should be increased. Others thought periodic reviews of Board members’ pay should be required, and varying combinations of these changes were also offered for consideration. Six of the 15 interviewees said that even though Board members’ salaries were increased from $10,000 to $30,000 in 1996, they were still below private sector salaries and should be made more comparable. Five of the 15 interviewees also believed the law should be changed to increase the $300 daily fee members are paid for attending Board meetings. Interviewees who suggested legislative change were particularly concerned that there is no legal requirement that pay be reviewed on a periodic basis, and they pointed out that the time span between the last two pay increases was 26 years. Seven interviewees, however, said Board members’ salaries should not be increased, and four said daily meeting attendance fees should not be increased. Two interviewees did not comment on Board members’ salaries, and six did not comment on daily meeting attendance fees. Interviewees opposing these suggested legislative changes were generally of the opinion that Board service should be recognized as public service and that Postal Service Governors should not expect compensation similar to that found on private sector boards. Our comparison of Postal Governors’ pay with the reported pay of board members of nine other government-created organizations did not show major disparities. In fact, we identified only two notable differences. First, board members at Fannie Mae and Freddie Mac may elect to receive shares of stock in lieu of cash compensation. Second, board members at TVA and FDIC are paid more than Postal Service Governors, but they serve full time. None of the interviewees believed Postal Board Governors should serve full time. As discussed earlier, compensation is an area of contention in both the public and private sectors. Board members’ compensation, like CEOs’ compensation, is currently being examined from different angles by various interest groups—e.g., stockholders and employee unions. Work done by Spencer Stuart, a company that tracks board trends and practices at 100 major American corporations, showed that private sector board members’ annual salaries and meeting attendance fees averaged $55,300 in 1996 (ranging from $25,000 to $100,000). This compares to compensation of about $38,000 that the Postal Service Governors will likely receive in 1997 (salary plus the historical average of daily meeting attendance fees). The final issue cited by a majority of current and former members as needing legislative attention was the lack of well-defined qualification requirements for Board appointments. Eight of the 15 interviewees stated that the statutes governing Board appointments are too general and should be more precisely defined. Seven of the interviewees, however, said no legislative change should be made in the appointment process. They were generally of the opinion that the current process, which requires Senate confirmation, ensures that highly qualified candidates are appointed to the Board. The eight interviewees who favored more precisely defined qualification requirements believed that, historically, appointments to the Board have not always been based on an individual’s demonstrated ability to govern large corporations like the Postal Service. They were concerned that because qualification requirements are not clearly defined in law, the Board may not always have the most appropriate mix of skills for effectively managing an organization as big and as complex as the Postal Service. The interviewees suggested a number of legislative changes that they believed could enhance the appointment process. These included having an independent body make recommendations for Board appointments and delineating, in law, specific requirements for Board service. Examples of specific requirements mentioned included (1) requiring that appointees have corporate experience, (2) requiring a mix of geographic representation on the Board, and (3) requiring labor and mailing industry representation on the Board. The statutory restrictions/qualifications for board service at six of the other nine government-created organizations included in our study were more specific than the Postal Service’s. For example, at Fannie Mae and Freddie Mac, four of the five presidential appointees to the board must have specific business backgrounds: one must be from the mortgage lending industry, one must be from the home building industry, one must be from the real estate industry, and one must be from an organization representing consumer interests. At the CPB, statutes require that the nine appointed board members be selected from such fields as education, cultural and civic affairs, or the arts. Board members are also to represent various regions of the nation and professions, occupations, and various kinds of talent and experience appropriate to the function and responsibilities of the CPB. Additionally, of the nine board members, one is to be selected from among individuals who represent the licensees and permittees of public television stations, and one is to represent the licensees and permittees of public radio stations. Australia Post and AMTRAK statutes require that at least one board member have an understanding of employee issues. The RTB statutes require that of the Bank’s 13 board members, 3 be elected by stockholders of eligible cooperative borrowers, and 3 be elected by stockholders of eligible commercial borrowers. The statutory qualifications for board service at the other three government-created organizations included in our study (TVA, FDIC, and Canada Post) were similar to the Postal Service’s qualifications in that they were generally nonrestrictive. For example, requirements for board membership at FDIC state only that the three appointed members must be U.S. citizens and that no more than three of the five board members may be members of the same political party. Additionally, like the Postal Service, three of the other nine government-created organizations included in our study have provisions for ex officio membership on their boards. At the Postal Service, the PMG and DPMG are ex officio members of the Board. At the RTB, there are five ex officio members—all from the Department of Agriculture. Ex officio members on the FDIC board include the Comptroller of the Currency and the Director of the Office of Thrift Supervision. Additionally, one of the presidentially appointed members also serves as the chair of the board and full-time head of FDIC. The Secretary of Transportation and AMTRAK president serve as ex officio members on AMTRAK’s board. Current literature on private sector governance suggests that some aspects of corporate governance have been undergoing changes in recent years. Some stockholders, concerned with publicized instances of excessive executive compensation, coupled with unacceptable corporate performance, are increasingly scrutinizing governance issues, including the qualifications of board members. An article in the spring 1995 issue of Business Quarterly points to a lack of meaningful qualifications for board members and a lack of needed expertise and knowledge as two areas that could signal competence problems affecting board performance. The article goes on to point out that healthy boards require, among other things, a balance of qualifications, knowledge, skills, attitudes, and experiences. Business literature suggests that now, more so than in previous eras, corporations are developing more well-defined criteria for board membership—acknowledging that various roles on the board may require various backgrounds and skills. Although conceptually it may be desirable to have board representation for all stakeholders, it presents a real challenge to do so within the Postal Service structure. The Postal Service, unlike many other corporate and corporate-like organizations, has numerous stakeholders with widely varying interests and concerns, e.g., rural patrons, inner-city patrons, business mailers, six labor unions, and three management associations. If qualification requirements are changed, one challenge for Congress will be determining what qualifications or special interests, if any, should be represented on the Board. In our discussions with current and former members of the Postal Service Board of Governors, we also identified areas where some, but less than a majority of, interviewees believed legislative attention is needed. Those areas were (1) the Board’s mission and responsibilities, (2) the Board’s relationship with postal management, (3) the Board’s accountability and performance measures, and (4) the Board’s composition and structure. Additionally, our review of pertinent literature indicated that others have expressed concerns within these same four areas as they relate to government-created organizations in general. A recurring theme in this literature focuses on accountability. For example, in April 1995, the Congressional Research Service reported that a key issue for policymakers is how to make government corporations politically accountable for their policies and operations while still giving them the necessary financial and administrative discretion to function in a commercial manner. An article in the February 1995 issue of Government Executive also expressed concern that quasi-government organizations are largely unaccountable for their actions. Some of the current and former Postal Service Board members we spoke with had the following specific concerns in these four areas. Also, where applicable, we have included as part of our discussion other related issues identified as part of our literature search. Six interviewees cited the Board’s mission and responsibilities as an area needing legislative attention. Concerns in this area centered on two issues. One issue was the Board’s uncertainty as to how far it should go in letting the Postal Service compete and operate like a private sector corporation. The other issue concerned the limited specificity in law concerning the Board’s oversight responsibilities. Four of the six interviewees said that uncertainties about how far the Postal Service should go in competing with the private sector are not helped by the Postal Service’s current legal designation. By law, the Postal Service is designated as an independent establishment in the executive branch. One interviewee characterized this situation by saying that the Postal Service’s current legal designation places it in the unenviable position of being “neither fish nor fowl,” i.e., neither an executive agency nor a private corporation. The four interviewees suggested that Congress consider clarifying the Postal Service’s legal designation, which, in turn, should provide a clearer picture of the Service’s mission. Legal status questions are not unique to the Postal Service. Such questions are being raised with regard to government-created organizations in general. Unclear legal definitions are disconcerting to some, while others use it to their advantage. For example, a fellow at both the National Academy of Public Administration (NAPA) and the Johns Hopkins Center for the Study of American Government said government-created organizations can generally choose whatever legal status best suits their purposes. He cited a 1977 incident in which the Secretary of Housing and Urban Development instructed Fannie Mae to increase its mortgage purchases in the inner cities. Fannie Mae replied that, as a private agency, its principal obligation was to its stockholders, who would object to its investing in riskier properties. A few years later, however, when the administration attempted to strip away some of Fannie Mae’s special privileges, such as its tax exemptions, Fannie Mae responded, “Congress established Fannie Mae to run efficiently as an agency, not as a fully private company.” Without those special relationships, Fannie Mae said, it would not be able to survive. While discussing the Postal Service Board’s mission and responsibilities, four of the six interviewees said the Board could benefit from more detailed guidance concerning its oversight responsibilities. They suggested that Congress consider making the law more specific. They were concerned that the broad guidance currently in law does not always provide them with a good basis for knowing Congress’ desires as the Postal Service moves toward the 21st century. Five interviewees cited the Board’s relationship with postal management as an area needing legislative attention. The most frequently cited issue related to perceptions that the position of Chief Postal Inspector did not have all the independence necessary. Four of the five interviewees said that to help ensure the Chief Postal Inspector’s independence, he/she should be appointed by the Board and be directly accountable to the Board—similar to the status of the Postal Service’s recently appointed Inspector General. They said the Chief Postal Inspector should not be appointed by, or be considered part of, management. The five interviewees also had three other suggestions for legislative consideration in this area, but no one suggestion was cited by more than two of the interviewees. The specific suggestions included the following. The Postal Service’s General Counsel should be appointed by the Board and be directly accountable to the Board—similar to the suggestion concerning the Chief Postal Inspector. The law should require that the PMG be appointed from within the Postal Service. This suggestion stemmed from the belief that the Postal Service’s size and complexity makes it very difficult for an outsider to be an effective Postmaster General during the early years of his/her appointment. The PMG and DPMG should be allowed to vote on all matters that come before the Board, except for personnel matters relating directly to them. This suggestion was made to make the PMG and DPMG a more integral part of the Board. Currently, the PMG and DMPG are prohibited from voting on some issues that come before the Board, e.g., increases in postage rates. Six interviewees cited Board accountability and performance measures as another area needing legislative attention, although no one issue was cited by more than two of the interviewees. Specific suggestions for legislative consideration included the following. Periodic peer reviews should be required as a prerequisite for continued service on the Board. The fiduciary responsibilities of Board members should be more clearly delineated in law—particularly in light of the Postal Service’s current legal status. Specific actions for which the Board will be held accountable should be clearly delineated in law. A mechanism should be established for removing nonproductive Board members. One of the interviewees, however, cautioned against such an action, citing the potential for abuse. Although the interviewees discussed accountability from a boardroom perspective, it is, in fact, a topic pertinent to all facets of organizational life. As discussed earlier, accountability is an issue being grappled with as the government examines its corporations and corporation-like organizations. Defining accountability in government begins with clearly establishing who is accountable to whom, and for what. Four interviewees cited Board composition and structure as an area needing legislative attention, but no one issue was cited by more than two of the interviewees. Specific suggestions for legislative attention included the following. The current 9-year appointments to the Board are too long and should be shortened. Appointments should be made more comparable to the private sector, where terms are generally for no more than 3 years. Board members should be prohibited from serving more than one term. Former Postal Service employees should be prohibited from serving on the Board. The process for selecting a Chair should be changed. The Chair should be appointed by the president rather than elected by the Board. The PMG should be designated, in law, as the permanent Chair of the Board. The law should be clarified to explicitly state that the PMG can be elected Chair by the members. Management should have only one, not two, seats on the Board. There were two areas discussed where none of the current or former Board members interviewed believed legislative attention is needed. These areas were (1) Board staffing and (2) the Board’s legal status. All of the interviewees agreed that Board staffing was an internal management issue and not an issue warranting legislative attention. They said the Board has the authority to hire as many staff as it needs to fulfill its responsibilities. Most individuals believed that the current staff, consisting of two professionals and two administrative staff, is adequate. However, four interviewees believed that the Board should consider expanding its staff to include experts in such areas as real estate, finance, and ratemaking. Nevertheless, they agreed that any decision to hire additional staff should be made by the Board itself, not by legislative fiat. Additionally, current and former Board members we spoke with saw no need for legislative action to change the Board’s legal status. The Board of Governors is part of the Postal Service and does not have a separate legal status. Nevertheless, discussion of the Board’s legal status prompted several interviewees to reiterate their concerns about the Postal Service’s legal status. As noted earlier, some interviewees believed that the current legal definition of the Postal Service—an independent establishment of the executive branch—is unclear and causes uncertainties about how far the Postal Service can go in competing with the private sector. The PMG and the Chairman of the Postal Service Board of Governors provided written comments on a draft of this report. The PMG said most of the issues raised in the report speak for themselves and have been discussed by the Governors and PMGs for many years. His comments also included supplemental information on compensation practices at TVA and CEO pay at nine foreign postal administrations plus the USPS. His comments are reproduced in appendix V. The Chairman of the Postal Service Board of Governors said in his written comments that the report provides valuable information on governance issues and how other boards function. He also said many of the issues raised in the report have been discussed by the various Boards of the Postal Service over the years. His comments are reproduced in appendix VI. Program personnel at the nine other organizations included in this report for comparison purposes were provided copies of a draft of appendix IV for their review and comment. The program personnel at two of the nine (AMTRAK and CPB) organizations said the information was accurate as presented. Program personnel at the other seven organizations either provided additional information or made technical suggestions that have been incorporated into the appendix as appropriate. We are sending copies of this report to the Ranking Minority Member of your Subcommittee, the Chair and Ranking Minority Member of the Senate oversight subcommittee, the Postal Service Board of Governors, the PMG, and other interested parties. Copies will also be made available to others upon request. Major contributors to this report are listed in appendix VII. If you have any questions about the report, please call me on (202) 512-4232. The organizations we selected to compare with the Postal Service Board of Governors are generally identified as wholly-owned government corporations, mixed-ownership government corporations, GSEs, or federally created private corporations. In addition, we compared the boards of two selected foreign postal administrations with the Board of Governors of the Postal Service. Although there is no authoritative definition for the term “government corporation,” there are certain characteristics common to government corporations that were identified by President Truman in 1948 and that have been referred to and accepted over the years by public administration experts. According to President Truman, a corporate form of organization is appropriate for the administration of government programs that are predominately of a business nature, produce revenue and are potentially self-sustaining, involve a large number of business-type transactions with the public, and require a greater flexibility than the customary type of appropriations budget ordinarily permits. In 1981, NAPA defined a wholly-owned government corporation as a corporation pursuing a government mission assigned in its enabling statute, financed by appropriations, with assets owned by the government and controlled by board members or an administrator appointed by the president or a department secretary. It defined a mixed-ownership government corporation as a corporation with both government and private equity, with assets owned and controlled by board members selected by both the president and private stockholders, and as usually intended for transition to the private sector. Of the organizations selected for this study, TVA and the RTB are wholly-owned government corporations, and FDIC and AMTRAK are generally considered to be mixed-ownership government corporations. GSEs are federally established, privately owned corporations designed to increase the flow of credit to specific economic sectors. GSEs typically receive their financing from private investment, and the credit markets perceive that GSEs have implied federal financial backing. GSEs issue capital stock and short- and long-term debt instruments, issue mortgage-backed securities, fund designated activities, and collect fees for guarantees and other services. GSEs generally do not receive government appropriations. Fannie Mae and Freddie Mac are two examples of GSEs. The CPB is a federally created private, nonprofit corporation. It does not consider itself to be a government corporation or a GSE. However, it does receive at least some of its operating funds from yearly federal appropriations and has been considered to be a government corporation by others. 1. Are you satisfied with the statutory relationship between the PMG and the Board? If not, why? Should anything be changed in law/regulation? 2. Aside from the statutory/regulatory relationship between the PMG and the Board, are there other issues dealing with the relationship that you would like to see addressed? If so, please explain your position and cite examples. 1. Are you satisfied with the Board’s statutory relationship with PRC? If not, why? Should anything be changed in law/regulation? 2. Do you believe PRC provides the Board with sufficient information to meet the Board’s needs? Is information provided in a timely manner? If the information is not sufficient and/or timely, what changes do you believe are needed? 1. How does the Board get involved in setting goals and developing implementation strategies for the Postal Service? 2. Are you satisfied with the Board’s mission and responsibilities as specified in legislation? If not, why? 3. Are you satisfied with the Board’s mission and responsibilities as further defined by the Bylaws? If not, please cite examples and discuss any changes you believe are needed. 1. Are there any statutory authorities the Board does not have that you believe it should have? If so, please explain. 2. Are there any statutory authorities the Board has that need to be expanded or contracted? 1. Is the Board’s legal status satisfactory, or are legislative changes needed? If so, what changes are needed and why? Provide examples supporting the need for any change in the legal status of the Board. 1. Do you believe there are Board accountability issues that need to be addressed with regard to the Board as a collective unit? If so, what are those issues? 2. To whom are individual Board members accountable? 3. Are there accountability issues that need to be addressed with regard to the performance of individual Board members? If so, what are those issues? 4. In general, how are ethical or conflict of interest issues addressed? Are you satisfied with the guidance available in this area? Board’s Compensation 1. Is the new pay level adequate? If not, please explain why. 2. Do you believe benefits are adequate in relation to other boards (other board directors may receive stock options, health insurance, life insurance, etc.)? If not, how should they be adjusted? 3. Are travel reimbursements adequate? If not, where do they fall short? 1. Do the current size and composition of the Board allow the Board to effectively perform its duties? 2. Are the qualifications/restrictions for Board membership adequate, or should more specific qualifications be spelled out in legislation? If more specific qualifications are needed, please state why and cite examples of how more specific qualifications would have been helpful in past situations. 3. Do you serve on any other boards? If so, how many and which ones? Do you believe there should be a limit on the number of boards on which members can serve? 4. Should service on the Postal Service Board of Governors be changed from part time to full time? Explain. 1. Do you believe that the Board has sufficient staff resources? If not, what additional staff are needed (numbers, qualifications, etc.)? Private, nonprofit corporation organized under D.C. law “Parent Crown Corporation” (fully owned by the Crown) Federal government business enterprise (fully owned by the Commonwealth Government of Australia) 49 U.S.C. 240101 et seq. Australia Postal Corporation Act of 1989 and amendments [CPCA 1980-81-82-83, c.54 and amendments] (continued) To provide postal services to bind the nation through the personal, educational, literary, and business correspondence of the people; and to provide prompt, reliable, and efficient service to patrons in all areas and to render postal services to all communities. To provide stability in the secondary market for residential mortgages; respond appropriately to the private capital market; provide ongoing assistance to the secondary market for residential mortgages (including activities relating to mortgages on housing for low- and moderate-income families involving a reasonable economic return that may be less than the return earned on other activities) by increasing the liquidity of mortgage investments and improving the distribution of investment capital available for residential mortgage financing; and promote access to mortgage credit throughout the nation (including central cities, rural areas, and underserved areas) by increasing the liquidity of mortgage investments and improving the distribution of investment capital available for residential mortgage financing. To provide stability in the secondary market for residential mortgages; respond appropriately to the private capital market; provide ongoing assistance to the secondary market for residential mortgages (including activities relating to mortgages on housing for low- and moderate-income families involving a reasonable economic return that may be less than the return earned on other activities) by increasing the liquidity of mortgage investments and improving the distribution of investment capital available for residential mortgage financing; and promote access to mortgage credit throughout the nation (including central cities, rural areas, and underserved areas) by increasing the liquidity of mortgage investments and improving the distribution of investment capital available for residential mortgage financing. To improve the navigability of the Tennessee River; provide for flood control, reforestation, the proper use of marginal lands, and the agricultural and industrial development of the Tennessee Valley; provide for the national defense; and provide an ample supply of electric power to seven-state region in the southeastern United States. To insure deposits of banks and savings associations. To provide intercity and commuter rail passenger transportation in the United States. To facilitate the full development of public telecommunications. To establish and operate a postal service for the collection, transmission, and delivery of messages, information, funds, and goods both within Canada and between Canada and places outside Canada; manufacture and provide such products and to provide such services as are, in the opinion of the Corporation, necessary or incidental to the postal service provided by the Corporation; and provide to or on behalf of departments and agencies of, and corporation owned, controlled, or operated by, the Government of Canada or a provincial, regional, or municipal government in Canada or to any person services that, in the opinion of the Corporation, are capable of being conveniently provided in the course of carrying out the other objects of the Corporation. To supply postal services within Australia and between Australia and places outside Australia. Australia Post is also able to carry on any business or activity, either in Australia or overseas, relating to the supply of postal service. Australia Post may also carry on any business or activity that is conveniently carried on by use of resources not immediately required in performing the principal function or in the course of performing the principal function. (continued) Postal rates are determined in conjunction with a Postal Rate Commission (PRC) recommendation. The Governors may approve a PRC-recommended change; accept recommended change under protest; reject or, in limited circumstances, modify recommended change. The Board has unilateral authority to conduct business operations, but generally day-to-day business activities are delegated to management subject to provisions of charter. Freddie Mac’s charter explicitly provides that Freddie Mac has full discretion in setting prices and other business operations. There are no regulatory or other external limits on the authority of Freddie Mac’s management to set prices for mortgages it purchases and the securities it issues. TVA’s board has exclusive authority to set prices, rates, etc., for the products or services that TVA sells. The TVA act contains standards for determining appropriate levels for TVA’s electric power rates but commits the fixing of those rates to the discretion of the TVA board and precludes judicial review thereof. PRC is an independent agency that acts upon requests from the USPS or in response to complaints filed by interested parties. Among its major responsibilities are to submit recommended decisions to the USPS on postage rates and fees and mail classifications, issue advisory opinions to the USPS on proposed nationwide changes in postal services, and submit recommendations for changes in the mail classification schedule. With one exception, no statutory provision authorizes another person, board, or commission to set or review prices. Yes, Governors set pay of the PMG, subject to limitations of 39 U.S.C. 1003(a); i.e., salary cannot exceed the rate for Level I of the Executive Schedule. Yes, the Board is authorized to fix compensation for the officers of the Corporation. Yes, the Board of Directors determines compensation of officers. Yes, the board sets compensation for all TVA employees. Salary for regular employees may not exceed that received by board members. Yes, subject to restrictions of Federal Retirement and Workers Compensation Laws. Yes, the Board is authorized to fix compensation for officers of the Corporation. Yes, the Board of Directors determines benefits of officers. Yes, the board sets compensation, including benefits, for all appointees. The board has unilateral authority to grant or deny deposit insurance to financial institutions. Board decisions are not subject to approval by another regulatory authority. The board has unilateral authority to set prices, rates, etc., without review or approval by an independent regulatory authority. The board has the authority to approve prices; however, it has no products to sell. Specifically, CPB is not a commodity business. The board sets prices for all products and services. The board must notify the Minister of any intention to alter the price of the standard postal rate (the reserved service), and the Minister has the opportunity to disallow it. The board, directly or indirectly through delegation of authority to the President/CEO, oversees virtually all rate-making decisions. The board, in delegating its authority, has established that (1) all rates established through regulation (i.e., noncompetitive products) require approval of the board, (2) all generic rates (rates available to anyone meeting specified terms and conditions) established outside of regulation require the President/CEO’s approval, and (3) all sales agreements (generic or non-generic) are subject to the board’s delegation of authority instrument and related processes. The Australian Competition and Consumer Council, while having no direct authority over the price, has the opportunity to consider any proposal and make its views known to the Minister as part of his/her consideration of proposed price alterations. No, the pay of the Chair of the Board (“CEO”) is determined by reference to Federal Statutes—Level III of the Executive Schedule. Yes. Yes, but president may not be compensated at an annual rate of pay that exceeds the rate of basic pay in effect from time to time for Level I of the Executive Schedule under Sec. 5312 of Title 5. No, the CEO’s pay is set by Governor in Council. Yes. Yes, under 49 U.S.C. § 24303(b). Yes. No, benefits are set by the Governor in Council. Yes. (continued) $800,000 salary; $833,263 bonus; and $23,102 other annual compensation, as well as long-term compensation in the form of stock awards and securities options. $865,000 salary; $394,000 bonus; and $100,688 other annual compensation, as well as long-term compensation in the form of restricted stock awards and securities options. Not applicable. The Chair’s total pay and benefits compensation for FY95 was $147,014.74. The CEO’s compensation does not exceed the Federal Executive Level I salary scale. This is not considered public information. Not publicly available. The CEO receives the following benefits: health insurance, an employer-paid retirement income plan, a 401(k) retirement savings plan, life and accidental death and disability insurance, split dollar life insurance, business travel accident insurance, short-term and long-term disability benefits, United States Railroad retirement benefits as well as paid vacation and sick leave, rail pass privileges, educational assistance, parking, and relocation benefits. However, the CPC Board contact provided a range of salary that is public: $189,000 to $233,000 (U.S. dollars). The benefit package is worth about 20% of salary. Terms and conditions are set at a level that takes into account both public and private sector considerations. Prior consultation with the Remuneration Tribunal is part of the process of establishing a package. (continued) For Governors, salary and reimbursable expenses determined by statute. Board advised by outside experts on appropriate levels of compensation based on payments made by comparable businesses. Salary of TVA Board Chair is established under Level III of the Executive Schedule Salary. Governors determine pay of PMG and DPMG within legislatively established parameters. Pursuant to a resolution adopted by the board, the 15 outside directors receive an annual retainer, annual award of stock options and restricted stock, and meeting attendance fees. They do not receive salaries or other employee benefits. The salary of the other two members of the TVA board is established under Level IV of the Executive Schedule. Benefits available to board members are those generally available to federal employees, including presidential appointees, by statute. Governors’ salaries are set by legislation. From 1970 to 1995, there were no salary increases. In 1996, salaries were increased by legislation. Generally annual adjustments. PMG and DPMG salaries are set by the Governors, subject to a pay cap. Board is advised by outside experts on appropriate levels of compensation based on payments made by comparable businesses. The Chairman and two directors of the TVA board are positions covered by level III and level IV, respectively, of the Executive Schedule (5 U.S.C. §5314 and §5315). Increases in pay are done through the legislative process. Increases in pay are done through the legislative process. Board members receive cash fees and stock awards as their compensation. Adjustments for inflation are not included in the criteria for setting compensation. However, from time to time Freddie Mac reviews the compensation package for board members to ensure that it remains competitive. Full time for PMG and DPMG. Part time for Governors. Full time for 3 management employees and part time for rest of board, who are outside management directors. Part time. Board members provide service year round. There is no fixed-hour requirement for service. Salary is determined under federal statutes —Level III of the Executive Schedule for Chairperson and Level IV for other members. Pay and expenses are set by statute. By statute. Determined by the Governor in Council. Determined by an independent central remuneration tribunal. Board members’ salaries are set by statute (5 U.S.C. §5314 and §5315) under appropriate executive levels. Changes would be done legislatively. Adjustment would require legislative change. Salaries and benefits may be changed by an act of Congress at any time. Increases are not made on a regular basis. They are made following a recommendation from the Minister responsible for Canada Post to the Governor in Council. The last adjustment was made by the Governor in Council in 1990. The Remuneration Tribunal regularly examines remuneration levels and will consult with the board on specific issues. Full time for Managing Director and part time for other Directors. (continued) $30,000 plus $300 a day for not more than 42 days of meetings per year for Governors. $23,000 retainer annually, plus $1,000 for attending each board or board committee meeting. $20,000 retainer annually, prorated based on the quarter in which they were appointed. Committee chairs received an additional $500 for each committee meeting they chaired. Directors also were paid $1,000 for attendance at each meeting of the board or any board committee meeting and were reimbursed for out-of-pocket costs of attending such meetings. Board service is full time; therefore, no daily meeting attendance fees paid. Additionally, each nonmanagement director has restricted common stock under the Fannie Mae Restricted Stock Plan for Directors and stock options under the Fannie Mae Stock Compensation Plan of 1993. Fannie Mae officers who serve on the Board of Directors do not receive compensation for serving as directors other than the compensation they receive as Fannie Mae officers. Fannie Mae officers are not eligible to participate in the Fannie Mae Restricted Stock Plan for Directors and are not eligible to receive nonmanagement director stock options under the Fannie Mae Stock Compensation Plan of 1993. Each board committee chairman also received an annual retainer of $2,500. Pursuant to the 1995 Directors’ Stock Compensation Plan,each Director was granted options to purchase 2,400 shares of the Corporation’s common stock and received shares of restricted stock having a fair market value of approximately $10,000 on the date of the award. (9 Governors plus the PMG and DPMG) $115,700 for other board members $437 (U.S. dollars) for physical attendance at board or board committee meetings. Board service is full time; therefore, no daily meeting attendance fees paid. Board members receive $300 per diem for attending board and committee meetings or conducting other official business of the Corporation. $150 a day while attending meetings or while engaged in duties related to such meetings or other activities of the board, including travel time. Directors—$27,650 (U.S. dollars) Deputy Chair—$37,750 (U.S. dollars) The $437 (U.S. dollars) is also payable for each full day of travel to and from the meeting. Chair—$58,700 (U.S. dollars) The $300 per diem is a fixed statutory compensation level that has been in place since the board was created. No board member shall receive compensation of more than $10,000 in any fiscal year. No daily meeting attendance fees paid. Board members are paid an annual retainer ($4,080 to $5,100 U.S. dollars) that is set by Order-in-Council (i.e., by Her Majesty’s Government) on the recommendation of the responsible Minister. Up to 9 Directors. (6 current members and 3 vacancies). (9 Directors plus the Chair and President). (continued) 9 Governors appointed by the President of the United States, by and with the consent of the Senate. 13 members elected by shareholders. 5 appointed by the President of the United States. 5 members appointed by President of the United States. 13 elected by voting common stockholders. Appointed by the President of the United States with the advice and consent of the Senate. Governors appoint PMG. Governors and PMG appoint DPMG. 3 appointed by the President of the United States, by and with the advice and consent of the Senate. 3 members are appointed by President of the United States and confirmed by the Senate (representing labor, state governors, and business). Appointed by the President of the United States with the advice and consent of Senate. 1 member shall be the Comptroller of the Currency. 9 Directors are appointed by the Minister with the approval of the Governor in Council. The Governor in Council appoints the Chair and President/CEO . Directors are appointed by the Governor-General on the nomination of the Minister for Communications and the Arts. 1 shall be the Director of the Office of Thrift Supervision. 2 members represent commuter authorities and are selected by the President from lists drawn up by those authorities. The Managing Director is appointed by the Board of Directors. 2 are selected by the Corporation’s preferred stockholder— the Department of Transportation. The Minister must consult with the Chair of Post prior to appointing Directors, and one Director must be recognized as having an appropriate understanding of the interests of employees. The Secretary of Transportation and Amtrak President serve by virtue of their offices. (continued) 9 years for the 9 Governors. A Governor may continue to serve up to 1 year after term expires while awaiting a successor to be named. 9 year fixed terms are staggered so that one begins every 3 years on May 18 (e.g., 1990, 1993, and 1996). PMG serves at pleasure of Governors. DPMG serves at pleasure of Governors and PMG. 6 years for each appointed member, but they may continue to serve after the expiration of their terms of office until a successor has been appointed and qualified. 3 members appointed by the President of the United States and confirmed by the Senate (representing labor, state governors, and business) serve for 4 years. Not to exceed 3 years for Directors. As determined by Governor in Council for Chair and President/CEO. Up to 5 years for Directors as specified in the instrument of appointment. 6 years, except as provided in section 5(c) of the Public Telecommunications Act of 1992. Others serve during their terms as Comptroller of Currency and Director of the Office of Thrift Supervision. 2 members representing commuter authorities serve for 2 years. 2 members selected by the Corporation’s preferred stockholder, the Department of Transportation, serve for 1 year. Any member whose term has expired may serve until such member’s successor has taken office, or until the end of the calendar year in which such member’s term has expired, whichever is earlier. 2 ex officio members (the Secretary of Transportation and the President of AMTRAK) serve as members as long as they remain in their positions as Secretary of Transportation and President of AMTRAK. Any member appointed to fill a vacancy occurring prior to the expiration of the term for which such member’s predecessor was appointed shall be appointed for the remainder of such term. (continued) Qualifications are not prescribed in legislation. No restrictions in legislation regarding who can be PMG and DPMG. Each member must be a U.S. citizen and profess a belief in the feasibility and wisdom of the TVA Act of 1933. No political recommendations may be considered when selecting PMG and DPMG. Governors are chosen to represent the public interest generally and cannot be representatives of specific interests using the USPS. Not more than 5 of the Governors can be members of the same political party. 1 from an organization that represents consumer interests for not less than 2 years, or 1 person who has demonstrated a career commitment to the provision of housing for low-income households. 1 from an organization that has represented consumer interests for not less than 2 years, or 1 person who has demonstrated a career commitment to the provision of housing for low-income households. No officer or employee of the United States may serve concurrently as a Governor. Members are prohibited from having a financial interest in any public utility corporation engaged in the business of distributing and selling power to the public or in any corporation engaged in the manufacture, selling, or distribution of fixed nitrogen or fertilizer, or any ingredients thereof; nor shall any member have any interest in any business that may be adversely affected by the success of the corporation as producer of concentrated fertilizers or as a producer of electric power. A Governor may hold any other office or employment not inconsistent or in conflict with his duties, responsibilities, and powers as an officer of the USPS. Also, board members are prohibited, during their tenure in office, from engaging in any other business. Appointed board members must be U.S. citizens, and not more than 3 of the members may be members of the same political party. Directors must be U.S. citizens. No more than 6 of the appointed members may be from the same political party. None specified. Secretary of Transportation serves as Board member by virtue of his office. The board must have a mix of skills appropriate for the Corporation. One member is to have an appropriate understanding of the interests of employees. Amtrak’s President serves as the Chairman of the board by virtue of his office. 3 members are appointed by the President of the United States and confirmed by the Senate (representing labor, state governors, and business). The 9 appointed members shall be selected from such fields as education, cultural and civic affairs, or the arts—including radio and television—and represent various regions of the nation, professions, and occupations, and represent various kinds of talent and experience appropriate to the function and responsibilities of CPB. 2 members represent commuter authorities and are selected by the President of the United States from lists drawn up by those authorities. 2 members are selected by the Corporation’s preferred stockholder. Of these appointed members, 1 shall be selected from among individuals who represent the licensees and permittees of public television stations, and 1 shall represent the licensees and permittees of public radio stations. (continued) Nothing specified in statute or regulation. A director should not be renominated after having served for 10 years or longer, although nominating committee may for good reason propose the renomination of such a director. No director should be proposed for renomination after 15 years of Board service. No, but stockholder-elected directors must retire at age 72. None. Board of Governors. Board of Directors. Board of Directors. Board of Directors. Elected by the Governors from among the members of the Board. Elected by Board. By annual vote of the Board of Directors. Designated by the President of the United States. None. Yes. No member of the board shall be eligible to serve in excess of 2 consecutive full terms. No. Law states that a Director may, on the expiration of his/her term of office, be reappointed to the board. None specified in enabling legislation. Directors have been reappointed. Board of Directors. Board of Directors. Board of Directors. Board of Directors. Board of Directors. One of the appointed members shall be designated by the President of the United States, by and with the advice and consent of the Senate, to serve as Chair of the Board of Directors for a term of 5 years. President serves as Chair. Members of the board annually elect one of their members to be Chair and elect one or more of their members as a Vice Chair or Vice Chairs. The chair is appointed by the Governor in Council. Chair is selected by the Minister, with appointment made by Governor General. Until privatization (privatization will occur when 51 percent of the class A stock issued to the United States and outstanding at any time after September 30, 1995, has been fully redeemed and retired). Some organizations provided data on pay and benefits, and others provided information only on pay. The PMG, in commenting on a draft of this report, provided additional information on CEO pay at nine foreign postal administrations, including Canada Post and Australia Post. See appendix V for additional information. We did not independently verify the information provided. Jill P. Sayre, Senior Attorney The first copy of each GAO report and testimony is free. Additional copies are $2 each. Orders should be sent to the following address, accompanied by a check or money order made out to the Superintendent of Documents, when necessary. VISA and MasterCard credit cards are accepted, also. Orders for 100 or more copies to be mailed to a single address are discounted 25 percent. U.S. General Accounting Office P.O. Box 6015 Gaithersburg, MD 20884-6015 Room 1100 700 4th St. NW (corner of 4th and G Sts. NW) U.S. General Accounting Office Washington, DC Orders may also be placed by calling (202) 512-6000 or by using fax number (301) 258-4066, or TDD (301) 413-0006. Each day, GAO issues a list of newly available reports and testimony. To receive facsimile copies of the daily list or any list from the past 30 days, please call (202) 512-6000 using a touchtone phone. A recorded menu will provide information on how to obtain these lists. | Pursuant to a congressional request, GAO obtained information on Postal Service governance issues, focusing on: (1) any major areas of concern, including specific issues, that current and former members of the Postal Service Board of Governors have about the Board and their suggested legislative changes; (2) major characteristics of the Postal Service's Board of Governors with the characteristics of selected boards of their government-created corporations or corporation-like organization to identity similarities and dissimilarities, particularly as they relate to the major areas of concern identified by current and former Board members; and (3) information on governance issues that might be helpful to the House Committee on Government Reform and Oversight, Postal Service Subcommittee as it deliberates Postal Service reform. GAO noted that: (1) a majority of current and former members of the Postal Service Board of Governors GAO interviewed said legislative attention was needed in three broad areas; (2) however, there was not a consensus among the members on what the specific issues were within each area of concern, or what legislative changes should be considered to address their concerns; (3) the major areas of concern were the Board's authority, Board members' compensation, and Board members' qualifications; (4) within these broad areas of concern, the most frequently cited issues were: (a) the limitations on the Board's authority to establish postage rates; (b) the inability of the Board to pay the Postmaster General more than the rate for level I of the Executive Schedule; (c) the Board's lack of pay comparability with the private sector; and (d) qualification requirements that are too general to ensure that Board appointees possess the kind of experience necessary to oversee a major government business; (5) GAO's comparison of the Board of Governors with nine other boards of government-created organizations showed both similarities and dissimilarities; (6) similarities indicate that these boards were created to function much like private-sector corporate boards; (7) dissimilarities, however, reflect the amount of flexibility the boards were given to operate like private sector corporations; (8) GAO also identified four broad areas where some of the interviewees, but less than a majority, believed legislative attention was needed; (9) these areas were the Board's mission and responsibilities, the Board's relationship with Postal management, the Board's accountability and performance measures, and Board composition; (10) the most frequently cited issues in these areas were: (a) uncertainties as to how far the Board should go in letting the Postal Service compete and operate like a private-sector corporation; (b) the limited specificity in law concerning the Board's oversight responsibilities, and (c) perceptions that the Chief Postal Inspector may not have all the independence the position requires; and (11) the interviewees' concerns about many issues, such as Board authority, accountability, and how far to let the Postal Service go in competing and operating like a private sector corporation, are issues being grappled with in the larger context of streamlining government operations. |
In its fight against terrorism, the United States has focused on individuals and entities supporting or belonging to terrorist organizations including al Qaeda, Hizballah, HAMAS and others. Al Qaeda is an international terrorist network led by Osama bin Laden that seeks to rid Muslim countries of western influence and replace their governments with fundamentalist Islamic regimes. The al Qaeda network conducted the September 11 attack on the United States and was responsible for the August 1998 bombings of U.S. embassies in Kenya and Tanzania, as well as other violent attacks on U.S. interests. Al Qaeda reportedly operates through autonomous underground cells in 60 to 100 estimated locations worldwide, including the United States. Hizballah is a Lebanese group of Shiite militants that seeks to create a Muslim fundamentalist state in Lebanon modeled on Iran. Hizballah has planned, or been linked to, numerous terrorist attacks against America, Israel, and other western targets. Although Hizballah’s leadership is based in Lebanon, Hizballah is a vast organization with a global network of supporters and established cells in Africa, North and South America, Asia, and Europe. According to the State Department, HAMAS has pursued the goal of replacing Israel with an Islamic Palestinian state. While HAMAS supplies humanitarian aid to Palestinians and has participated in peaceful political activity, the organization conducts large-scale suicide bombings. According to the State Department, HAMAS currently limits its terrorist operations to targeting Israeli civilians and the Israeli military in the Gaza Strip, the West Bank, and Israel, but Americans have been killed in HAMAS attacks, and the organization raises funds in North America and Western Europe. These terrorist organizations are known to have used alternative financing mechanisms to further their terrorist activities. Government officials and researchers believe that terrorists do not always need large amounts of assets to support an operation, pointing out that the estimated cost of the September 11 attack was between $300,000 and $500,000. However, government officials also caution that funding for such an operation uses a small portion of the assets that terrorist organizations hold—assets earned, moved, or stored through mainstream financial or alternative financing mechanisms. According to the Treasury’s Office of Foreign Assets Control, the support infrastructure critical for indoctrination, recruitment, training, logistical support, the dissemination of propaganda, and other material support requires substantial funding. A number of strategies and laws guide the U.S. government in deterring terrorists’ use of alternative financing mechanisms. Among the strategies, for example, the Departments of Justice and the Treasury publish an annual National Money Laundering Strategy, which has increasingly focused on terrorist financing, including alternative financing methods. This strategy sets goals for U.S. agencies in combating terrorist financing and reports on progress made in implementing these goals. In addition, the Department of State issues an annual International Narcotics Control Strategy Report, which features a section describing mechanisms, cases, and efforts to deter terrorist financing. Moreover, the President’s National Security Strategy of the United States of America calls for the United States to work with its allies to disrupt the financing of terrorism by blocking terrorist assets, and the National Strategy for Combating Terrorism includes an objective to interdict and disrupt material support for terrorists. Regarding laws, the authority of the USA PATRIOT Act of 2001 significantly expanded U.S. law enforcement’s ability to deter, investigate, and prosecute cases of terrorist financing. More recently, the United States enacted the Suppression of the Financing of Terrorism Convention Implementation Act of 2002, which implements the requirements of the 1999 International Convention for the Suppression of the Financing of Terrorism. Among its provisions, this act makes it a crime to provide or collect funds with the intention of using the money for terrorist activities. Deterring terrorists’ use of alternative financing mechanisms falls within the overall U.S. interagency framework of plans, agency roles, and interagency coordination mechanisms designed to combat terrorism. In general, the National Security Council manages the overall interagency framework. The National Security Council heads the Counterterrorism Security Group, which is composed of high-level representatives (at the Assistant Secretary level) from key federal agencies that combat terrorism. To implement directives and strategies, various federal agencies are assigned key roles and responsibilities based on their core missions. Numerous components of the Departments of Justice, the Treasury, State, Homeland Security, and other agencies participate in efforts to combat terrorist financing (see table 1). In addition, the intelligence community plays a significant role. Terrorists use an assortment of alternative financing mechanisms to earn, move, and store their assets. Terrorists, like other criminals, focus on crimes of opportunity in vulnerable locations worldwide and seek to operate in relative obscurity by taking advantage of close-knit networks of people and nontransparent global industry flows when earning, moving, and storing their assets. To earn assets, they focus on profitable crimes or scams involving commodities such as smuggled cigarettes, counterfeit goods, and illicit drugs and the use of systems such as charitable organizations that collect large sums. To move assets, terrorists use mechanisms that enable them to conceal or launder their assets through nontransparent trade or financial transactions such as charities, informal banking systems, bulk cash, and commodities such as precious stones and metals. To store assets, terrorists may use commodities that are likely to maintain their value over time and are easy to buy and sell outside the formal banking system. For example, terrorists may use precious stones and metals that serve as effective forms of currency. Table 2 shows examples of mechanisms that terrorists may use to earn, move, and store assets and also shows that terrorists may use assets for more than one purpose. Terrorists earn assets through illicit trade in myriad commodities, such as drugs, weapons, and cigarettes, and systems, such as charities, owing to their profitability. Like other criminals, terrorists can trade any commodity in an illegal fashion, as evidenced by their reported involvement in trading a variety of counterfeit and other goods. However, although terrorists are generally motivated by ideological factors rather than pure profit, terrorists, like other criminals, benefit most from smuggling those commodities with the highest profit margins. Terrorist organizations have also earned funds using systems such as charitable organizations. The potential misuse of charitable contributions by terrorist organizations can take many forms, sometimes with the knowledge of the charity or donor and sometimes without their knowledge. Globally, trafficking in illicit drugs and weapons is a profitable means for terrorists to earn assets. Terrorists have been reportedly involved in trafficking illicit drugs, the most lucrative commodity illegally traded, according to the U.S. State Department’s Bureau of International Narcotics and Law Enforcement Affairs. According to the U.S. State Department’s 2003 International Narcotics Control Strategy Report, this trade is valued in the billions and allows drug traffickers to corrupt government and law enforcement officials worldwide, particularly in countries with weakly enforced laws and regulations where officials are poorly paid. In East Asia, trafficking in drugs and weapons—as well as engaging in organized crime and official corruption—are serious international crimes that terrorist organizations have exploited to finance their operations. In South Asia, al Qaeda is reported to have trafficked heroin to support its operations and Osama bin Laden was reportedly involved. In Latin America, terrorists trafficked in drugs and arms to finance their activities. In some South American countries, international terrorist groups have established support bases that sustain their worldwide operations. For example, the triborder area where the borders of Argentina, Brazil, and Paraguay converge continues to be a safe haven for Hizballah and HAMAS, where the organizations raise funds to finance their operations through criminal enterprises. According to the DEA, terrorist operatives associated with Hizballah generate significant income from contraband, including drugs in several Latin American countries, to support their organization in Lebanon. Terrorists have earned assets through the highly profitable illicit trade in cigarettes. According to officials from the ATF, Hizballah, HAMAS, and al Qaeda have earned assets through trafficking in contraband cigarettes or counterfeit cigarette tax stamps. ATF officials told us that as of August 20, 2003, they were investigating at least six such cases with ties to terrorist groups. ATF officials also believe that there are several other investigations under way that may produce evidence linking them to terrorist groups. In the one closed case example, during 2002, an ATF investigation revealed a conspiracy where the defendants were illegally trafficking cigarettes from 1996 to 2000 between North Carolina, a low tax state, and Michigan, a high tax state, and funneling some of the illegal proceeds back to the Hizballah. In this case, family and religious ties enabled the smugglers to sell illegal cigarettes at a network of small convenience stores in Michigan. Figure 1 shows how the Charlotte, North Carolina, Hizballah cell profited from this illegal activity. The total value of the assets seized was about $1.5 million and consisted of cigarettes, real property, and currency. The investigation resulted in at least two convictions, in June 2002, for cigarette trafficking, money laundering, and providing material support to a terrorist organization. More generally, the opportunity to earn illegal profits in the cigarette industry is significant given the growing trend of counterfeit cigarettes and Internet cigarette sales. According to a European Commission Anti-Fraud Office official, cigarette smuggling is widespread in Europe, and in many eastern European countries smuggled cigarettes are commonly used as currency. (The Anti-Fraud Office could not formally discuss ongoing cases involving terrorists’ links, because it would jeopardize ongoing investigations.) Terrorist organizations have earned funds using systems such as charitable organizations that provide a ready source of sizable funds generated from religious, ethnic, or geographic ties between people with similar interests. In many countries, charitable giving is a religious duty and, although most contributions are intended for legitimate humanitarian purposes, terrorists are able to divert these funds owing to the lack of oversight or financial controls for charities to ensure that moneys are spent according to their intended purpose. The potential misuse of charitable contributions by terrorist organizations can take many forms. According to the Financial Action Task Force on Money Laundering’s 2002-2003 Report on Money Laundering Typologies, some charitable organizations were established with a stated charitable purpose but may actually exist in part or only to earn funds for a terrorist organization. For example, according to the Treasury, Holy Land Foundation for Relief and Development in Texas raised $13 million in the United States in 2000, claiming that the money it solicited went to care for needy Palestinians, although evidence shows that HAMAS used some of the money that the Holy Land Foundation raised to support suicide bombers and their families. Terrorists or their supporters may also infiltrate legitimate charitable organizations and divert funds to directly or indirectly support terrorist organizations. In both cases, the charitable organizations may collect donations from both witting and unwitting donors. An example of a witting donor would be one who donated funds to a charity knowing that the funds would go to al Qaeda. An unwitting donor would be one who donated funds to the charity not knowing that funds would go to al Qaeda. To move assets, terrorists use mechanisms that enable them to conceal or launder their assets through nontransparent trade or financial transactions such as charities, informal banking systems, bulk cash, and commodities such as precious stones and metals. Although charities and informal banking systems serve many legitimate purposes, they entail a significant degree of nontransparency that terrorist groups and their supporters can exploit to move funds raised in the United States and elsewhere across borders. To carry assets across borders without detection, terrorists seek to smuggle bulk cash or convert their assets into commodities that are relatively liquid and easy to conceal. Terrorists can also convert their assets into internationally traded commodities that serve as forms of currency, such as gold, but are not subject to standard financial reporting requirements. Commodities that can be smuggled owing to their ease of concealment are particularly attractive. While terrorists use legitimate systems and commodities in an illicit manner to move their assets, they may also use illicit means such as trade-based money laundering to move assets or settle accounts. Moreover, according to law enforcement officials, they may use more than one mechanism, layering their activities, to better hide the trail of their transactions. Terrorists may be attracted to charities to move their assets owing to the industry’s nontransparent nature. According to the Financial Action Task Force on Money Laundering’s 2002-2003 Report on Money Laundering Typologies, in addition to serving as a direct source of income, some charities may have served as a cover for moving funds to support terrorist activities, usually on an international basis. For example, according to court documents, the Global Relief Foundation, an Illinois-based charity, sends more than 90 percent of its donations abroad, and, according to DOJ, the foundation has connections to and has provided support and assistance to individuals associated with Osama bin Laden, the al Qaeda network, and other known terrorist groups. The Global Relief Foundation has also been linked to financial transactions with the Holy Land Foundation. Similarly, the DOJ asserts that the Illinois-based Benevolence International Foundation moved charitable contributions fraudulently solicited from donors in the United States to locations abroad to support terrorist activities. As shown by the shaded locations in figure 2, the foundation has offices worldwide through which it could facilitate the global movement of its funds. Terrorist organizations use a type of informal banking system sometimes known as hawala to move their assets, owing to the system’s nontransparent and liquid nature. An informal banking system is one in which money is received for the purpose of making it, or an equivalent value, payable to a third party in another geographic location, whether or not in the same form. Such transfers generally take place outside the conventional banking system through nonbank money services businesses or other, often unregulated and undocumented, business entities whose primary business activity may not be the transmission of money. Traditionally, expatriates—traders and immigrant laborers—used informal banking systems by sending money home from or to countries lacking formal and secure banking systems. Informal systems are still used by immigrant ethnic populations in the United States and elsewhere today. Such systems are based on trust and the extensive use of connections such as family relationships or regional affiliations. These systems also often involve transactions out of the United States to remote areas with no formal banking system or to countries with weak financial regulations, such as Afghanistan and Somalia, where the Al Barakaat informal banking system moved funds for al Qaeda. Figure 3 provides an example of how a simple hawala transaction can occur. According to FinCEN, while the majority of informal banking systems’ activity may be legitimate in purpose, these systems have been used to facilitate the financing of terrorism and the furtherance of criminal activities. As a result, law enforcement and international entities have focused a great deal of attention on the possibility that terrorist financing takes place through informal banking systems such as hawala to move money, particularly since September 11. For example, according to the FBI, some of the 19 September 11 hijackers allegedly used hawala to transfer thousands of dollars in and out of the United States prior to their attacks. Somalis working in the United States used the Al Barakaat informal banking network, founded with a significant investment from Osama bin Laden, to send money to their families in Somalia. According to a September 2002 Treasury fact sheet on terrorist financing, Al Barakaat’s worldwide network was channeling several million dollars a year to and from al Qaeda. The law enforcement community has long suspected that some terrorist organizations use bulk cash smuggling to move large amounts of currency. Bulk cash smuggling is an attractive financing mechanism because U.S. dollars are accepted as an international currency and can always be converted; there is no traceable paper trail; there is no third party such as a bank official to become suspicious of the transaction; and the terrorist has total control of the movement of the money. Conversely, the factors against cash smuggling include the costs of couriers and equipment, the risk of the courier stealing the money, the risk of informants within the network, or losses due to border searches or government inquiries that could compromise the network or mission. In the United States, bulk cash smuggling is a money laundering and terrorism financing technique that is designed to bypass financial transparency reporting requirements. Often the currency is smuggled into or out of the United States concealed in personal effects, secreted in shipping containers, or transported in bulk across the border via vehicle, vessel, or aircraft. According to the FBI, some of the 19 September 11 hijackers allegedly used bulk cash as another method to transfer funds. Furthermore, in response to the September 11 events, Customs initiated an outbound-currency operation, Operation Oasis, to refocus its efforts to target 23 identified nations involved in money laundering. According to the Department of Homeland Security’s (DHS) ICE, between October 1, 2001, and August 8, 2003, Operation Oasis had seized more than $28 million in bulk cash. However, according to ICE officials, while some of the cases involved were linked to terrorism, they were unable to determine the number and the extent to which these cases involved terrorist financing. Terrorist organizations have also reportedly traded in precious stones such as diamonds to launder money or transfer value because it is easy to conceal these materials and transfer them. Terrorists can move their assets by converting moneys into a commodity, such as diamonds, that serves as a form of currency. U.S. law enforcement and others told us that there is a potential for the use of gold to move assets, but little has been reported on the link between terrorists and gold, other than by the media. As we previously reported, diamonds can be used in lieu of currency in arms deals, money laundering, and other crimes. Diamonds are also easily smuggled because they have high value and low weight and are untraceable and odorless. The international diamond industry is fragmented, with numerous small mining operations located in remote areas of Africa, in countries that have porous borders and no rule of law. There is limited transparency in diamond flows owing to the complex way in which diamonds move from mine to consumer, the existence of significant data inconsistencies, and the industry’s historical avoidance of close scrutiny. Diamonds are often traded fraudulently, and smuggling routes for rough diamonds are well established by those who have used such routes for decades to evade taxes or move stolen diamonds. According to a Belgian law enforcement official, a substantial number of the diamonds traded in Antwerp, the world’s largest trading center, are sold on the black market with no transaction records. Most officials and researchers we spoke with recognized a highly probable link between Hizballah and a part of the Lebanese diamond-trading network in West Africa. The U.N. Special Court Chief Prosecutor and the Chief Investigator in Sierra Leone both reported that the problem is current. Moreover, though U.S. law enforcement has been unable to substantiate the reports, officials from the U.N. Special Court for Sierra Leone, representatives of Global Witness (a London-based nongovernmental organization), media, and other U.S. and international experts have also stated that al Qaeda was reportedly buying diamonds from rebel groups in West Africa in the months leading up to September 11 and may still be involved in the trade. According to officials of the U.N. Special Court and Global Witness, they have witnesses of such a connection. U.S. government officials both within and among agencies remain divided over whether there is sufficient evidence to establish a current link between al Qaeda and the diamond trade. Gold also presents an opportunity for moving terrorist assets. As highlighted in a number of money-laundering cases, gold can be smelted into any form, camouflaged, and smuggled across borders. Because its form can be altered, gold used in trade often has no valid paper trail. ICE officials and researchers have focused on the possibility that terrorists may use trade-based money laundering to move their assets, owing to its criminal and nontransparent nature. ICE defines trade-based money laundering as the use of trade to legitimize, conceal, transfer, and convert large quantities of illicit cash into less conspicuous assets such as gold or diamonds. In turn, these criminal proceeds are transferred worldwide without being subject to bank secrecy laws. For example, hawala operators reportedly use false (under- or over-) invoicing to balance books or move assets. According to the FBI, some cases of terrorist use of trade-based money laundering to move assets may exist but are too sensitive for discussion at this time. Terrorists may store assets in cash, or in commodities, that serve as forms of currency that are likely to maintain value over longer periods of time and are easy to buy and sell outside the formal banking system. However, little has been reported concerning the storing of terrorist assets in alternative financing mechanisms. The FBI testified in the case of the United States versus the Benevolence International Foundation that a key associate of Osama bin Laden kept thousands of dollars of cash in several currencies in shoeboxes in his apartment. According to a September 2002 United Nations Security Council letter, al Qaeda was believed to have shifted a portion of its assets to gold, diamonds, and other untraceable commodities. In 2002, we reported that diamonds might be used as a store of wealth for those wishing to hide assets outside the banking sector, where assets could be detected and seized. According to Global Witness, a nongovernmental organization, British forces in Afghanistan found an al Qaeda training manual in December 2001 that addressed how to smuggle gold. While various press reports suggested that al Qaeda was shifting assets into gold last fall, U.S. law enforcement has been unable to substantiate these allegations. Terrorists may store their assets in gold because its value is easy to determine and remains relatively consistent over time. There is always a market for gold given its cultural significance in many areas of the world, such as Southeast Asia, South and Central Asia, the Arabian Peninsula, and North Africa. Gold is considered a global currency and is easily exchanged throughout the world. The true extent of terrorist use of alternative financing mechanisms is unknown, owing to the criminal nature of the activity and the lack of systematic data collection and analyses. Although we recognize that the criminal nature of terrorist financing prevents knowing the full extent of their use of alternative mechanisms, systematic data collection and analyses of case data does not yet exist to aid in determining the magnitude of the problem. The limited and sometimes conflicting information available on alternative financing mechanisms adversely affects the ability of U.S. government agencies to assess risk and prioritize efforts on terrorist financing mechanisms. It would be unrealistic to expect U.S. law enforcement to determine the full extent of terrorist or criminal use of alternative financing mechanisms. As we noted, terrorists, like other criminals, strive to operate in obscurity and thus seek out nontransparent mechanisms that have little or no paper trail, often operating in weakly regulated industries. The terrorist link may be difficult to determine or define. While dollar amounts of funds frozen in terrorist-related bank accounts have been used to serve as rough indicators of the extent of terrorist financial flows through the formal financial networks, researchers and government officials have presented few such indicators about terrorist assets outside of formal mechanisms. Further, limited useful information exists about the total annual flow of assets through some types of alternative financing mechanisms, such as informal banking systems, and on what portion of that total may be terrorist assets. For example, there is a wide range of estimates about the total annual flow of transactions through informal banking systems; the United Nations estimates $200 billion, the World Bank and International Monetary Fund estimate tens of billions of dollars, and a FinCEN report noted that quantifying the amount with certainty is impossible. Moreover, officials and researchers we spoke with could not provide estimates on the extent of terrorist use of informal banking systems and other alternative financing mechanisms. U.S. law enforcement agencies—specifically, the FBI, which leads terrorist financing investigations and operations—do not systematically collect and analyze data on terrorists’ use of alternative financing mechanisms. When agencies inform the FBI that an investigation has a terrorist component, the FBI opens a terrorism case. However, the FBI cannot, through its existing processes, furnish the numbers of open or closed terrorist financing cases and cannot furnish the numbers of those cases broken down by funding source. According to the FBI’s Terrorist Financing Operations Section (TFOS) officials, most, if not all, terrorist cases involve a financial aspect, known as a “funding nexus,” which is normally considered to be a component of the overall investigation. However, the FBI does not currently isolate terrorist financing cases from substantive international terrorism cases, and its data analysis programs do not designate the source of funding (i.e., charities, commodities, etc.) for terrorist financing. The lack of such data hinders the FBI from conducting systematic analysis of trends and patterns focusing on alternative financing mechanisms from its case data. Without such an assessment, the FBI would not have analyses that could aid in assessing risk and prioritizing efforts to address these and other mechanisms. According to TFOS, it and the DOJ Counterterrorism Section have initiated a number of proactive data mining and data link analyses using a number of government and private data sources to identify potential terrorists and terrorist-related financing activities, but these initiatives generally focus on formal financial systems, not alternative financing mechanisms. According to the Chief of TFOS, the FBI plans to collect information from the field offices through its Crime Survey/Threat Assessment and Annual Field Office Reports, and these tools might include information on alternative financing mechanisms. However, the formats and results of these tools were not available to us during our review. Although the FBI reported that it solicited information from the field on identified threats and efforts including terrorist financing, we received no evidence showing that these reports addressed alternative financing mechanisms using a systematic methodology. The FBI disseminated its Crime Survey/Threat Assessment to all of its field offices, and the responses were due to FBI headquarters in August 2003 after we completed our fieldwork. According to the TFOS Chief, this information from the field was to highlight the threats identified in the field and might include discussions of alternative financing mechanisms. Also, according to the TFOS Chief, the Annual Field Office Reports were to be disseminated in April 2003 and finalized before conclusion of our fieldwork on July 30, 2003. However, as of July 30, 2003, the Annual Field Office Reports had not been finalized, and their status was unavailable. According to the TFOS Chief, the Annual Field Office Reports, once finalized in their new format, would furnish myriad useful documentation concerning the FBI’s efforts within the International Terrorism program and the terrorist financing arena. However, it remained unclear to what extent these documents would address alternative financing mechanisms. The DHS’s ICE, which participates in terrorist financing investigations in coordination with the FBI, also does not systematically collect and analyze data on terrorists’ use of alternative financing mechanisms. The former U.S. Customs Service initiated Operation Green Quest (OGQ) in October 2001 to focus on terrorist financing, and some of its data collection and analysis were intended to focus on alternative financing mechanisms. However, first, Customs officials were unable to furnish accurate numbers of open and closed terrorist financing cases. According to OGQ officials, they had approximately 580 open terrorist financing cases and 559 closed cases between OGQ’s inception in October 2001 and February 2003. However, Customs officials told us that, although cases may initially be thought to have a terrorist link and be categorized as such in their database, they might not be recategorized as nonterrorist cases once no terrorist link was found. Rather, the database captured criminal cases that may or may not have had a terrorist link; and the number of actual cases with a terrorist link, which would also depend on how “link” is defined, is not readily known. Second, ICE officials and former OGQ officials confirmed that they could not readily distinguish among the types of alternative financing mechanisms in their case database. According to these officials, it would take an intensive effort to segregate data by categories of alternative financing mechanisms. They said that they believed they could accomplish this, but that it would take resources and time, because the system was not set up to search for these mechanisms. Further, this method does not identify a terrorist link, requiring further effort to determine whether such a link existed. Moreover, while ICE officials use an analytical tool known as the Numerically Integrated Information System to investigate money laundering, terrorist financing, and other criminal activities, the tool, while useful, could not be used to automatically analyze information on alternative methods of terrorist financing and the extent of their use. The tool enables users to analyze databases for anomalies, criminal patterns, and specific transactions in global commerce when the user knows what to look for, based on other information or a tip; however, the tool does not automatically identify problem areas for attention. For example, if ICE officials know to compare export and import data between the United States and another country, and that country shares its data, then trade anomalies can be identified and further investigated using a number of databases and features. Customs officials used the system to identify money laundering based on irregular patterns in the gold trade between the United States and Argentina. However, the tool cannot be used to automatically flag anomalies in all U.S. imports and exports. Officials agreed that an automated feature would be beneficial and they believed that it would be developed in the future. Further, according to the May 13, 2003, DOJ and DHS memorandum of agreement concerning the FBI’s management of terrorist financing cases, resulting DHS analyses will be shared with the FBI, but it remains unclear how or if this information might be integrated with FBI databases or analyses. Despite an acknowledged need from some U.S. government officials and researchers for further analysis of the extent of terrorists’ use of alternative financing mechanisms, in some cases, U.S. government reporting on these issues has not always been timely or comprehensive. This could affect planning efforts. Upon requesting U.S. government studies on terrorist or criminal use of alternative financing mechanisms, we found that few rigorous studies exist. We also found that studies from researchers and information from various government and nongovernmental sources sometimes conflict. The Departments of the Treasury and of Justice have yet to produce their report on how money is being moved or value is being transferred via the trade in precious stones and commodities. This report was required by March 2003 under the 2002 National Money Laundering Strategy. The information gained in the report was to form the basis of an informed strategy for addressing this financing mechanism. According to Treasury officials, the report was drafted in April and will be released as an appendix in the yet-to-be-released 2003 National Money Laundering Strategy. The draft was not made available for our review, and it remains unclear whether the report addresses the recent investigative efforts of other U.S. government and international entities on this subject. Moreover, we found widely conflicting information in numerous interviews concerning the use of precious stones and commodities and in the available reports and documentation. Further, while a Treasury report to Congress on informal value transfer systems, required under the USA PATRIOT Act, described informal banking systems and related regulations, as required, it did not discuss terrorist use of such systems and did not include a review of the potential use of precious stones and commodities in such systems. While a discussion of precious stones and commodities was not specifically required under the USA PATRIOT Act, the report notes that there is a need for further research, particularly with regard to understanding the range of mechanisms associated with informal banking systems, including the use of gold and precious gems in hawala transactions, among others. The U.S. government faces challenges in monitoring terrorists’ use of alternative financing mechanisms, a few of which include accessibility to networks, the adaptability of terrorists, and competing priorities within the U.S. government. We recognize the inherent difficulty in monitoring terrorists’ use of alternative financing mechanisms and highlight three key challenges in this report. First, accessing the networks through which alternative financing mechanisms operate is difficult for U.S. authorities, because such systems are close knit and nontransparent. Second, the adaptable nature of terrorist groups can hinder authorities’ efforts to target industries and systems vulnerable to terrorists’ use. Finally, when monitoring alternative financing mechanisms, U.S. agencies face competing priorities that may present challenges for utilizing and enforcing existing laws and regulations or fully implementing strategic efforts. The difficulty of accessing the networks through which alternative financing mechanisms operate represents a significant challenge for U.S. efforts to monitor terrorists’ use of such mechanisms. In particular, these networks are difficult to access because they are close knit and based on trust. Informal banking systems, the diamond industry, and organized crime networks such as those that smuggle cigarettes and drugs are examples of alternative financing mechanisms that share these common factors. Similarly, terrorist organizations such as al Qaeda and Hizballah are close knit and difficult to penetrate. The closeness and high degree of trust between parties to terrorist financing networks are often based on long-standing ethnic, family, religious, or organized criminal ties. According to officials from U.S. law enforcement and the Treasury, investigators who seek to monitor such networks rely on developing inside sources of information, but the high degree of trust within the networks poses challenges for recruiting informants and conducting undercover operations. Law enforcement and the Treasury also report that language and cultural barriers can increase the difficulty of accessing such networks by impeding communication between government officials and parties to the networks. Nontransparency in many of these alternative financing mechanisms poses another challenge to U.S. law enforcement’s ability to access and monitor terrorists’ use of them. One component of this nontransparency is lacking or indecipherable transaction records. While officials report that transaction records in the formal banking sector have been critical to their ability to freeze terrorists’ assets, the lack of a paper trail created by alternative financing mechanisms limits investigators’ ability to track and apprehend terrorist financiers. In one case, DEA pursued drug smugglers with suspected terrorist links who used hawala to transfer their profits to Lebanon. However, the indecipherable records of the hawala transactions to Lebanon impeded DEA’s ability to trace the money once it reached Lebanon. As a result, DEA was not able to ascertain if the smugglers were providing material support to terrorists. In addition to the lack of a paper trail, key trade data and accountability measures for industries vulnerable to terrorist financing can be poor or nonexistent, contributing to this nontransparency. For example, international data on the diamond industry show that import, export, and production statistics often contain glaring inconsistencies. Comprehensive international trade data on the industry are not available in volume terms, even though volume data are a better indicator of true trade flows. These data flaws inhibit analysts’ ability to find patterns and anomalies that could reveal criminal smuggling of the diamonds, including for terrorist financing. Further, as we previously reported, while a recent international initiative to curb trade in illicit diamonds, known as the Kimberley Process, incorporates some elements of increased transparency, critical shortcomings exist with regard to internal controls and monitoring. Terrorist organizations’ adaptability can hinder U.S. law enforcement’s efforts to target industries and mechanisms that are at a high risk for terrorist financing. According to law enforcement and researchers, once terrorists know that authorities are scrutinizing a mechanism they use to earn, move, or store assets, they may switch to an alternate industry, commodity, or fundraising scheme to avoid detection. According to a former intelligence official, in one case, terrorists who were counterfeiting household appliances switched to creating their own appliance brand when law enforcement began to scrutinize their activities. Analysts from the former Customs Service have identified various counterfeit goods including CDs, DVDs, and apparel as having a possible connection to terrorist financing. Additionally, according to researchers, terrorist groups such as al Qaeda can exploit their geographically diffuse structure to move the location of their operations if they are notified that authorities are pursuing their financing activities in a particular location. The DOJ reports that the Director of the Pakistan office of the Benevolence International Foundation, an international charity whose U.S. Executive Director was indicted for supporting al Qaeda and other terrorist organizations, avoided a Pakistani intelligence investigation by moving to Afghanistan with the foundation’s money and documents. Within the United States, geographic flexibility may also facilitate terrorist financing. For example, according to IRS investigators and researchers, terrorists may have moved their charity from one state to another and changed the charity’s name to evade law enforcement. This adaptability also presents challenges in monitoring terrorists’ use of informal banking systems, such as hawala. The USA PATRIOT Act strengthened existing anti-money laundering laws by requiring that operators of informal banking systems register with FinCEN and obtain state licenses, where required under state law. The act also requires that informal banking systems report suspicious transactions to FinCEN and maintain anti-money laundering programs. However, officials and researchers report that these requirements are difficult to enforce, and it is likely that numerous small hawala operations remain unregistered and noncompliant with one or more of these requirements. Terrorists may have adapted to these new regulations by developing and maintaining relationships and conducting business with the hawala operators that remain underground, increasing the likelihood that their transactions will not be detected. Addressing competing priorities presents challenges for U.S. government agencies’ efforts to monitor use of alternative financing mechanisms. Increased emphasis on combating terrorism and terrorist financing since the September 11 terrorist attacks has placed greater urgency on preexisting responsibilities for some agencies. New laws such as the USA PATRIOT Act are generally recognized as assisting U.S. law enforcement efforts but also increase the workload of agencies. While the FBI is the lead agency on terrorist financing investigations, all agencies have an inherent responsibility to aid in this effort. However, some agency officials noted that new tasks sometimes compete with traditional roles or increase workloads, creating a strain on their resources, which could slow the sharing of potentially useful information. As a result, agencies may fail to fully utilize existing laws or fully implement strategic efforts in a timely manner, as described below. Competing priorities slowed IRS plans to take advantage of law enabling greater information-sharing with the states. Although the IRS told us in February 2002 that it had begun to develop a system to share data with the states for the oversight of charities as allowed by law, the IRS has not made this initiative a priority and has not developed and implemented this system. While neither the IRS’s nor the states’ primary goal is deterring terrorism, using data-sharing systems is even more important now, when feasible, in light of the charities cases involving terrorist financing. States have an important role in combating terrorist financing because states share overall oversight responsibility for charities with the IRS. Further, according to state officials, questionable charities tend to move from state to state to avoid detection. According to the President of the National Association of State Charitable Organizations, the system of proactive information-sharing discussed with us in 2002 (including final denials of applications, final revocations of tax-exempt status, and notices of a tax deficiency) could be very useful for states in identifying and shutting down suspect charities, including charities involving terrorist financing. This system would establish uniform procedures for sending information from the IRS to states, including information about charities that have misused their funds. IRS officials attributed delays in fully developing and implementing the system to a number of factors, including competing priorities in the department and the desire to combine this effort with the potential for increased information-sharing that may be allowable under pending legislation. However, IRS officials agreed that they could have developed this system without passage of further legislation, and while they stated that they had begun to do so, as of July 31, 2003, when we concluded fieldwork, they had provided no evidence of work completed to date and had not specified a time frame for how and when implementation would be completed. Subsequently, on September 4, 2003, the IRS provided us with draft IRS procedures and draft guidelines for state charity officials. Officials said they were reviewing the drafts, and their proposed completion date for this information-sharing program is December 31, 2004. The IRS did not establish milestones for meeting the completion date and did not establish interim guidelines. The President of the National Association of State Charitable Organizations told us that if the issuance of guidelines for state charity officials were further delayed, then interim guidelines would be useful. The extent of the workload created under the 2001 USA PATRIOT Act initially increased the amount of work required of FinCEN and may have slowed efforts to take full advantage of the act concerning the establishment of anti-money laundering programs. The information to be gained under the regulations, through financial institution registration and submission of required Suspicious Transaction Reports, was intended to be shared with law enforcement and intelligence analysts in their efforts to detect and deter terrorism. In October 2002, FinCEN officials told us that they had insufficient resources to draft regulations required under the act and they had not decided how to prioritize the workload. According to the 2002 National Money Laundering Strategy issued by the Departments of the Treasury and Justice, the process was made more challenging by the fact that many of the new provisions imposed regulations on various sectors and financial institutions that were not previously subject to comprehensive anti-money laundering regulations, such as automobile and boat dealers, pawn brokers, and dealers in precious metals, stones, or jewels. This meant that time and resources were needed to study and consult with law enforcement and industry leaders. FinCEN rules for dealers in precious metals, stones, or jewels were proposed on February 21, 2003, and have not been finalized. Implementation of the 2002 National Money Laundering Strategy, which ostensibly directs the U.S. government’s resources against money laundering and terrorist financing, has proven to be challenging partially owing to the number of competing priorities. The 2002 strategy states that the U.S. government has moved aggressively to attack terrorist financing by refocusing its ongoing anti-money laundering efforts and acknowledges the larger burden placed on agencies owing to provisions of the USA PATRIOT Act. The 2002 strategy contains 19 objectives and 50 priorities but does not assign resources to these priorities based on a risk or threat assessment. Although the Secretary of the Treasury and the Attorney General issued the annual strategy, Justice officials, including FBI officials, told us that the strategy contained more priorities than could be realistically accomplished, and said that it did not affect how they set priorities or aligned resources to address terrorist financing. Treasury officials said resource constraints and competing priorities were the primary reasons why strategy initiatives, including those related to alternative financing mechanisms, were not met or were completed later than expected. Moreover, although the 2003 National Money Laundering Strategy was to be issued in February 2003, according to Treasury officials, as of July 31, 2003, the new strategy had not been published owing to the demands involved in the creation of DHS. At the conclusion of our review, Treasury officials told us that the Secretary of DHS would be added as a signatory to the 2003 National Money Laundering Strategy. However, subsequently, when reviewing the draft of this report, Treasury, DOJ, and DHS officials told us that the Secretary of the DHS would not be a signatory to the 2003 National Money Laundering Strategy. Efforts to disrupt terrorists’ ability to fund their operations may not succeed if they focus solely on the formal banking or mainstream financial sector. To form a viable strategy, the U.S. government and others face challenges in understanding the nature and extent of terrorists’ use of alternative financing mechanisms and in monitoring these and emerging mechanisms. While we recognize that the full extent of criminal activity cannot be determined, information can be systematically collected and synthesized to provide a useful gauge. We recognize that such analyses are difficult, but without an attempt to do so, information about terrorists’ usage and potential usage remains unknown, leaving vulnerabilities for terrorists to exploit. Since current FBI systems do not allow for such data collection and synthesis, linkages, patterns, and emerging trends may not be effectively identified and, thus, resources may not be focused on the most significant mechanisms. Further, without rigorous assessments of high-risk industries and systems, critical information may remain unidentified or unexplored, leaving such industries and systems vulnerable to exploitation by terrorists. Without good data and analysis, leading to viable threat assessments and strategies, U.S. government officials cannot make good decisions among competing priorities and the resources to address them. To establish a basis for an informed strategy to focus resources on the most significant mechanisms that terrorists use to finance their activities, we recommend that the Director of the FBI, in consultation with relevant U.S. government agencies, systematically collect and analyze information involving terrorists’ use of alternative financing mechanisms. Moreover, to create a basis for an informed strategy for determining how money is being moved or value is being transferred via the trade in precious stones and commodities, we recommend that the Secretary of the Treasury and the U.S. Attorney General produce a report on this subject, fulfilling their overdue action item under the 2002 National Money Laundering Strategy. Such a report should be based on up-to-date law enforcement investigations of links between precious stones and commodity trading and the funding of terrorist groups, as required under the strategy. Finally, to improve the oversight of charities, leading to the possible disruption of terrorist financing, we recommend that the Commissioner of the IRS, in consultation with state charity officials, establish interim IRS procedures and state charity official guidelines, as well as set milestones and assign resources for developing and implementing both, to regularly share data on charities as allowed by federal law. We provided draft copies of this report to the following agencies for review: the Department of Justice, the Department of the Treasury, the Internal Revenue Service, the Department of Homeland Security and the Department of State. We received formal comments from the Treasury and IRS (see apps. II and III). We received technical comments from DOJ, DHS, and State, which we incorporated in the report as appropriate. The DOJ did not formally respond to our recommendation that the Director of the FBI, in consultation with relevant U.S. government agencies, systematically collect and analyze information involving terrorists’ use of alternative financing mechanisms. However, in DOJ’s technical comments, they agreed that the FBI does not systematically collect and analyze such information, but they did not specifically agree or disagree with our recommendation. DOJ commented that it designates sources of funding in its terrorist financing cases, but it does not initiate or organize investigations on an industrywide basis or as a result of the type of commodity used or particular means of transfer. Additionally, DOJ suggested that the effort might more appropriately be a function of the Treasury based on Treasury’s prior work on alternative financing mechanisms. However, according to FBI TFOS, their mission is to centralize and coordinate all terrorist financing investigations. As stated in this report, TFOS officials said that they and the DOJ Counterterrorism Section have already initiated a number of data mining and data link analysis initiatives to identify terrorist-related financing activities focusing on formal financing systems, but not alternative financing mechanisms. Further, TFOS officials said they plan to evaluate the feasibility of adding a separate designation for terrorist financing in their data system according to the source of funding. We continue to believe the FBI should work in consultation with relevant U.S. government agencies to systematically collect and analyze information involving terrorists’ use of alternative financing mechanisms, which would include strategizing with and engaging the expertise of other agencies such as Treasury and DHS, among others. In response to our recommendation that the Secretary of the Treasury and the U.S. Attorney General produce a planned report on precious stones and commodities, the Department of the Treasury responded that the report would be issued as an appendix to the 2003 National Money Laundering Strategy. However, the strategy was to be issued in February 2003 and had not been issued as of our receipt of Treasury’s comments on October 29, 2003. Further, the Treasury did not address whether their report would include up-to-date information from law enforcement investigations of links between precious stones and commodity trading and the funding of terrorist groups, as required under the strategy. The Department of Justice did not comment on this recommendation. We continue to recommend that their report be based on up-to-date law enforcement investigations given the conflicting views and the lack of comprehensive reporting on terrorists’ use of precious stones and commodities. The IRS agreed with our overall recommendation to establish IRS procedures and state charity official guidelines to regularly share data on charities as allowed by federal law. Although IRS told us at the conclusion of our fieldwork that they planned to establish this information-sharing program by December 31, 2004, in response to our draft report and recommendation, the IRS committed to expediting its efforts by one year, having procedures in place by the end of calendar year 2003. Subsequent to our fieldwork, the IRS exhibited progress by producing draft procedures and guidelines. However, the IRS did not address our recommendation to establish milestones and assign resources to meet the target date or interim guidelines should they miss the 2003 target date. Given the complexity and time needed to complete the effort, as described by the IRS, we continue to recommend that the IRS establish milestones and assign resources to ensure that it meets its new target date. We also continue to recommend that IRS establish interim procedures and guidance should the IRS not meet its target date. As agreed with your offices, unless you publicly announce the contents of this report earlier, we plan no further distribution until 30 days from the report date. At that time, we will send copies to the Attorney General, the Secretary of Homeland Security, the Secretary of State, the Secretary of the Treasury, the Commissioner of Internal Revenue, and interested congressional committees. We also will make copies available to others upon request. In addition, the report will be available at no charge on the GAO Web site at http://www.gao.gov. If you or your staff have any questions about this report, please call me at (202) 512-4128. Other contacts and staff acknowledgments are listed in appendix IV. The Ranking Minority Member of the Senate Committee on Governmental Affairs’ Subcommittee on Oversight of Government Management, the Federal Workforce and the District of Columbia and the Chairman of the Senate Caucus on International Narcotics Control asked us to assess (1) the nature of terrorists’ use of key alternative financing mechanisms for earning, moving, and storing terrorists’ assets; (2) what is known about the extent of terrorists’ use of alternative financing mechanisms; and (3) the challenges that the U.S. government faces in monitoring terrorists’ use of alternative financing mechanisms. To determine the nature of terrorists’ use of some key alternative financing mechanisms for earning, moving, and storing assets, we reviewed past GAO work, studies, analyses, and other documents prepared by experts from U.S. agencies, international organizations, and other groups. We also interviewed officials of the U.S. government, international entities, foreign governments, industry, and nonprofit groups, as well as representatives from academia and research institutions. Our scope and methodology were limited by the lack of complete access to sensitive information and documentation. In cases where little documentation was provided and views conflicted, we corroborated information to the extent possible and noted the conflicting views. We reviewed available documentation and interviewed officials from the following U.S. departments and agencies: the Department of Justice (Criminal Division; Federal Bureau of Investigation; Bureau of Alcohol, Tobacco, Firearms, and Explosives; Drug Enforcement Administration); the Department of the Treasury (Executive Office of Terrorist Financing and Financial Crime, Office of Foreign Assets Control, Financial Crimes Enforcement Network, Internal Revenue Service (IRS), and the Office of International Affairs); the Department of Homeland Security (Bureau of Immigration and Customs Enforcement); the Department of State (Office of the Coordinator for Counterterrorism, Bureau of International Narcotics and Law Enforcement Affairs, and Bureau of Economic and Business Affairs); the Department of Defense (Office of the Secretary of Defense, Office of Naval Intelligence, Defense Intelligence Agency); the Central Intelligence Agency; the Congressional Research Service; the U.S. Mission to the United Nations; the U.S. Embassy in Belgium (political and economic officers, Department of Homeland Security (Customs), Drug Enforcement Administration, Federal Bureau of Investigation, Defense); the U.S. Embassy in France (Department of Homeland Security (Customs), Federal Bureau of Investigation); the U.S. Mission to the European Union; and U.S. representatives to INTERPOL. We also reviewed and assessed available documentation and interviewed officials from the following international entities: the Financial Action Task Force on Money Laundering; the World Customs Organization; the Charities Commission on England and Wales; and the Supreme Headquarters Allied Powers Europe (one of the North Atlantic Treaty Organization’s military commands). Additionally, we interviewed officials from Belgian law enforcement, the Federal Prosecutor’s Office, and the Ministry of Foreign Affairs, Foreign Trade and International Cooperation. We also interviewed experts from India and Pakistan on hawala systems. We interviewed the Chief Prosecutor and Chief Investigator for the United Nations Special Court for Sierra Leone. Moreover, we reviewed studies and analyses and interviewed officials from industry, nonprofit groups, academia, the media, and research institutions such as the Belgian Diamond High Council, the Phillip Morris Company, Global Witness, the International Peace Information Service, Council on Foreign Relations, Business Exposure Reduction Group, the Washington Institute for Near East Policy, and the Investigative Project, among others. To determine what is known about the extent of terrorists’ use of alternative financing mechanisms, we reviewed studies, analyses, and other documents and interviewed officials from the U.S. government, international entities, foreign governments, industry, nonprofit groups, academia, and research institutions. We attended and reviewed briefings from the Federal Bureau of Investigation and the U.S. Customs Service (now part of the Department of Homeland Security) on their data collection, databases, and analysis methods and discussed with them what their systems could and could not do. We were limited by the lack of complete access to sensitive information and by the lack of available and reliable data to determine the extent of terrorists’ use of alternative financing mechanisms. Our reporting on the current FBI data collection and analysis methods was curtailed by the Department of Justice due to sensitivity concerns. We also discussed studies completed and expected from the Departments of the Treasury and Justice as required under the 2002 National Money Laundering Strategy with officials from these departments. To determine challenges that the U.S. government faces in monitoring terrorists’ use of alternative financing mechanisms, we reviewed past GAO work and documents from U.S. and foreign governments, industry, and international entities including strategies, such as the National Money Laundering Strategy; laws, regulations, rules, policies, procedures, and actions; and studies. For example, we analyzed federal and state tax laws pertaining to the oversight of charitable organizations, including reviewing Internal Revenue Code section 6104 on information-sharing between IRS and state regulators. Further, we interviewed officials from these organizations to corroborate analysis and documentary evidence. We also interviewed officials from the National Association of State Charitable Organizations and state Attorneys General Offices from California, New York, Pennsylvania, and Texas to identify challenges to deterring the use of charitable organizations in terrorist financing. According to the President of the National Association of State Charitable Organizations, California, New York and Pennsylvania are heavily regulated states while Texas is not. Additionally, we reviewed FinCEN issuance of rules and regulations as allowed under the USA PATRIOT Act. Further, we assessed and obtained views on competing priorities involved in implementing the 2002 National Money Laundering Strategy. We conducted our fieldwork in Washington, D.C., and New York, N.Y.; Brussels and Antwerp, Belgium; and Paris and Lyon, France. We performed our work from August 2002 through July 2003 in accordance with generally accepted government auditing standards. 1. The term “earn” more fully captures the criminal effort involved in the range of alternative terrorist financing mechanisms. 2. While the use of terrorist funding may provide transactions that can be investigated, the scope of this review focused on how terrorists earn, move, and store their assets. The final use of terrorist funding is not relevant in the context of this report. 3. We amended the description of the Executive Office for Terrorist Financing to incorporate additional information provided. The description was edited in a manner consistent with those of the other agencies in the table and it captures both the information provided in the Executive Office’s Mission Statement as well as the agency comments. 4. We amended the description of the Financial Crimes Enforcement Network in Table 1 to include its role in administering the Bank Secrecy Act. 5. The description used was obtained from IRS Criminal Investigation and is consistent with the format used for other agencies. 6. We incorporated the description of the Treasury’s Office of the General Counsel in Table 1. 7. We respond to this comment on page 28. 8. We agree that the USA PATRIOT Act did not specifically require that the Department of the Treasury report to Congress on informal value transfer systems include a discussion of precious stones and commodities. While a discussion of precious stones and commodities was not specifically required under the USA PATRIOT Act, the Treasury report notes that there is a need for further research, particularly with regard to understanding the range of mechanisms associated with informal banking systems, including the use of gold and precious gems in hawala transactions, among others. We modified our report, accordingly. 9. The Department of the Treasury’s comments state that their report to Congress on informal value transfer systems did not discuss terrorists’ use of these systems because there was no direct evidence that terrorists had used these systems in the United States. However, the Treasury report states that “these systems have been used to facilitate the financing of terrorism” and the USA PATRIOT Act requirement for the report addresses the transfer of money both domestically and internationally. The Treasury report provides no further discussion on the link between terrorist financing and these systems. 10. The sentence is characterized accurately. The context of the discussion was the development of regulations required under the USA PATRIOT Act. 11. We have omitted the example concerning the timeline for finalizing anti-money laundering program rules for money service businesses due to conflicting information presented by FinCEN during our review and the Department of the Treasury’s comments. In addition to those individuals named above, Kate Blumenreich, Tracy Guerrero, Janet Lewis, Kendall Schaefer, Jenny Wong, Mark Dowling, Rona Mendelsohn, and Reid Lowe made key contributions to this report. | Cutting off terrorists' funding is essential to deterring terrorist operations. The USA PATRIOT Act expanded the ability of law enforcement and intelligence agencies to access and share financial information regarding terrorist investigations, but terrorists may have adjusted their activities by increasing use of alternative financing mechanisms. GAO was asked to assess (1) the nature of terrorists' use of key alternative financing mechanisms for earning, moving, and storing terrorists' assets; (2) what is known about the extent of terrorists' use of alternative financing mechanisms; and (3) challenges that the U.S. government faces in monitoring terrorists' use of alternative financing mechanisms. Terrorists use many alternative financing mechanisms to earn, move, and store assets. They earn assets by selling contraband cigarettes and illicit drugs, by misusing charitable organizations that collect large donations, and by other means. They move funds by concealing their assets through nontransparent mechanisms such as charities, informal banking systems, and commodities such as precious stones and metals. To store assets, terrorists may choose similar commodities that maintain their value and liquidity. The extent of terrorists' use of alternative financing mechanisms is unknown, owing to the criminal nature of terrorists' use of alternative financing mechanisms and the lack of systematic data collection and analysis of case information. The Federal Bureau of Investigation (FBI) does not systematically collect and analyze data on these mechanisms. Furthermore, the Departments of the Treasury and of Justice have not yet produced a report, required under the 2002 National Money Laundering Strategy, which was to form the basis of a strategy to address how money is moved or value transferred via trade in precious stones and commodities. In monitoring terrorists' use of alternative financing mechanisms, the U.S. government faces a number of challenges, including accessing ethnically or criminally based terrorist networks, targeting high-risk financing mechanisms that the adaptable terrorists use, and sharing data on charities with state officials. The Internal Revenue Service (IRS) has committed to, but has yet to establish, procedures for such data sharing. |
Mr. Chairman and Members of the Subcommittee: We are pleased to have this opportunity to discuss issues related to the proposed legislation entitled “Honesty in Sweepstakes Act of 1998,” (S. 2141), which was introduced on June 5, 1998, by Senator Ben Nighthorse Campbell. In my statement, I will provide information on the results of our efforts to determine the extent and nature of problems that consumers may have experienced with various sweepstakes mailings that organizations have used to entice consumers to purchase goods and services. Also, I will provide information on our efforts to obtain similar information related to the mailing of documents that resembled cashier’s checks, also known as cashier’s check “look-alikes,” which are not the negotiable instruments that they appear to be. In addition, I will provide information on initiatives in which various agencies and organizations have participated to address consumers’ problems with direct mail marketing practices. We performed our work in response to Senator Campbell’s July 1, 1998, request. As Senator Campbell indicated in his remarks that appeared in the June 5, 1998, Congressional Record, the proposed legislation is primarily intended to protect consumers, particularly senior citizens, from deceptive direct mail marketing practices. The provisions of the proposed legislation are generally designed to help ensure that organizations, which may use questionable or deceptive direct mail sales promotions involving sweepstakes or other games of chance and cashier’s check look-alikes, be required to be as accurate and honest as possible in such promotions. Specifically, the provisions would require these organizations to ensure that statements are printed in large typeface on the outside of the envelope to clearly indicate that the printed material inside involves a sweepstakes or game of chance and that the consumer has not automatically won. Also, the provisions would require that these organizations include statements at the top on the first page of the printed material inside the envelope that would repeat the statements that were printed on the outside of the envelope; indicate consumers’ chances of winning the sweepstakes; and state that no purchase is necessary for consumers to win a prize nor would such purchases enhance their chances of winning. In addition, for mailed cashier’s check look-alike documents, the provisions would generally require that in accordance with prescribed Postal Service regulations, a statement be included in large or contrasting typeface on the document to indicate that it is not a check and has no cash value. As Senator Campbell has indicated, consumers would be key stakeholders in helping to ensure that organizations complied with the provisions in the proposed legislation. The role of consumers would be to report their complaints to the Postal Service about any mailed material that appeared not to meet the proposed legislative provisions. Such complaints would provide the Postal Service with information that could be used to appropriately investigate and determine an organization’s compliance with the proposed “Honesty in Sweepstakes Act” provisions. If such information indicates that the mailed material is not in compliance, the Postal Service may take action to dispose of the material or return it to the sender. (NCL), which established the National Fraud Information Center (NFIC);and (3) Direct Marketing Association (DMA). We contacted officials at FTC and the Postal Inspection Service and discussed with them the extent to which they may have collected and maintained data that could indicate the extent or scope of consumers’ problems with questionable or deceptive mail marketing practices that involved mailed sweepstakes material and cashier’s check look-alikes. Also, we discussed with these officials whether we could obtain examples of consumers’ complaints about such practices that could indicate the nature or the types of problems that consumers had experienced. In selecting states to contact, we relied in large part on information obtained from FTC officials. These officials generally cited various states that had laws, which included requirements for organizations to follow in using mailed sweepstakes material as marketing techniques; were involved in legal actions concerning mailed sweepstakes material against specific organizations; and had been active in dealing with consumers’ complaints about mailed sweepstakes material and working with other agencies and organizations to help educate consumers about questionable or deceptive mail marketing practices. During the course of our work, we also obtained information about initiatives in which various federal and state government agencies and nongovernmental organizations have participated in addressing consumers’ problems with questionable or deceptive direct mail marketing practices. At the time we completed our work in mid-August 1998, we had obtained information from officials and representatives in 17 federal, state, and local government agencies and nongovernmental organizations. Because we had a limited amount of time in which to obtain information related to mailed sweepstakes material and cashier’s check look-alikes, we did not independently verify the information provided by the 17 agencies and organizations. A list of these agencies and organizations is included in the appendix to this statement. We did our work from July through mid-August 1998, in accordance with generally accepted government auditing standards. Of the 17 agencies and organizations from which we obtained information, we found that comprehensive data on the extent of consumers’ problems with mailed sweepstakes material and cashier’s check look-alikes were generally not available. We found that in 2 of the 17 agencies and organizations—namely FTC and the Postal Inspection Service—some data were available that could help indicate the nature or types of problems that consumers had experienced with mailed sweepstakes material. However, we were unable to obtain similar data concerning cashier’s check look-alikes. According to FTC and Postal Inspection Service officials, consumer complaint data on cashier’s check look-alikes were not as readily available as data on mailed sweepstakes material. Various officials and representatives in the remaining 15 agencies and organizations told us that generally they could not provide us with information similar to FTC and the Postal Inspection Service that could indicate the extent or nature of consumers’ problems. The reasons they cited were mainly because (1) their agencies and organizations did not believe it was their primary function to collect or maintain such information or (2) their data collection was limited to information that could assist the agencies and organizations in taking action against a specific company that may have misused sweepstakes as a marketing tool. For example, an official in Florida’s Office of the Attorney General told us that consumer complaint information was collected and maintained only on American Family Publishers (AFP) because the state of Florida had filed a lawsuit against AFP for allegedly deceiving consumers with mailed sweepstakes material. In attempting to identify the extent of consumers’ problems with mailed sweepstakes material and cashier’s check look-alikes, we found that comprehensive data that could clearly indicate the extent of the problems, including such information as how frequently such problems might occur, were not available. Various officials and representatives from the 17 federal, state, and local government agencies and nongovernmental organizations from which we obtained information told us that generally, such data were not available for two main reasons—first, consumers oftentimes do not complain or report their problems and second, no centralized database existed that could indicate the full extent of such problems involving those who did not register complaints. Regarding the first main reason for the lack of comprehensive data, officials and representatives told us that consumers often did not report problems because they were too embarrassed or did not realize that they had been victimized. Also, some consumers reportedly feared that if they complained, their chances of future sweepstakes winnings would be diminished. In addition, an AARP representative mentioned that in many instances, elderly consumers may fear losing their financial independence if they reported negative experiences with mailed sweepstakes material. Specifically, elderly consumers may fear that if their family members learned that they had been victimized, the family members might then take steps to prevent future victimization, such as stricter control over bank account activities. In addition, consumers may not file complaints because such complaints can be filed with various organizations, such as FTC, the Postal Inspection Service, NFIC, a local better business bureau, or a consumer protection agency. In many instances, consumers may be uncertain about which organization is the most appropriate one to receive their complaints. Also, in some cases, if consumers try to file complaints, they may be referred to or told to contact other organizations, which may cause consumers to become frustrated and abandon their attempts to file complaints. Concerning the second reason for the lack of comprehensive data, various officials and representatives mentioned that no centralized database existed that could indicate the extent of consumers’ reported problems with deceptive mail marketing practices involving mailed sweepstakes material and cashier’s check look-alikes. Some of the agencies and organizations from which we obtained information, such as FTC, NFIC, and state attorney general’s offices, have collected and maintained some, but not complete, consumer complaint data related to such practices. Consumers can complain to a variety of organizations, but none of these organizations necessarily receives information on complaints filed with other organizations. For example, in large part, FTC receives complaints directly from consumers and from various outside organizations, including NFIC, AARP, and Project Phonebusters. However, FTC does not generally receive consumer complaints from all organizations that may accept such complaints, such as state attorneys general offices and local consumer affairs offices. An FTC official mentioned that currently FTC is working with other organizations, such as the National Association of Attorneys General (NAAG), to encourage these organizations to share consumer complaint information with FTC, so that more comprehensive data on consumer complaints can be centrally collected and maintained. Also, although the Postal Inspection Service receives numerous complaints related to consumers’ problems with alleged fraudulent activities, including mailed sweepstakes material, it does not necessarily receive these complaints from all organizations that accept them. In addition, according to Postal Service Inspection officials, the extent to which complaints within the Postal Inspection Service’s database involve mailed sweepstakes material or cashier’s check look-alikes is not easily determined. Furthermore, some of the agencies and organizations from which we obtained information did not have comprehensive data because they generally believed that collecting and maintaining such data were not their primary functions. Also, an AARP representative told us that the general lack of comprehensive data was partially due to an overall scarcity of resources, including staff and funds, which she believed would be needed to collect and maintain a comprehensive, centralized database. In our discussions with various officials and representatives of the agencies and organizations from which we obtained information, they suggested that in order to obtain examples of such problems, in all likelihood, FTC would be the most appropriate agency to provide us with data on consumers’ complaints about sweepstakes mailings and cashier’s check look-alikes. FTC officials explained that the Consumer Information System (CIS) is FTC’s database that includes consumer complaint information. The officials told us that the purpose of CIS, which became fully operational in September 1997, was to collect and maintain various data related to consumers’ complaints. FTC officials expected that CIS data would be used primarily by law enforcement organizations and officials to assist them in fulfilling their law enforcement duties. The CIS database contained a total of about 200 categories within which consumers’ complaints were included. The categories in CIS covered a wide range of topics such as (1) creditor debt collection, (2) home repair, (3) investments, (4) health care, and (5) leases for various products and services such as automobiles and furniture. We identified one of those categories—prizes/sweepstakes/gifts—as the key category that could provide us information on consumers’ complaints about mailed sweepstakes material. However, we were unable to identify a specific category that could help us obtain similar information on cashier’s check look-alike documents. FTC officials told us that consumer complaints about such documents could be included in many of the CIS categories because these types of documents may be related to a wide range of products and services, including home mortgage loans, automobiles, and real estate sales. Thus, we would have needed to review nearly all the CIS categories to try to obtain insight into the nature of consumers’ problems with these documents. Because our time to review this information was limited, we determined that we should focus our efforts on reviewing those complaints that were included in the prizes/sweepstakes/gifts CIS category. by mail had been filed with either FTC or NFIC. Also, they mentioned that many of the 15,735 records in the prizes/sweepstakes/gifts category included consumer complaints that both FTC and NFIC had maintained in their databases for several years before CIS was established. In reviewing the consumer complaint data we received from FTC, we focused on those complaints that were included in CIS during the most recent 12-month period (i.e., July 1, 1997, through June 30, 1998). For this period, we identified 1,394 consumer complaints within the prizes/sweepstakes/gifts CIS category in which the initial contact with the consumer was made by mail. Of the 1,394 complaints, we found that in 1,215, or about 87 percent, of these complaints, companies had requested individual consumers to remit money. The total amount of money requested by the companies was reported to be about $102,000. Also, our review of the 1,394 consumer complaints showed that 734, or about 53 percent, of consumers reported that they had remitted money to the companies. The total amount of money these consumers said they had paid was about $46,000. The amounts of money individual consumers said that they had paid ranged from less than $5 to $8,850. Of the 734 complaints, 551 individual consumers, or about 75 percent, reported that they had paid amounts less than $5, whereas, in one case, a consumer reported paying $8,850. We did not independently verify the accuracy of this information. In reviewing the 1,394 complaints, we identified 1,371 that included information in the “comment” data field, which indicated the nature of consumers’ complaints. From the 1,371 complaints, we randomly selected 200 for analysis to try to more clearly determine the nature of consumers’ complaints that were included in the prizes/sweepstakes/gifts CIS category. We sorted the 200 complaints into the following five groups: Sweepstakes that required consumers to send in money or pay fees. Sweepstakes that required consumers to purchase products or services. Sweepstakes that required consumers to call a telephone number for which they were charged a fee. Sweepstakes that required consumers to provide personal information, such as social security numbers or bank account numbers. A miscellaneous group for those complaints that could not readily be included in the previous four groups. Table 1 shows the general breakdown of the 200 consumer complaints into the five groups. As indicated in table 1, 160, or 80 percent, of the consumer complaints we sampled involved sending in money or fees or purchasing products or services. Some examples of the types of complaints included in the two categories were as follows: A consumer was told by a company that she had won $12,000, but that she was required to send in a processing fee to claim her winnings. She remitted the fee to the company but received no winnings. Later, she received an identical notice from the same company but she did not remit the requested processing fee. A consumer received repeated notices that she had won a cash prize in a company’s sweepstakes. However, she never received such a prize, even after she ordered and received several plants from the company. A consumer reported that a company had offered to enter his name in its sweepstakes when he purchased magazines. After the consumer purchased the magazines, the company advised him that he was a sweepstakes winner. The company told the consumer to remain at home on a specific date so that he could receive his prize, which was a suitcase full of money. Although the consumer remained at home on the specified date, no suitcase arrived. winnings or verify their winning numbers. Examples of such complaints included the following: A consumer complained that he had received an award notification in the mail. He was required to call a 900 telephone number to verify his winning number. The company told the consumer that he had won one dollar. Later, the consumer was charged $56 for the telephone call. A consumer was told by a company that she had won either a car or cash and required her to either call a 900 telephone number or send in a card to receive her prize. Although she sent in the card, she did not receive her promised prize. As indicated in table 1, 7 consumer complaints from our sample involved organizations requesting personal information, such as the consumer’s social security number or bank account number. Some examples of these types of complaints included the following: A consumer reported that a company informed him that he could win as much as $100,000 if he would send in a release form that included bank account information. The consumer did not send in the form. A consumer complained that a company instructed him to call immediately concerning his sweepstakes winnings. When he called, a company representative tried to solicit his telephone number as well as credit card information. The consumer refused to provide the information. As shown in table 1, 26 complaints contained a variety of miscellaneous consumer complaints that did not easily fit into one of the previous four groups. Examples of these miscellaneous complaints included the following: A consumer received three letters informing him that he was the winner of a large sum of money. After writing many letters to the company, the consumer never received any explanation as to why he had not received his money. A consumer reported that he had received a notice that he was the winner in a company sweepstakes. The notice stated that the company was preparing to award him a prize. The consumer sent the company a letter requesting the prize, but subsequently, the company notified the consumer that he in fact was not the winner. Postal Inspection Service officials told us that the Fraud Complaint System (FCS) is used by the Postal Inspection Service to collect and maintain consumer complaint information about various types of alleged fraudulent activities, including those involving deceptive mail marketing practices. The officials estimated that the Postal Inspection Service generally receives between 60,000 and 100,000 consumer complaints each year that pertain to alleged fraudulent activities. However, officials were unable to estimate how many of these complaints were related to mailed sweepstakes material and cashier’s check look-alikes. The officials told us that generally, it would be difficult to identify such complaints because FCS has limited search capabilities. In large part, complaints regarding mailed sweepstakes material and cashier’s check look-alikes in FCS can only be identified by searching on the company name or product sold. According to Postal Inspection Service officials, we could best obtain information on the nature of consumers’ complaints by reviewing specific cases for which postal inspectors had performed investigations. One of the officials told us that during the period October 1, 1997, through August 21, 1998, 16 cases involving mailed sweepstakes material were closed and specific law enforcement actions, such as the issuance of cease and desist orders, had been taken. The 16 cases most often involved sweepstakes and cash prize promotions for which up-front taxes or insurance, judging, or handling fees were required before consumers could participate in the sweepstakes. the consumers’ names with the federal government for which the consumers would have to pay a fee. The two combined cases resulted in the issuance of a cease and desist order, a withholding mail order, and a false representation order. We identified various initiatives by specific agencies and organizations that were intended to provide opportunities for these entities to address, among other things, the problems affecting consumers that involved questionable or deceptive mail marketing practices. These initiatives also provided the agencies and organizations with information that they could use to assist law enforcement organizations in initiating appropriate actions, such as investigations and lawsuits. In addition, the initiatives provided agencies and organizations with opportunities to work together on efforts that could help educate and inform consumers about direct mail marketing practices that could cause problems. Examples of two of the more recent initiatives included (1) Project Mailbox and (2) the establishment of a multi-state sweepstakes committee, which resulted from a legal complaint involving AFP. the establishment of a strike force involving FTC, the Postal Inspection Service, various state Attorneys General, NAAG, and AARP that would collect and review direct mail for future law enforcement actions; the initiation of AARP’s “Project Senior Sting,” a project established in Massachusetts and Arizona in which unsolicited mail would be turned over to law enforcement agencies to search for possible examples of fraud; and the launching of a consumer education campaign involving the Postal Inspection Service, AARP, and the Yellow Pages Publishers Association that is intended to help consumers and small businesses spot mail fraud. Within NAAG, various committees work on a wide range of issues including civil rights, environment, energy, health care, bankruptcy, and taxes. These committees are responsible for studying such issues and recommending policy positions to NAAG members for action. In July 1998, NAAG approved a resolution to establish within its Consumer Protection Committee a subcommittee that plans to address matters related to sweepstakes and prize promotions. According to the resolution, some of the subcommittee’s objectives include (1) ensuring active enforcement of current laws that prohibit unfair and deceptive practices by operators of sweepstakes and prize promotions, (2) determining whether specific legislative initiatives would be effective in deterring and punishing deceptive and abusive practices by operators of sweepstakes and prize promotions, and (3) when appropriate, drafting documents that could be developed into state legislation. required consumers who wanted to enter the sweepstakes without purchasing magazines to follow a more circuitous and cumbersome procedure than those who purchased magazines. According to various states, as part of the settlement, which was reached in March 1998, AFP agreed to pay a total of approximately $1.25 million to about 30 states and the District of Columbia. AFP also agreed to revise future mailed sweepstakes material so that it would only tell consumers that they were winners if they had in fact won, only tell consumers that they were among a select group that has a chance of winning a prize if the odds of winning are disclosed, tell consumers that no purchase is necessary to participate in the sweepstakes, clearly explain how to enter the sweepstakes without a purchase, make it clear to consumers who order magazines on an installment payment plan how much money is due each month, and not imply that consumers have a better chance of winning if they purchased magazines. According to a NAAG official, the sweepstakes subcommittee chair—the Indiana Attorney General—has been identified. However, it was not clear whether other subcommittee members had been selected or whether the subcommittee’s work had begun. Generally, the subcommittee members are expected to include representatives from various state Attorneys General offices. —Federal Trade Commission (FTC) Washington, D.C. Washington, D.C. State government agencies (Offices of Attorneys General): —Citizen Assistance (Consumer Affairs) for City of Alexandria —Consumer Affairs Division for Montgomery County —Advertising Mail Marketing Association (AMMA) Washington, D.C. —American Association of Retired Persons (AARP) Washington, D.C. —Arizona State University (Gerontology Program) —Council of Better Business Bureaus (CBBB) —Direct Marketing Association (DMA) Washington, D.C. —National Association of Attorneys General (NAAG) Washington, D.C. —National Consumers League (NCL)/National Fraud Information Center (NFIC) Washington, D.C. —U.S. Public Interest Research Group (USPIRG) Washington, D.C. 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A recorded menu will provide information on how to obtain these lists. | GAO discussed the issues related to the Honesty in Sweepstakes Act of 1998, introduced on June 5, 1998, by Senator Ben Nighthorse Campbell, focusing on: (1) the extent and nature of problems that consumers may have experienced with various sweepstakes mailings; and (2) information related to the mailing of documents that resembled cashier's checks, which are not the negotiable instruments that they appear to be. GAO noted that: (1) it found that comprehensive data that could indicate the full extent of the problems that consumers experienced with mailed sweepstakes material and cashier's check look-alikes were not available; (2) the main reasons officials and representatives gave for the lack of comprehensive data were that: (a) consumers oftentimes did not report their problems; and (b) no centralized database existed from which comprehensive data could be obtained; (3) although comprehensive data were unavailable, the Federal Trade Commission (FTC) and the Postal Inspection Service were two organizations that GAO identified as having some data on consumers' complaints about deceptive mail marketing practices, which could indicate the nature of these types of problems; (4) much of the consumer complaint information, which GAO obtained in a sample from FTC's Consumer Information System, showed that in many instances, consumers were required to remit money or purchase products or services before being allowed to participate in the sweepstakes; (5) information about Postal Inspection Service cases that had been investigated largely involved sweepstakes and cash prize promotions for which up-front taxes or insurance, judging, or handling fees were required before consumers could participate in sweepstakes promotions; (6) GAO was unable to identify examples of consumers' problems with cashier's check look-alikes similar to those involving mailed sweepstakes material because such information was not readily available; (7) two recent initiatives are intended to address consumers' problems with deceptive direct mail marketing practices; and (8) the initiatives are: (a) Project Mailbox, for which various participating organizations, including FTC, the Postal Inspection Service, and 25 state attorneys general, collectively took steps to target organizations that used such practices; and (b) the establishment of a multi-state sweepstakes committee that, among other things, is designed to facilitate cooperation among various states in dealing effectively with companies that attempt to defraud consumers through the use of mailed sweepstakes material. |
DOD’s current space network is comprised of constellations of satellites, ground-based systems, and associated terminals and receivers. Among other things, these assets are used to perform surveillance and intelligence functions; detect and warn of attacks; provide communication services to DOD and other government users; provide positioning and precise timing data to U.S. forces as well as other national security, civil, and commercial users; and counter elements of an adversary’s space system. DOD categorizes these assets into four space mission areas—each with specific operational functions. (See table 1 for a description of space mission areas, operational functions, and related examples of systems and activities.) The Air Force is the primary procurer and operator of space systems. For fiscal years 2002 through 2007, the Air Force is expected to spend about 86 percent of total programmed space funding of about $165 billion, whereas the Navy, the Army, and other Defense agencies are expected to spend about 8 percent, 3 percent, and 3 percent, respectively. The space surveillance network and other space control systems, some of which are classified, are currently helping to protect and defend space assets or are under development. For example, the Space-Based Surveillance System is being developed to provide a constellation of satellites and other initiatives that will improve the timeliness and fidelity of space situational awareness information. The Rapid Attack Identification and Reporting System, also under development, is expected to ultimately provide notification to Air Force Space Command of threats (radio frequency and laser) impinging upon the right of friendly forces to use space. DOD’s space control mission, which endeavors to protect and defend U.S. space assets, is becoming increasingly important. This importance was recognized by the Space Commission that was established by Congress in the National Defense Authorization Act for Fiscal Year 2000to assess a variety of management and organizational issues relating to space activities in support of U.S. national security. Principally: While the commission recognized that organization and management are important, the critical need is national leadership to elevate U.S. national security space interests on the national security agenda. A number of disparate space activities should be merged, organizations realigned, lines of communication opened, and policies modified to achieve greater responsibility and accountability. The relationship between the officials primarily responsible for national security space programs is critical to the development and deployment of space capabilities. Therefore, they should work closely and effectively together to set and maintain the course for national security space programs. Finally, the United States will require superior space capabilities and a cadre of military and civilian talent in science, engineering, and systems operations to remain the world’s leading space-faring nation. Among other things, the Space Commission emphasized the importance of increasing the visibility and accountability of space funding. It also recommended that DOD pursue modernization of aging space systems, enhance its command and control structure, and evolve the surveillance system from cataloging and tracking to a system that could provide space situational awareness. We recently reported on the status of implementation of the Space Commission recommendations. We found that DOD has decided to take actions related to 10 of the commission’s 13 recommendations, including organizational changes aimed at consolidating some activities, changing chains of command, and modifying policies to achieve greater responsibility and accountability. In addition, we have reported that Over the years, DOD’s space acquisition management approach has resulted in each of the services pursuing its own needs and priorities for space. This, in turn, has increased the risk that acquisitions will be redundant and not interoperable. Also, under this approach, there has also been no assurance that the services as a whole are satisfying the requirements of the U.S. Space Command to the maximum extent practicable. DOD continues to face cost and schedule growth for some of its larger, more complex space system acquisitions primarily as a result of not having knowledge on the maturity of necessary technology before entering product development. DOD is now undertaking a wide range of efforts to strengthen its ability to protect and defend space-based assets. Some of these are focused solely on the space control mission while others are broader efforts aimed at strengthening space-related capabilities. The changes are intended to elevate the importance of space within the department; promote greater coordination on space-related activities both within and outside the department, particularly within the intelligence community; reduce redundant systems and capabilities while promoting interoperability; and enable the department to better prioritize space-related activities. At the same time, DOD is making changes to its acquisition and oversight policies that will affect how space programs are developed and managed. Specifically, the U.S. Space Command is developing a space control strategy that is to outline objectives for space control over the next 20 years. Concurrently, DOD is developing a national security space plan that will lay down broader objectives and priorities for space-based programs. As the future executive agent for space, the Air Force created an office to develop and implement the national security space plan and has yet to finalize plans for the organizational realignment of the office of the National Security Space Architect. The National Security Space Architect is responsible for developing architectures—frameworks that identify sets of capabilities—across the full range of DOD and intelligence community space mission areas. In addition, DOD is making changes to its budgeting process to gain greater visibility over space-related spending and has created a “virtual” space major force program for the purpose of identifying what funding is specifically directed toward space efforts. The virtual major force program identifies spending on space activities within other major force programs. This does not change the current process that the military services use to fund their own space programs, but it does aggregate space funding so that the department will be able to compare space funding to DOD’s total budget and conduct future trend analyses. Moreover, DOD will be able to identify space control funding from other space-related activities. Lastly, DOD has made changes to its acquisition policy that will affect how space systems are acquired and managed. These changes focus on making sure technologies are demonstrated at a high level of maturity before beginning product development as well as taking an evolutionary, or phased, approach for producing a system. The Air Force is also implementing a new acquisition oversight mechanism for space intended to streamline the time it takes to review and approve a program before moving onto a subsequent stage of development. Table 2 describes some of DOD’s efforts related to strengthening space control in more detail. DOD’s efforts to strengthen its management and organization of space activities, including space control, are a good step forward, particularly because they seek to promote better coordination among the services involved in space, prioritization of space-related projects, visibility over funding, and interoperability. But there are substantial planning and acquisition challenges involved in making DOD’s current space control efforts successful. The Space Commission recognized that stronger DOD-wide leadership and increased accountability were essential to developing a coherent space program. As noted above, one effort to provide stronger leadership and accountability is the development of a space control strategy. Completion of this strategy is a considerable challenge for DOD because it has not yet been aligned with other strategies still being revised and because agreement among the military services on specific roles, responsibilities, priorities, milestones, and end states may prove difficult to achieve. In February 2001, a draft of the space control strategy, prepared by U.S. Space Command, was submitted to the Chairman of the Joint Chiefs of Staff for review, refinement, and submission to the Secretary of Defense. In June 2001, the Chairman stated that it was important that the space control strategy be put on hold until it could be aligned with the national security and national military strategies that were being updated before official submission to the Secretary of Defense. Also, the space control strategy was drafted initially without the benefit of the broader national security space plan to use as a foundation for setting priorities, objectives, and goals. The National Security Space Integration Office expects to complete the space plan in the summer of 2002; however, there are indications that the plan may not be completed until 2003. Whenever the plan is completed, DOD would then have to reexamine the draft space control strategy to ensure alignment with the broader plan. Currently, the services are not satisfied with the draft strategy. Army, Navy, and Air Force officials told us that the draft was not specific enough in terms of what their own responsibilities are going to be and what DOD’s priorities are going to be. They also pointed out that there were no specific milestones, only a rough 20-year time frame for achieving a “robust and wholly integrated suite of capabilities in space.” Without more specifics in this area, DOD would not be able to measure its progress in achieving goals. According to a U.S. Space Command official, although a final date for issuing the strategy is unknown, comments from the services have been incorporated where appropriate and additional detail has been added to reflect changes in DOD terminology. Without knowing more details, service officials said that they would continue pursuing their own space control programs as they have been. In fact, two services—the Air Force and the Army—have already set their own priorities for space control. For example, Air Force Space Command, in its Strategic Master Plan, lists its first priority under space control as improving space surveillance capability to achieve real-time space situational awareness and provide this information to the warfighter. The Army’s Space Master Plan recognized shortfalls in the space control area and identified future operational capabilities for space control that include space-based laser, airborne laser and the congressionally-directed Kinetic Energy Anti-Satellite capability. Another issue that could affect accountability for space control is the lack of a DOD-wide investment plan for space control to guide the development of the services’ budget submissions. The Space Commission recognized that increasing funding visibility and accountability is essential to developing a coherent space program. According to the commission, for example, the current decentralized approach of funding satellites from one service’s budget and terminals from another’s can result in program disconnects and duplication. The newly implemented virtual major force program for space addresses the need for visibility into space funding across the services by aggregating most space funding by service and function. DOD officials stated that the first iteration of the virtual major force program captured a high percentage of space funding and it will be fine tuned in the future years. The virtual major force program for space was designed to include program elements that represent space activities only. Funding for non-space-weapon systems that may have some space related components (such as a Global Positioning System receiver in the bomb hardware of the Joint Direct Attack Munition bombs) are not included in the virtual major force program. Although the virtual major force program provides greater visibility into space funding, it is not intended to provide an investment plan for space. However, the space control systems and funding identified in the virtual major force program, along with priorities outlined in the space control strategy, could be used as a basis for developing an investment plan that would prioritize space control capabilities that DOD needs to develop. Such a plan would benefit DOD by setting DOD-wide priorities and helping the services make decisions on meeting those priorities; including short-, mid-, and long-range time frames to make sure space control activities were carried out as envisioned in DOD’s overall goals and the national security space plan; establishing accountability mechanisms to make sure funding is targeted at priority areas; and providing the level of detail needed to avoid program disconnects and duplications. Developing such an investment plan for space control will be a considerable challenge because it will require the services to forgo some of their authority to set priorities. Secondly, DOD will need to identify space capabilities that are scattered across programs and services, and in many instances, are even embedded in non-space-weapon systems. Finally, development of an investment plan for space control will require leadership on the part of the Air Force, as the executive agent for space, because such a plan will have to balance the needs and priorities of all of the services. The changes DOD has made to its acquisition policy embracing practices that characterize successful programs are a positive step that could be applied to the acquisition of space control systems. By separating technology development from product development (system integration and system demonstration) and encouraging an evolutionary approach, for example, the new policy would help to curb incentives to over promise the capabilities of a new system and to rely on immature technologies. Moreover, decisionmakers would also have the means for deciding not to initiate a program if a match between requirements and available resources (time, technology, and funding) was not made. But, so far, DOD has been challenged in terms of successfully implementing acquisition practices that would reduce risks and result in better outcomes—particularly in some of its larger and more complex programs. For example, in 1996, DOD designated the Space-Based Infrared System (SBIRS), consisting of a Low and High program, a Flagship program for incorporating a key acquisition reform initiative aimed at adopting successful practices that would develop systems that are generally simpler, easier to build, and more reliable, and that meet DOD needs. In 2001, we reported that the SBIRS Low program, in an attempt to deploy the system starting in fiscal year 2006 to support a missile defense capability for protecting the United States, was at high-risk of not delivering the system on time or at cost or with expected performance. In particular, we reported that five of six critical satellite technologies had been judged to be immature and would not be available when needed. As stressed in previous GAO reports, failure to make sure technologies are sufficiently mature before product development often results in increases in both product and long-term ownership costs, schedules delays, and compromised performance. The SBIRS Low program has recently undergone restructuring in an attempt to control escalating costs and get back on schedule. In 2001, we reported that the SBIRS High program was in jeopardy because (1) ground processing software might not be developed in time to support the first SBIRS High satellite, and (2) sensors and satellites might not be ready for launch as scheduled due to technical development problems. These difficulties increased the risk that the first launches of SBIRS High sensors and satellites would not occur on time and that mission requirements would not be met. The Under Secretary of the Air Force recently acknowledged that the SBIRS High program was allowed to move through programmatic milestones before the technology was ready. In addition, the Under Secretary of Defense for Acquisition, Technology and Logistics recommended modifications to the SBIRS High requirements to meet realistic cost and performance goals. As we recently testified, there are actions DOD can take to make sure that new acquisition policies produce better outcomes for acquisitions of space control systems (or any other space systems). These include structuring programs so that requirements will not outstrip available establishing measures for success for each stage of the development process so that decisionmakers can be assured that sufficient knowledge exists about critical facets of a product before investing more time and money, and placing responsibility for making decisions squarely in those with authority to adhere to best practices and to make informed trade-off decisions. Our prior reports have recommended actions that DOD could take in these and other areas. DOD recognizes that space systems are playing an increasingly important role in DOD’s overall warfighting capability as well as the economy and the nation’s critical infrastructure. Its recent actions are intended to help elevate the importance of space within the Department, and also improve coordination, priority setting, and interoperability. But there are substantial challenges facing DOD’s efforts to achieve its objectives for space control. Principally, the services and the U.S. Space Command have not agreed to the specifics of a strategy, especially in terms of roles and responsibilities. DOD still lacks an investment plan that reflects DOD-wide space control priorities and can guide the development of the services budget submissions for space control systems and operations. Moreover, it is still questionable whether DOD can successfully apply best practices to its space control acquisitions. Clearly, success for space control will depend largely on the support of top leaders to set goals and priorities, ensure an overall investment plan meets those goals and priorities, as well as encourage implementation of best practices. To better meet the challenges facing efforts to strengthen DOD’s space control mission, we recommend that the Secretary of Defense align the development of an integrated strategy with the overall goals and objectives of the National Security Space Strategy, when issued. The Secretary should also ensure that the following factors are considered in finalizing the integrated space control strategy: roles and responsibilities of the military services and other DOD organizations for conducting space control activities, priorities for meeting those space control requirements that are most essential for the warfighter, milestones for meeting established priorities, and end states necessary for meeting future military goals in space control. We further recommend that the Secretary of Defense develop an overall investment plan that: supports future key goals, objectives, and capabilities that are needed to meet space control priorities, and supports the end states identified in the integrated space control strategy, and is aligned with the overall goals and objectives of the national security space strategy. We received written comments on a draft of this report from the Secretary of Defense. DOD concurred with our findings and recommendations. It also offered additional technical comments and suggestions to clarify our draft report, which we incorporated as appropriate. DOD’s comments appear in appendix I. To identify DOD’s efforts to strengthen its ability to protect and defend its space assets and the challenges facing DOD in making those space control efforts successful, we reviewed the DOD Instruction for Space Control, U.S. Space Command’s draft Space Control Strategy, U.S. Space Command’s Long Range Plan, military service space master plans, DOD’s 1999 Space Policy, the Report of the Commission to Assess United States National Security Space Management and Organization, and the 2001 Quadrennial Defense Review. We also reviewed national and DOD space policies and DOD’s Future Years Defense program from fiscal year 2002 through 2007. To understand DOD’s efforts and challenges, we reviewed the draft space control strategy and held discussions with officials at the U.S. Space Command, Colorado Springs, Colorado. To gain a better understanding of how the services regarded the draft space control strategy and development of a corresponding investment plan, we held discussions with and obtained documentation from officials at the Air Force Space Command, Peterson Air Force Base, Colorado Springs, Colorado; Air Force Headquarters, Washington, D.C.; the Army Space and Missile Defense Command, Arlington, Virginia; the Naval Space Command Detachment, Peterson Air Force Base, Colorado Springs, Colorado; the Office of the Assistant Secretary of Defense for Command, Control, Communications and Intelligence; the Joint Staff; Under Secretary of Defense Comptroller/Chief Financial Officer and Director, Program, Analysis and Evaluation; the Office of the National Security Space Architect, Fairfax, Virginia; and the RAND’s National Security and Research Division, Washington, D.C. To identify the acquisition challenges, we reviewed prior GAO reports on practices characterizing successful acquisition program and held discussions with DOD officials. Specifically, we held discussions with and obtained documentation from representatives of the Under Secretary of Defense for Acquisition, Technology, and Logistics and officials with the Air Force/National Reconnaissance Office Integration Planning Group. We performed our work from July 2001 through July 2002 in accordance with generally accepted government auditing standards. We are sending copies of this report to the Secretaries of the Army, the Navy, and the Air Force; the Director of the Office of Management and Budget; and interested congressional committees. We will also make copies available to others on request. The head of a federal agency is required under 31 U.S.C. 720 to submit a written statement of actions taken on our recommendations to the Senate Committee on Governmental Affairs and the House Committee on Government Reform no later than 60 days after the date of the report and to the Senate and House Committee on Appropriations with the agency’s first request for appropriations made more than 60 days after the date of the report. In addition, the report will be available at no charge at the GAO Web site at http://www.gao.gov. If you or your staff have any questions, please contact me at (202) 512-4841 or Jim Solomon at (303) 572-7315. The key contributors to this report are acknowledged in appendix II. Key contributors to this report were Cristina Chaplain, Maricela Cherveny, Jean Harker, Art Gallegos, and Sonja Ware. | The United States is increasingly dependent on space for its security and well being. The Department of Defense's (DOD) space systems collect information on capabilities and intentions of potential adversaries. They enable military forces to be warned of a missile attack and to communicate and navigate while avoiding hostile action. DOD's efforts to strengthen space control are targeted at seeking to promote better coordination among DOD components, prioritization of projects, visibility and accountability over funding, and interoperability among systems. Among other things, DOD is drafting a space control strategy that is to outline objectives, tasks, and capabilities for the next 20 years. It has also aggregated funding for space programs so that it can compare space funding, including space control funding, to its total budget, make decisions about priorities, and conduct future-trend analyses. In addition, DOD has changed its acquisition policy to include separating technology development from product development and encouraging an evolutionary, or phased, approach to development. There are, however, substantial challenges to making DOD's space control efforts successful. One challenge is putting needed plans in place to provide direction and hold the services accountable for implementing departmentwide priorities for space control. Further, DOD's draft space control strategy has been completed and does not yet define roles and responsibilities among the services, departmentwide priorities and end states, and concrete milestones. Finally DOD's aggregation of space funding is not a plan that targets investments at priority areas for DOD overall. |
This section provides information on BLM’s mission and organizational structure for management of oil and gas development, BLM’s process for overseeing the development of federal oil and gas resources and mitigating environmental impacts, and our prior work on BLM’s management of federal oil and gas resources. BLM’s mission is to maintain the health, diversity, and productivity of public land for present and future generations. As part of this mission, BLM manages more than 245 million surface acres of federal land for multiple uses, including recreation; range; timber; minerals; watershed; wildlife and fish; natural scenic, scientific, and historical values; and the sustained yield of renewable resources. BLM oversees onshore oil and gas development on and under BLM-managed federal land, under other federal agencies’ land, and under private land for which the federal government has retained mineral rights—a total of about 700 million subsurface acres. BLM manages these responsibilities through its headquarters office in Washington, D.C.; state offices; district offices; and field offices. BLM’s headquarters office develops guidance and regulations, and the state, district, and field offices manage and implement the bureau’s programs. BLM’s oversight of oil and gas development is led by field offices located primarily in the Mountain West, the center of much of BLM’s onshore oil and gas development. BLM’s process for overseeing federal oil and gas resource development consists of three phases, each of which includes opportunities to mitigate impacts of development on the environment. These phases—land use planning, leasing, and permitting—incorporate mitigation through, for example, lease and permit requirements, including best management practices. BLM can grant exceptions to these requirements, and it conducts environmental and monitoring inspections intended, respectively, to verify operators have implemented the requirements and to assess the effectiveness of the requirements in mitigating environmental impacts of development. The process is illustrated in figure 1. FLPMA requires the Secretary of the Interior to develop land use plans and, when appropriate, revise them. The plans identify, among other things, federal land and mineral resources that will be available for oil and gas development and other activities. As part of developing or revising land use plans, BLM is required under the National Environmental Policy Act of 1969 (NEPA), as amended, to evaluate likely environmental impacts of proposed actions in the plan, such as developing oil and gas resources in certain areas. Generally, BLM prepares an environmental impact statement—a detailed analysis of the likely environmental effects of a proposed action—in preparing a land use plan. However, depending on the anticipated level of public interest and potential for significant impacts, BLM may instead develop an environmental assessment—a more concise analysis developed for an amendment to the plan. BLM officials said the agency uses the land use plans and environmental impact statements to (1) help develop reasonably foreseeable development scenarios to estimate outcomes, such as the number of wells to be involved and the surface disturbance that may occur under the land use plan; (2) identify land open and closed to leasing; (3) identify resource protection measures, such as lease requirements and environmental best management practices; and (4) establish monitoring protocols. BLM develops land use plans over several years. During a plan’s development, BLM coordinates with state and local governments and collaborates with stakeholders, including oil and gas operators, nongovernmental organizations, and state wildlife agencies, and provides multiple opportunities for comment by the public. Comments can address such topics as criteria for granting exceptions to lease requirements and the appropriateness of best management practices. Once a land use plan is completed, BLM holds a lease sale. Operators may purchase a lease for land identified by the land use plan as available for oil and gas development. As part of this phase, BLM generally conducts an environmental assessment to determine whether the proposed development is likely to significantly impact the environment. In the assessment, BLM can propose applying lease requirements that were identified in the land use plan, where many of the requirements are intended to protect the environment. For example, a lease requirement may state that an operator cannot drill within a specified distance of a raptor’s nest during its breeding season. BLM allows the public to review and comment on draft environmental assessments for lease sales, including proposed lease requirements. In addition, the public may protest a lease before it is offered for sale. When a lease is offered for sale, the lease requirements identified through the environmental assessment are included as requirements for holding the lease. Operators that have obtained a lease must submit to BLM a drilling permit application and obtain BLM’s approval before drilling any new oil or gas wells. A complete drilling permit application must include, among other things, a “Surface Use Plan of Operations” that includes the operator’s plan for reclaiming disturbed land during production (known as interim reclamation) and upon final abandonment of the site (known as final reclamation). The reclamation plan outlines the specific steps the operator proposes to take to reclaim the well site, which may include recontouring the land to better match the surrounding landscape, redistributing the topsoil, and replanting the site with native plant species. As part of the permitting phase, BLM generally conducts a NEPA analysis—that is, an environmental impact statement or an environmental assessment—to identify any site-specific environmental impacts from the proposed oil and gas activity. On the basis of this analysis, BLM may identify certain requirements to attach to the permit. According to BLM officials, these permit requirements are generally attached to ensure environmental protection, safety, or conservation of mineral resources and may be based on environmental best management practices, described below. While BLM notifies the public that an operator has submitted a drilling permit application, BLM may or may not require public comment on the associated NEPA analysis. According to BLM’s NEPA Handbook, the type of public involvement required when an environmental assessment is prepared is at the discretion of the decision maker and can include public notification before or during preparation of the environmental assessment, among other types of involvement. After BLM approves a drilling permit, the operator generally has a 2-year window to drill the well and begin production, subject to any lease or permit requirements. However, BLM may extend the drilling permit for up to 2 additional years if an operator requests an extension in writing. In 2004, BLM issued its best management practices policy, which defines environmental best management practices as innovative mitigation measures applied on a site-specific basis to prevent or reduce adverse environmental or social impacts. BLM can include best management practices as lease and permit requirements or, in some cases, operators may apply them voluntarily. BLM’s policy identifies four key practices that should be considered as lease or permit requirements in nearly all circumstances: (1) painting of facilities to blend with the surrounding environment, (2) design and construction of roads in accordance with BLM guidance, (3) interim reclamation, and (4) final reclamation. There are numerous additional best management practices that, according to the policy, BLM field offices should consider on a site-specific basis. Such practices may include installing raptor perch avoidance structures, placing wellheads underground, drilling multiple wells from a single pad, and screening facilities from view. To help BLM manage resources based on current conditions, BLM’s regulations and policies allow it to grant operators’ requests for exceptions, waivers, or modifications to lease and permit requirements. Exceptions are one-time exemptions for a particular site within a lease; waivers are permanent exemptions from a lease requirement; and modifications are changes to the provisions of a lease requirement, either temporary or for the term of the lease. BLM issued a policy in November 2007 providing guidance on (1) including exception, waiver, and modification criteria in BLM land use plans and (2) reviewing and approving exceptions, waivers, and modifications to lease and permit requirements. Criteria for considering exception requests are generally developed through the NEPA process as BLM develops its land use plans. To help ensure operators’ compliance with all lease and permit requirements, as well as with certain laws and regulations, BLM has an inspection and enforcement program, which comprises a variety of inspection types. Among these are environmental inspections, intended to verify operators’ compliance with certain lease and permit requirements, and monitoring inspections, intended to assess the effectiveness of lease and permit requirements in mitigating environmental impacts of development. Environmental inspections are BLM’s primary mechanism to verify operators’ compliance with lease and permit requirements, including best management practices, related to the surface environment and to initiate enforcement actions, if needed. For example, BLM may perform environmental inspections to help ensure that operators are adhering to lease and permit requirements designed to mitigate the impact of oil and gas development on sensitive species and their habitat. Environmental inspections typically are performed by BLM staff, such as natural resource specialists, environmental protection specialists, or other resource program specialists. These staff document the inspections using hard copy forms and BLM’s electronic system for oil and gas management, the Automated Fluid Minerals Support System (AFMSS). In addition, BLM conducts monitoring inspections to collect quantitative or qualitative data for the purpose of assessing the effectiveness of lease and permit requirements in mitigating environmental impacts of development. BLM is required by Council on Environmental Quality (CEQ) regulations to establish a monitoring and enforcement program, where applicable, for any mitigation. To fulfill this requirement for oil and gas development, BLM issued a policy in 2009 to ensure adequate monitoring of oil and gas development and clarify how staff are to conduct and track monitoring inspections. Specifically, the policy requires that BLM field offices that have oil and gas programs conduct monitoring inspections to assess the effectiveness of lease and permit requirements in mitigating environmental impacts of development. BLM field offices are to independently track monitoring inspections and report via BLM’s PMDS the number of inspections completed. During the past 10 years, we have reported on various aspects of BLM’s management of federal oil and gas resources. In March 2007, as part of our work on major management challenges at the Department of the Interior, we reported that the numbers of oil and gas permit approvals had increased in recent years and that the effect of resulting development on surrounding communities and the environment would depend on BLM’s use and enforcement of lease and permit requirements. In March 2010, we found that Interior’s long-standing efforts to implement a mobile computing solution to allow BLM employees to document inspection results while in the field were behind schedule, and we recommended that the Secretary of the Interior direct BLM to implement such technology. In May 2014, Interior officials stated that BLM had issued policies related to allowing BLM staff, including staff conducting inspections in the field, to wirelessly connect to BLM’s information technology system via laptops when in the field. In July 2010, we found that BLM’s publicly available data related to lease protests (i.e., instances where the public challenged BLM’s leasing decisions) were incomplete and inconsistent, and we recommended that Interior determine and implement an agency-wide approach for collecting protest information that was complete, consistent, and available to the public. In 2016, BLM officials reported that the agency had issued guidance to standardize the collection and public display of data related to lease protests. In August 2013, we reviewed BLM’s processing of drilling permit applications and other efforts to protect the environment. Among other things, we found that BLM had increased the number of environmental inspections it conducted of federal oil and gas wells and facilities from 2007 through 2012, but that BLM’s methods for prioritizing inspections may not identify wells that pose the greatest environmental risk and that BLM’s documentation of enforcement actions was not consistent. We recommended that BLM improve its ability to prioritize environmental inspections and consistently document enforcement actions. Interior agreed with our recommendations but has not fully implemented them. The extent to which BLM approves requests for exceptions to environmentally related lease and permit requirements is unknown because BLM does not have comprehensive or consistent data on these requests. Additionally, BLM’s processes for considering exception requests and documenting its decisions vary across its field offices. BLM does not have consistent data on requests for exceptions to lease and permit requirements. BLM officials in headquarters stated that they did not consistently track data on operator requests for exceptions to lease and permit requirements or BLM’s decisions at a bureau-wide level. These officials further stated that BLM does not have a policy requiring its field offices to consistently track these exception data. As a result, the extent to which BLM approves exception requests is generally unknown. To identify available exception data, we surveyed BLM officials at offices in the field and found that fewer than half of the field offices tracked data on operator requests for exceptions to either lease or permit requirements for fiscal years 2005 through 2015. Officials representing 42 BLM offices responded to our survey. Regarding exceptions to lease requirements, after excluding 6 offices because officials stated that they had received few or no exception requests, we found that 10 of the remaining 36 offices responded that they tracked these data, 24 responded that they did not track these data, and 2 responded that they were unsure whether they tracked these data. Regarding exceptions to permit requirements, after excluding data from 4 offices because officials stated that they had received few or no exception requests, we found that 16 of the remaining 38 offices responded that they tracked these data, 21 responded that they did not track these data, and 1 responded that it was unsure whether it tracked these data. Further, we found that of the 6 BLM field offices we visited, 5 tracked exception data. However, officials from 3 of the 5 offices stated that the data were not consistently tracked, raising concerns about the data’s reliability. At one of these offices, officials told us that they tracked data only for requests to exceptions to requirements related to a single species. Officials stated that while they may have received exception requests for other environmentally related lease and permit requirements, they believed the number was low. An official from another office stated that while the office has a spreadsheet to track the data, the spreadsheet has been inconsistently updated. Officials from another office told us that the responsibility for tracking data had been left to employees who had inconsistently tracked the data and had since retired and that, for a period of time, they had not tracked exceptions. Officials at the single office that did not track exception data at the time of our visit subsequently told us that they planned to start tracking these data. When asked to estimate the number of exceptions approved per year at this office, officials offered widely varying estimates. One official estimated that the office might receive 10 requests per year, while other officials within the same office estimated they have had years with more than 100 requests. BLM field office processes for considering exception requests and documenting decisions on them varied from fiscal years 2009 through 2015, and the reasons for the decisions were not always clear from the documentation. In November 2007, BLM issued a policy on reviewing and approving exceptions. BLM included as an attachment to the policy written instructions on how field offices were to review and approve exceptions. The written instructions state that an exception decision should be fully documented in the case file with an appropriate level of environmental review. The written instructions state that BLM field office staff’s review and recommendations should be documented along with any necessary mitigation and provided to the authorized officer for approval or disapproval. Overall, BLM officials told us that the general process is that an exception request is made in some written format, such as a sundry notice (a standardized form for submitting information to BLM), e-mail, or BLM form. Upon receiving the request, BLM field office staff are to assess the request, review decision criteria, and make a decision. The decision is then to be communicated back to the operator as per BLM’s November 2007 guidance. Within this general process, our review of the 6 BLM field offices we visited found significant variation in how BLM officials consider exception requests and document decisions. We found that BLM field office processes for considering exception requests and documenting decisions varied in the following ways. Standardized request form. We found that 2 of the 6 field offices required operators to use a standardized form when requesting an exception, while the remaining offices received requests via a letter or sundry notice. In reviewing files, we found that there was more complete information about the request in offices using a standardized form for exception requests. For example, one of the forms required information on the permit or lease requirement involved, a description of the proposed exception to the requirement, and the justification for the request. In other offices that did not have a standardized form, information on the operator requests varied. In some cases the operator provided a detailed explanation of the request, whereas in other instances little information was provided other than that an exception was requested. Lease versus permit requirements. BLM officials in all 6 field offices told us that they make minimal distinction between lease and permit requirements when reviewing exception requests. Knowing which requirement is at issue is necessary to determine the applicable exception criteria. When reviewing BLM files, we found that sometimes documentation in the file clearly indicated the exception request was related to a permit requirement, whereas other times it was unclear whether the request related to a permit or lease requirement. Without clear documentation in the file indicating whether the request is for a permit or lease requirement, it may be difficult to identify what exception criteria, if any, apply to the request. Written exception policy. We found that 3 of the 6 BLM field offices had a written policy for processing exception requests. These policies, according to BLM officials, were developed to provide greater specificity about the exception process. According to BLM officials at 1 of the offices with a written policy, having a written policy helps them communicate expectations to operators for how exception requests will be considered. Internal checklist. We found that 2 of the 6 field offices employed an internal checklist for processing exceptions, though an official in 1 of the offices stated that staff used it inconsistently. In 1 of these offices, the checklist details a sequential review process where signatures and comments are made by the relevant decision makers. Specifically, the form requires input from BLM’s project lead and wildlife biologist, state fish and game officials, and the BLM field office manager. In completing the checklist, officials are to identify the applicable criteria for considering the request and describe whether there is any biological benefit for the proposed action. The field office manager receives the checklist after relevant input has been made by BLM staff and then completes a signature box on the form for granting, denying, partially granting, or not concurring. Space is also provided for the field office manager to provide an explanation of the decision. In contrast, other offices did not have a standardized form for considering the request and approved or denied the request via sundry notice without an explanation. In these instances, BLM’s actual process for considering the request was unclear. Compensatory mitigation. We found that 1 of the 6 field offices frequently requires compensatory mitigation when approving an exception. This means that if the field office grants an exception, it requires the operator to take some other action to mitigate the environmental impacts of the exception. According to BLM officials, the office has developed a standard practice of requiring operators to improve 25 acres of habitat for each approved month of an exception to a wildlife-related seasonal drilling limitation. According to these officials, this practice was developed over time. BLM officials also told us that allowing year-round drilling for certain projects could minimize disturbance to wildlife by allowing drilling to be completed sooner. For example, a project might have taken 3 years to complete if seasonal permit drilling requirements were in effect, whereas it might take 1 1/2 years to complete if BLM approves an exception to seasonal drilling permit requirements. Resource management plan exception criteria. We found that the primary resource management plan for all 6 BLM field offices we visited had generally identified criteria for granting exceptions, in accordance with BLM’s November 2007 policy. However, the specificity of the criteria varied. One of the resource management plans we reviewed included very specific exception criteria for a number of lease and permit requirements. For example, the plan describes lease requirements related to a type of habitat used by birds for mating. It specifically states that surface disturbance is prohibited or restricted within a 1/4 mile perimeter of the habitat, if occupied. The plan then identifies the particular conditions under which BLM may approve an exception request. Specifically, the plan states that BLM may approve the exception if it is determined that the “action is of a scale, sited in a location, or otherwise designed so that the action will not impair the function and suitability of sharp-tailed grouse breeding habitat.” In contrast, another resource management plan includes less specific criteria for granting exceptions. The plan states that exception requests from seasonal lease and permit requirements will be coordinated with the state wildlife agency and that requests are to be analyzed and documented individually for compliance with the resource management plan and NEPA. However, the plan further states that “there is no clear formula” for arriving at these biological recommendations. In addition, the plan does not include specific information on any particular lease or permit restriction; rather, the plan lays out a variety of factors to consider, such as weather. In reviewing a nongeneralizable sample of 54 exception decisions made in fiscal years 2009 through 2015 at the 4 field offices that could provide us with data, we found that documentation of exception decisions varied. We examined each file for a range of information, including (1) documentation on the operator’s request for the exception, (2) whether the exception request related to a lease or permit requirement, (3) whether the exception criteria were specified, (4) the basis for the field office’s decision, and (5) how the decision was communicated to the operator. We found that of the 54 exception decisions reviewed, 27 were well documented, 20 were partially documented, and 7 were not well documented. While BLM has some written guidance on considering and documenting exception requests, it may not result in BLM staff documenting exception decisions fully or clearly because the November 2007 guidance does not specify the format for documenting the exception requests and decisions. We found that the checklist used for considering and documenting exception decisions employed in 1 of the field offices provided an effective means to consistently and clearly document the decision making process. In other offices that did not employ such a checklist, the reasons for the exception decisions were not always clear. Standards for Internal Control in the Federal Government states that agencies are to clearly document transactions and other significant events and that documentation should be readily available for examination. Without consistent and clear documentation of exception decisions, BLM may not be able to justify its decisions and provide reasonable assurance that its decisions were consistent with its responsibilities under NEPA. BLM consistently involved the public when developing lease requirements and to some extent when developing permit requirements. However, BLM generally did not involve the public when considering an operator’s request for an exception to a lease or permit requirement. In 2010, BLM introduced bureau-wide reforms to the oil and gas leasing process, and since the implementation of these changes, it has consistently involved the public in the development of lease requirements, as part of the lease sale process. As part of the leasing reforms, most parcels that field offices determine should be available for lease are subject to a site-specific NEPA analysis, generally in the form of an environmental assessment, and lease requirements are identified as part of this process. Such lease requirements are often developed through BLM’s land use planning phase and applied to specific leases during the leasing phase. Officials from environmentally related nongovernmental organizations, state wildlife agencies, and the oil and gas industry stated that they comment on the initial development of lease requirements during the planning phase. In addition, the public has formal opportunities to comment on land use plans, including lease requirements, as described in the background section of this report. During the leasing phase, field offices are required to provide a 30-day public review and comment period for the environmental assessment before forwarding their lease recommendations to the BLM state office. In addition, state offices must provide a 30-day public protest period prior to the lease sale date. We reviewed 35 lease sales that occurred from calendar years 2012 through 2015 at the 6 field offices we visited. In all cases the field offices provided the public with an opportunity to review and comment on the environmental assessment associated with parcels to be offered for sale, and some of the comments provided by the public pertained to proposed lease requirements. For example, in some cases the public commented that additional, or changes to, lease requirements would better protect environmental resources from the effects of proposed development. As part of the lease sale process, BLM reviews and responds to comments on draft environmental assessments. The agency may make changes to the environmental assessment if it determines changes are appropriate. BLM includes these comments and its response in the final version of each environmental assessment. We also found that, in all cases, BLM provided the public with an opportunity to protest the lease sale. BLM involved the public to some extent when developing drilling permit requirements, but the level of involvement varied depending on the field office and characteristics of the permit. BLM’s Onshore Order 1 requires BLM field offices to notify the public of all drilling permit applications received. Officials at all of the 6 field offices we visited stated that their offices follow this requirement by posting information identifying the proposed development—often the cover page of the drilling permit application—in an area of their office that is available to the public, such as a reading room. Members of the public then have the opportunity to review this information and submit comments. However, the field offices generally do not post the information electronically on BLM’s public website. According to representatives of environmentally related nongovernmental organizations, when BLM does not make this information available on a website, it is difficult for the public to track potential drilling activities and comment. Once a drilling permit application is received, BLM field offices complete an environmental assessment to assess the potential environmental impacts of the proposed development. As part of this process, the agency can develop permit requirements, which are intended to mitigate environmental impacts. In 2014, BLM began implementing a website called ePlanning through which BLM field offices are required to make environmental assessments associated with drilling permits (among other documents) available to the public. Prior to the use of ePlanning, the public could not access drilling permit environmental assessments on a centralized site, although officials from 2 of the field offices we visited stated that they previously posted some limited information about the environmental assessments on their individual field office websites. According to BLM policy, BLM’s ePlanning website is intended to standardize the agency’s land use planning documents and allow public access to NEPA documents, including environmental assessments completed as part of the oil and gas permitting process. According to BLM’s ePlanning implementation plan, when the plan is fully implemented, BLM offices will be required to post all NEPA documents on the site within 1 week of completion and must include all associated draft and final documents. Documents posted to ePlanning must be updated within 1 week of any status change. According to a BLM official responsible for overseeing the implementation of ePlanning, while the agency expects the site to be fully implemented by late 2017, the remaining implementation steps involve internal, technical changes to the system. The official stated that the aspects of the site that are accessible to the public are “fully functional” at this time, meaning that BLM offices are currently posting all NEPA-related documents to the site. Officials from all of the 6 field offices we visited stated that their office posts environmental assessments related to oil and gas permits to ePlanning when they are final. However, officials from only 1 of the 6 field offices stated that their office makes a draft version of the environmental assessment available online; officials from the other 5 stated they post a draft version of the environmental assessment only sometimes. Officials from 4 of these offices explained that they would post a draft if development in the area was likely to be of substantial public interest. For example, BLM officials stated that proposed development near a national park or a populated area may warrant increased public involvement. Again, representatives of environmentally related nongovernmental organizations stated that, in some cases, it is difficult to identify and comment on proposed drilling activities. While BLM’s ePlanning policy requires that all draft and final versions of environmental assessments be posted to the site, BLM’s NEPA Handbook states that CEQ regulations do not require agencies to make environmental assessments available for public comment and review, and that public involvement is at the discretion of the decision maker. According to the handbook, such public involvement may include external scoping, public notification before or during preparation of an environmental assessment, public meetings, or public review and comment of the completed environmental assessment and unsigned “Finding of No Significant Impact.” BLM field offices are not required to produce a draft environmental assessment in all cases, but if a draft is produced, the offices are required to post the document for public review on ePlanning. BLM officials stated that they have generally not involved the public when considering operator requests for exceptions to lease and permit requirements. According to BLM’s policy, public notification is not required unless granting an exception would result in a substantial modification or waiver of a lease requirement. According to BLM officials, this is seldom the case, particularly if the exception criteria are outlined in the land use plan. According to a BLM official, one circumstance in which the public could be involved is when an operator requests an exception at the time a drilling permit is requested. In this circumstance, the public may be able to submit comments on BLM’s environmental assessment for the permit, depending on the scale of the proposed drilling project. However, BLM officials from all 6 offices we visited stated that public involvement in exception requests was infrequent. BLM officials stated that in many cases public involvement may not be practical. For example, an operator may experience drilling complications and need an exception to drill 1 or 2 additional days beyond a seasonal deadline. BLM officials stated that in such cases, it would be impractical to solicit public input given the need to respond to the operator’s request promptly. Additionally, BLM officials stated that if they are making a decision in accordance with exception criteria in the lease or permit developed through the NEPA process, public involvement is not required. Representatives of environmentally related nongovernmental organizations told us that they typically do not comment on exception request decisions because BLM generally does not notify, or solicit input from, the public when determining whether to grant an exception. Several representatives told us their organizations focus their efforts on providing comments related to lease and permit requirements early in the oil and gas development process. For example, several representatives told us their organizations provide the majority of their input when BLM is developing its resource management plans or identifying lease parcels for sale. One representative said that the organization rarely finds out when operators have been granted exceptions and so at times believe incorrectly that lease and permit requirements are in effect. One representative told us that the representative’s organization attempted to develop informal agreements with certain BLM field offices whereby BLM staff would notify the organization when an exception request was submitted. However, according to the representative, the organization was unable to develop such agreements. Another organization’s representative stated that BLM and operators often agree to an exception verbally and document the decision afterwards, precluding any opportunity for public comment. This representative noted that some exceptions, such as those that allow an additional 1 or 2 days of work, might not warrant comments. However, the representative stated that if an exception request were made for a more significant activity, such as a road proposal for an area that has a no surface occupancy requirement, the organization would like the opportunity to provide comments. A representative of an oil and gas industry association stated that operators make requests in accordance with criteria laid out in leases and permits and that the exception process is a key part of BLM’s adaptive management policy, which attempts to provide for a flexible management approach based on current resource conditions. Of the 6 BLM field offices we visited, only 1 made information about exception decisions available to the public, both in the office and on its website. The Office of Management and Budget issued a memorandum in December 2009 directing agencies to publish government information online with the goal to increase accountability, promote informed participation by the public, and create economic opportunity. Also, Standards for Internal Control in the Federal Government state that information should be recorded and communicated to those who need it, which can include external stakeholders, in a form and within a time frame that enables them to carry out their internal control and other responsibilities. NEPA and BLM regulations and guidance provide multiple opportunities for public involvement during BLM’s land use planning process. The substance of this involvement could be dependent on the effects of BLM’s past decisions in implementing aspects of its resource management plans, including those related to exceptions. However, BLM does not require that its field offices make the results of exception decisions available to the public. Without access to information on how often exception requests are made and approved and the reasons for the decisions, the public may not have the information necessary to provide substantive input into BLM’s land use planning process. BLM has generally implemented its best management practices policy by including key practices as permit requirements. However, BLM has not consistently documented environmental inspections, which are intended to verify that operators have implemented permit requirements. Moreover, BLM has not effectively used data from monitoring inspections, which are intended to assess the effectiveness of lease and permit requirements in mitigating environmental impacts of development. BLM has generally implemented its best management practices policy by including key practices as permit requirements. As described previously, BLM’s policy on best management practices states that there are four key practices, described in table 1 that should be considered for inclusion as permit requirements in nearly all circumstances. Our review of 109 randomly selected well files at six BLM field offices found that at least one of the four key practices had been included as a permit requirement in nearly all of the files we reviewed. Specifically, of the 109 files we reviewed, 108 (99 percent) included at least one of the four key practices, 105 (96 percent) included at least three of the four practices, and 82 (75 percent) included all four of the key practices as permit requirements. BLM’s policy states that field offices should consider requiring other best management practices, such as those described on BLM’s website, on a site-specific basis. BLM field office officials we interviewed stated that all drilling permits include best management practices, though field offices generally do not track this information. Officials described the best management practices policy as being flexible to accommodate a wide range of site-specific conditions found across the areas where BLM oversees oil and gas development. Officials told us that BLM does not have a nationally approved list of best management practices but stated that suggested best management practices can be found in its Surface Operating Standards and Guidelines for Oil and Gas Exploration and Development and on a BLM webpage discussing best management practices. During our site visits to the six BLM field offices, officials described and demonstrated a variety of best management practices that they frequently consider for inclusion as permit requirements, including the following. Segregation of topsoil. Retaining topsoil (the outermost layer of soil) separately from the lower levels of soil when clearing an area for development can preserve the quality of the soil until reclamation activities occur. Topsoil generally contains the highest concentration of organic matter and is critical for successful plant growth. Erosion control. Various erosion control methods, such as putting stones in culverts or straw matting on steep slopes, can help prevent soil erosion. Bird cones. Installing wire mesh cones over exhaust pipes can prevent birds from nesting or becoming trapped in the pipes. Centralized liquid gathering. Using liquid gathering lines to move oil, gas, water, and condensate from well pads to centralized facilities placed offsite can reduce the need for truck traffic in areas of sensitive resources and habitat. Avian protection on power lines. Installing protective equipment on power lines can prevent birds from being electrocuted. Protective grates over pits and tanks. Covering production-related pits and tanks with nets or metal grates can prevent wildlife from drowning in contaminated water and other liquids. Secondary containment to prevent damage from leaks. Secondary containment around tanks on well pads can prevent damage to the environment in case of tank leakage. Radio telemetry. Placing radio telemetry equipment at wells and related production equipment to transmit data from the well site to an operator’s remote monitoring facility can reduce the number of maintenance and inspection trips made during critical periods for wildlife and result in less wildlife disturbance. Figure 2 illustrates a selection of best management practices we observed at drilling sites located on lands managed by the BLM field offices we visited. BLM field office officials generally stated that there is not a formal process for how a practice becomes a best management practice. According to officials, new practices can be identified and recommended by industry or BLM headquarters staff. Additionally, according to BLM field office officials, some field offices have developed their own best management practices. BLM officials told us that more recently issued resource management plans typically include an appendix listing best management practices. In examining the most recently issued resource management plans for the field offices we visited, we found that four of six field offices had plans that included a best management practices appendix. The other two field offices are in the process of updating their resource management plans. In reviewing the plans that contained best management practices appendixes, we found that the amount of information they contained varied. For example, one plan included over 80 pages of suggested best management practices, while another plan included information on best management practices that totaled fewer than 20 pages. BLM field office officials stated that the extent to which best management practices are attached as BLM permit requirements, or included in an operator’s plan, varies. Officials told us that some companies are more proactive and include best management practices in their plans, whereas other companies rely on BLM to identify such practices. BLM staff from one field office stated that discussion about best management practices typically occurs when BLM officials visit a proposed drilling site. During such visits, BLM officials and the operator will discuss the proposed plan, and BLM staff will highlight practices they anticipate would be effective in mitigating environmental impacts. The operator may then elect to voluntarily include these practices in the proposed plan, or BLM may include them as permit requirements. A representative from an association of oil and gas operators stated that BLM’s best management practices policy is generally successful because the BLM field offices have the flexibility to determine which practices to require. Additionally, the representative told us that many best management practices are initially developed by operators. The representative stated that operators may try various approaches for mitigating environmental impacts of oil and gas development, and when they identify a practice that works, BLM will often adopt it as a best management practice and require other operators to implement it as well. The representative cautioned that the feasibility and effectiveness of practices greatly depends on the local topography and geology. For example, one best management practice is to bury temporary liquid gathering lines used to transport fluids away from a drill site, thereby reducing visual impacts to the landscape. However, in certain areas, this is not an effective approach to protecting the environment because the area has very little topsoil and would require digging through rocks to bury the lines. Such digging, according to the representative, could result in longer-term impacts to the environment than leaving the gathering lines on the surface. Representatives from environmentally focused nongovernmental organizations offered a mixed view of best management practices. Some representatives stated that it was beneficial for operators to employ these practices. Another representative pointed out that the easier a best management practice is, the more likely it is to be implemented. For example, painting a storage tank to blend in with the environment is relatively easy and commonly implemented, whereas certain practices related to drilling—such as conducting horizontal or directional drilling to reduce surface disturbance—are more complex and may not be used as often. A representative from another environmental organization stated that BLM applies best management practices in a sporadic and nonrigorous manner and that the bureau appears to treat these practices as a menu from which operators can select the ones they would like to implement. Another representative stated that operators tend to make economically driven decisions and implement best management practices only when required to do so. BLM has not consistently documented environmental inspections, which are conducted to verify that operators have implemented permit requirements, including best management practices. BLM’s Inspection and Enforcement Documentation and Strategy Development Handbook states that documentation of all inspections must be clear, concise, and legible and provide an accurate description of what was inspected, including the findings. The handbook states that documentation should include, among other things, worksheets or checklists developed by field offices or other sources to document inspection results. According to the handbook, without clear and accurate documentation of existing conditions and activities, enforcement actions cannot be taken or decisions upheld if appealed by the operator. We found that inspections were documented using different formats and that the inspection documents varied in the level of detail provided. During our file review, we examined 152 environmental inspection documents associated with our random sample of 109 files from the six field offices to determine whether the four key best management practices were verified during these inspections and found that 58 (38 percent) of the documents did not indicate that all four key practices were verified. The two most commonly used documents we observed were a “Surface Inspection Form” and a “Production/Interim Reclamation Inspection/Monitoring–Environmental” form. The “Surface Inspection Form,” which is generally completed using AFMSS (BLM’s data system for oil and gas management), uses a narrative format. It includes fields for basic identifying information about the well and type of inspection and fields for general remarks about the inspection and follow-up remarks, if applicable. The “Production/Interim Reclamation Inspection/Monitoring– Environmental” form, which was created in 2007 by BLM’s Washington Office but is not an official agency form, uses a checklist format. Our file review found that the narrative format, in some cases, resulted in inspection documents that did not contain sufficient detail to indicate whether permit requirements had been verified. For example, we observed some inspection documents using the narrative format that consisted of two lines of general remarks that did not identify whether implementation of the four key practices had been verified. In contrast, we found that the checklist format typically resulted in greater assurance that the four key practices were verified. For example, we found that the four key practices were verified in 64 of 65 (98 percent) inspection documents when the checklist format was used, versus 15 of 62 (24 percent) documents when only the narrative format was used. In some cases, we observed a version of the checklist format that included an additional check to indicate whether all permit requirements were verified during the inspection. The use of this check provided assurance that the inspector had verified all permit requirements that applied to that well, rather than only the requirements listed on the checklist. Appendix II contains templates of the three formats. BLM’s guidance for documenting inspections does not clearly indicate which forms are required to document environmental inspections. One part of the guidance identifies both the narrative and checklist formats in a list of forms that may be mandatory for completion, depending on the inspection type. However, at another point, the guidance states that only the narrative format must be used for environmental inspections. During interviews with BLM officials responsible for conducting environmental inspections, we found that officials did not have a common understanding of the requirements for documenting inspections. For example, an official at one field office stated that, when conducting environmental inspections, he uses the narrative format and does not use the checklist format. Officials at another field office stated that they complete both formats but do not always print a copy of the narrative format for the hard copy file, which is BLM’s official record. Officials at another field office stated they received conflicting instructions about which documentation format to use. According to the officials, at one point, the field office used a version of the checklist format and received guidance from BLM’s Washington Office that they should instead be using the narrative format in AFMSS. However, the officials stated that the following year, they received instruction from the Washington Office stating that both formats are required to document environmental inspections. As a result of the conflicting instructions, at the time of our visit, officials said they were unsure of the requirements for documenting environmental inspections. BLM is in the process of developing updates to its AFMSS database, which a BLM official stated will include more detailed forms for documenting environmental inspections and the ability to electronically document inspections from the field. Specifically, BLM officials stated that one planned update will replace the existing narrative format for documenting environmental inspections with a checklist format similar to the one described above. In addition, BLM is continuing its effort to develop a mobile computing solution as part of its AFMSS update. The mobile computing solution would allow BLM employees to remotely document environmental inspections when in the field. According to BLM’s lead point of contact for the development of these AFMSS updates, BLM is currently evaluating different devices to determine which one will best meet the agency’s needs. BLM officials stated that the updates are projected to be implemented by the end of 2017. We also found that some BLM field office employees may not have received training on how to document environmental inspections. BLM offers a limited number of voluntary classroom training courses but does not require training for BLM officials responsible for conducting environmental inspections. Some officials responsible for conducting environmental inspections stated that they have been unable to attend the voluntary training because funding to travel to the training was not approved. Some BLM field office officials stated that, in the absence of required training or the necessary funds to attend voluntary training, they rely on on-the-job training. An official from one field office stated that new employees must rely on training received from a mentor, who may not have attended classroom training recently or at all. In our 2016 report on Interior’s human capital challenges, we found that Interior’s bureaus, including BLM, have not evaluated their oil and gas staff’s training needs or the effectiveness of the training provided to key oil and gas staff, and we recommended that Interior annually evaluate its bureaus’ training programs. Interior partially agreed with the recommendation, and the recommendation remains unimplemented. Standards for Internal Control in the Federal Government states that operational success is possible only when the right personnel for the job are on board and provided the right training, tools, structure, incentives, and responsibilities. BLM is in the process of redesigning the training it offers to officials responsible for conducting environmental inspections. A BLM official responsible for training stated that BLM’s redesigned training program would lead to a certification for officials conducting environmental inspections, similar to the training program BLM has in place to train those conducting other types of oil and gas inspections, including those related to drilling and measurement. Funding for the training is also under consideration. Currently, BLM headquarters funds training for the existing inspector certification courses, while funding for training those conducting environmental inspections is allocated by field office managers. The BLM official responsible for training stated that, as a result, funding challenges can impact the consistency of training across the agency. If BLM headquarters funded the new training, it could reduce the funding challenges field office managers currently face. The official further stated that if the training was successfully implemented, it should ensure greater consistency and thoroughness of environmental inspections. However, in December 2016, a BLM official stated that BLM does not have a policy that would require employees to attend the redesigned training. Instead BLM officials stated that they plan to start a training pilot project in the spring of 2017. The steps BLM is taking to improve its training program and data system may help to improve the quality of environmental inspection documents, but these limitations in the agency’s inspection documentation guidance and training policies may continue to present challenges. Without clear guidance regarding which forms are required to document environmental inspections, BLM employees may continue to document the inspections in a manner that does not always indicate whether all requirements were verified. In addition, without a policy requiring employees responsible for conducting environmental inspections to complete formal training, BLM may be unable to ensure that its employees receive the training. Ensuring that BLM staff responsible for conducting environmental inspections receive the guidance and training they need to conduct and document environmental inspections could enhance the ability of BLM to mitigate the impacts of oil and gas development and to carry out its responsibilities for proper stewardship of the environment. BLM field offices conduct monitoring inspections but have not effectively used data collected during these inspections to assess the effectiveness of mitigation activities, such as those carried out under BLM’s best management practices policy. BLM requires field offices to conduct monitoring inspections; however, we found that field offices vary in their understanding of what qualifies as a monitoring inspection. In addition, not all field offices have been able to effectively use monitoring inspection data to assess the effectiveness of best management practices. In fiscal year 2008, BLM conducted a self-assessment of its best management practices policy and found, among other things, that staff in field offices may not clearly understand how to monitor the effectiveness of these practices. As a result, a report on the self-assessment recommended that BLM update or issue policy about monitoring the effectiveness of best management practices. According to BLM officials, the agency implemented this recommendation by issuing a monitoring inspection policy in 2009. The policy requires BLM field offices with oil and gas management responsibilities to conduct monitoring inspections in accordance with CEQ regulations. BLM’s policy states that monitoring is conducted to assess actual or potential environmental impacts, determine whether BLM standards are being met, and evaluate whether permit requirements (which could include best management practices) are effective to achieve their desired intent. To ensure the agency’s compliance with the CEQ requirements, BLM’s policy requires BLM field offices to report the number of completed monitoring inspections. BLM officials from all of the six field offices we visited stated that their field office conducts some type of monitoring activities. However, during fiscal years 2010 through 2015, these activities were tracked in a variety of ways, and some field offices did not report the number of monitoring inspections completed, as required by BLM’s 2009 policy. Because BLM’s AFMSS database is unable to track monitoring inspections, the 2009 policy required officials to report the number of monitoring inspections in BLM’s PMDS. We found that two of the field offices we visited did not report numbers of monitoring inspections in the PMDS from fiscal years 2010 through 2015. Officials from one of these field offices explained that they require operators to conduct monitoring through third-party contractors, and the officials did not believe the activities should be reported because the monitoring was not conducted by BLM employees. Officials from the other field office stated that they conducted monitoring inspections and tracked these inspections using their own internal spreadsheets. BLM’s 2009 monitoring policy includes an attachment that provides guidance on how to interpret and implement the policy. The attachment provides examples of the types of activities that could be considered monitoring inspections, including conducting wildlife surveys, conducting habitat restoration surveys, and determining the status of interim reclamation. The attachment also explains how a monitoring inspection differs from an environmental inspection. For example, in assessing interim reclamation, an environmental inspection would verify whether the operator seeded a disturbed area according to permit requirements, while a monitoring inspection would collect data to assess whether the seeding was successful. The attachment states that, in some cases, a visit to a particular inspection site could count as both an environmental inspection and a monitoring inspection, depending on the activities completed. However, we found that despite this guidance, officials at the six field offices we visited varied in their approaches to conducting monitoring and did not share a common understanding of what types of activities constitute a monitoring inspection. For example, officials from one field office stated that they consider inspections related to air or water quality to be monitoring inspections, while officials from another field office stated that they consider inspections related to reclamation of plugged and abandoned wells to be monitoring inspections. Officials from a third field office stated that they plan to consider inspections of plugged and abandoned wells to be monitoring inspections, but in prior years, the field office had considered all environmental inspections as monitoring inspections. Some BLM field office officials stated they were unsure of the difference between a monitoring inspection and an environmental inspection. BLM employees responsible for conducting monitoring inspections are also responsible for conducting environmental inspections. As previously noted, BLM has only voluntary classroom training for these employees, and some employees have had only on-the- job training because of barriers to attending the voluntary training that BLM currently offers. We also found that BLM field offices generally do not use the data collected from monitoring inspections to assess the effectiveness of lease and permit requirements, including best management practices, at mitigating environmental impacts. Although BLM’s 2009 monitoring policy requires that field offices track the number of monitoring inspections completed, it does not provide guidance on how data collected during monitoring inspections should be tracked or used. As a result, according to BLM officials, monitoring inspection data are captured in a variety of formats, including monitoring reports submitted by operators, agency databases, and spreadsheets. In addition, although officials from five of the six BLM field offices we visited stated that their field office has access to monitoring data, officials from four of the field offices stated they generally have not used the data to assess the effectiveness of mitigation measures. Officials at one field office stated that collecting and maintaining monitoring data is at the discretion of individual BLM employees, while officials from another field office stated that they were unaware of any efforts to use monitoring data to assess the effectiveness of mitigation. Officials from two field offices stated that while they have access to monitoring data, they are unable to analyze the data because of its format or the office’s system for tracking the data. Both of the two field offices where officials described using monitoring data described mechanisms for tracking the data, which included databases and a series of electronic spreadsheets. In particular, one of the two offices was using a database to track interim and final reclamation efforts and was able to generate reports based on a variety of criteria to assess the status of reclamation. Representatives from environmentally focused nongovernmental organizations and an association of oil and gas operators stated that, from their perspective, BLM may not fully assess the effectiveness of best management practices. For example, a representative from one nongovernmental organization stated that the analysis of the effectiveness of the best management practices is sometimes conducted by operators, so the quality of the data and the conclusions are questionable. In addition, he stated that he was unaware of any analysis comparing the environmental impact of projects that use best management practices with the impact of projects that do not. Another representative stated that from his perspective monitoring seemed to be a low priority for BLM. A representative from an association of oil and gas operators stated that in some instances BLM requires operators to conduct surveys and provide the agency with survey data, but the agency does not always use the data provided to assess the effectiveness of best management practices. When BLM field offices are unable to effectively use data collected during monitoring inspections, the agency cannot leverage these inspections to assess the effectiveness of its mitigation efforts, including its best management practices policy, in accordance with the purpose of its 2009 monitoring policy. Providing guidance to the field offices on how monitoring data should be used could enhance BLM’s ability to assess the effectiveness of its mitigation activities across the bureau. In addition, as previously discussed, although BLM is redesigning its training for employees responsible for conducting inspections, it does not currently have a policy that would require employees to take the redesigned training. Ensuring that staff have training could potentially improve BLM employees’ understanding of what types of activities should be included as part of the agency’s monitoring inspection program and improve the consistency of reporting and documenting inspections. Improving BLM’s monitoring inspection program could allow the agency to better assess environmental impacts of oil and gas development and the effectiveness of efforts to mitigate such impacts. BLM is responsible for managing oil and gas development on federal lands while also mitigating the environmental impacts of such development. BLM mitigates the impacts primarily through the requirements that it places on the leases and permits it issues to operators. It has also developed a best management practices policy, and best management practices may be included as lease and permit requirements. Operators can request exceptions to these requirements, and BLM can decide to approve requests if certain criteria are met. However, BLM field offices have not tracked exception data consistently, making it difficult to determine the extent to which they have approved exception requests. Additionally, BLM staff across field offices are not using a consistent process for considering and clearly documenting exception decisions. Although BLM issued a policy in November 2007 stating that exception decisions should be fully documented, it does not have documented procedures to ensure that field office decisions are consistently and clearly documented. BLM could better quantify the extent to which exceptions are approved and better ensure that such decisions are consistent with its responsibilities under NEPA if it tracked exception requests and had documented procedures for consistently considering and clearly documenting exception decisions across its field offices. In addition, BLM does not currently require field offices to make the results of its exception decisions available to the public. Without access to this information, the public may not be able to provide substantive input into BLM’s future land use planning processes. Moreover, BLM field offices have generally implemented BLM’s best management practices policy but have not consistently documented environmental inspections to verify that operators have implemented the practices as required, in part because the guidance for documenting inspections is unclear. Without consistently documenting that all permit requirements are verified as implemented when conducting environmental inspections, BLM field offices cannot provide assurance that activities designed to mitigate environmental impacts have been carried out by operators as required. In addition, documentation of environmental inspections that is not sufficiently clear and accurate could limit BLM’s ability to take and uphold enforcement actions when needed. Further, BLM field offices have not effectively used monitoring inspection data to assess the effectiveness of best management practices to mitigate environmental impacts of oil and gas development. Consequently, the agency may be limited in its ability to understand and demonstrate the extent to which its lease and permit requirements have successfully mitigated the environmental impacts of oil and gas development. The agency is in the process of implementing training for employees responsible for conducting environmental and monitoring inspections, but it has not established a policy requiring employees to complete this training. Without such a requirement, BLM cannot ensure that employees understand how to carry out monitoring inspections, that environmental inspection documents will be prepared consistently by field office staff, or that the data will be used to assess the effectiveness of best management practices. The Director of the Bureau of Land Management should take the following six actions. 1. Develop a policy to ensure that field offices consistently track exception data. 2. Develop bureau-wide written procedures for consistently considering and clearly documenting the information and processes used to make exception decisions. 3. Direct field offices to make the results of exception request decisions available to the public, such as on BLM’s public website. 4. Clarify guidance related to documentation of environmental inspections to ensure that inspections are documented in a manner that indicates whether all permit requirements were checked as part of the inspection. 5. Provide additional guidance to field offices on how to collect and use data collected during monitoring inspections and, in doing so, determine and implement an approach for using the data to assess the effectiveness of the agency’s mitigation efforts, including its best management practices. 6. Establish a policy requiring staff responsible for conducting environmental and monitoring inspections to take standardized training. We provided a draft of this report to Interior for review and comment. Interior concurred with five of our recommendations and partially concurred with one recommendation. Agency comments are reproduced in appendix III, and key areas are discussed below. Interior partially concurred with our recommendation that it direct field offices to make the results of exception request decisions available to the public, such as on BLM’s public website. According to an attachment to BLM’s 2007 policy on exceptions, it is to fully document exception decisions in the case file with the appropriate level of environmental review. Interior stated that it is required to document exception decisions in case files and that these files can be made available to the public upon request. Interior further stated that database upgrades will improve exception tracking and public posting in the future. In our review, we found that BLM offices did not always document exception decisions. We further found that these offices did not consistently track exception decisions. As a result, the public may not be aware of the extent to which exceptions are approved or the reasons for doing so. Because the public is an important stakeholder in the land use planning process, we believe that BLM should strive to make this information available to the public to enhance its ability to participate as BLM develops new land use planning documents. As agreed with your office, unless you publicly announce the contents of this report earlier, we plan no further distribution until 30 days from the report date. At that time, we will send copies to the appropriate congressional committees, the Secretary of the Interior, and other interested parties. In addition, the report will be available at no charge on the GAO website at http://www.gao.gov. If you or your staff have any questions about this report, please contact me at (202) 512-3841 or [email protected]. Contact points for our Offices of Congressional Relations and Public Affairs may be found on the last page of this report. GAO staff who made key contributions to this report are listed in appendix IV. This appendix details the methods we used to assess the Department of the Interior’s Bureau of Land Management’s (BLM) efforts to mitigate environmental impacts from oil and gas activities. Specifically, this report examines the extent to which BLM (1) approved requests for exceptions from lease and permit requirements intended to mitigate environmental impacts, and how these decisions were made and documented; (2) involved the public in the development of lease and permit requirements and in the approval of exception requests; and (3) implemented its best management practices policy and assessed its effectiveness in mitigating environmental impacts. Because of availability of data and the issuance of policies, the time frames varied for each of the objectives. To conduct our work, for all three objectives, we reviewed relevant laws, regulations, and BLM guidance. We also interviewed officials in BLM headquarters and officials from a nongeneralizable sample of eight BLM field offices (two of which were for scoping purposes to help formulate our audit approach and not included in our file reviews) and the corresponding four BLM state offices. We selected field offices based primarily on (1) geographic variability and (2) oil and gas leasing and permitting activity. Specifically, we visited and interviewed officials in two BLM state offices (Colorado and Wyoming) and interviewed officials by telephone in two additional offices (Utah and New Mexico). We also visited and interviewed officials in seven BLM field offices (Carlsbad and Farmington in New Mexico, Buffalo and Pinedale in Wyoming, White River and Colorado River Valley in Colorado, and Vernal in Utah) and interviewed an official by telephone in one additional office (Royal Gorge in Colorado). In fiscal year 2014, the four states we selected accounted for approximately 75 percent of producing federal leases and 85 percent of approved drilling permits. To obtain additional perspectives on our three objectives, we interviewed by telephone representatives from an oil and gas association representing industry perspectives, seven environmentally related nongovernmental organizations, and four state wildlife agencies corresponding with the BLM state and field offices we visited. To learn about available BLM data and BLM’s decision making related to exceptions, waivers, and modifications, we conducted a survey, interviewed agency officials, and completed a file review of a nongeneralizable sample of exception decisions. We electronically surveyed BLM officials responsible for 52 BLM offices with oil and gas activity to determine the extent to which BLM approved requests for exceptions to lease and permit requirements, and how these decisions were made and documented for fiscal years 2005 through 2015. We sent the questionnaire by e-mail in an attached Microsoft Word form that respondents could return electronically after marking checkboxes or entering responses in blank spaces. In an e-mail in advance of the questionnaire, we asked the official at each land unit if he or she was the correct respondent, and, if not, we asked for a referral to the official who was. We sent the questionnaire with a cover letter on March 1, 2016. We telephoned all respondents who had not returned the questionnaire after approximately 2 weeks and again after 4 weeks and asked them to participate. We received completed responses from officials responsible for 42 BLM offices in the field, which constituted an 81-percent response rate. The survey asked about available data on exceptions, waivers, and modifications from lease stipulations and drilling permit conditions of approval. In instances in which field offices had the data, we requested that they be e-mailed to us. Because the data were tracked inconsistently and BLM officials made statements indicating uncertainty about the completeness of the data, we determined the data were not sufficiently reliable for use to generate summary statistics on exception decisions across the bureau. Additionally, to learn about the exception process, we used a semistructured interview guide to interview BLM officials in four state offices (Colorado, Wyoming, Utah, and New Mexico) and BLM officials in six field offices (Carlsbad and Farmington in New Mexico; Buffalo and Pinedale in Wyoming; Colorado River Valley in Colorado, and Vernal in Utah). To complete our file review, we used exception data provided by field offices to select a nongeneralizable sample of well files that included exception decisions. Specifically, at the six field offices included in our file review (Carlsbad and Farmington in New Mexico, Buffalo and Pinedale in Wyoming, Colorado River Valley in Colorado, and Vernal in Utah), we selected a nongeneralizable sample of approximately 10 files per office using the exception data field offices had sent to us as part of our survey. We selected these files based on fiscal year and the operator making the request to obtain a range of requests over time. Four of the six offices provided us data, while the remaining two were unable to do so. At the four offices that provided us data, we selected a nongeneralizable sample of 44 files from fiscal years 2009 through 2015. These 44 files included 54 exception requests. We then examined the files to see whether the decision was reasonably documented. This included examining (1) how the request was made; (2) who at BLM reviewed the request; (3) what the applicable BLM criteria were, if any; (4) whether BLM provided an explanation of its decision; and (5) how BLM communicated the decision to the operator. In many instances, the well files were not complete. The initial assessment on the reasonableness of the documentation was made by one analyst and subsequently reviewed and verified by a separate analyst. When a discrepancy occurred, source documents were examined, and the assessment was discussed. We determined that the process of assessing the reasonableness of the documentation of BLM’s exception decisions based on the available source documentation in the well file rendered the findings of the review to be sufficiently reliable for our purposes. Because we examined this issue at six field offices, our findings are not representative of all BLM field offices. To examine the extent to which BLM involved the public in the development of lease and permit requirements and associated exception requests, we analyzed lease sale documents, conducted follow-up on our semistructured interviews with BLM field office officials, reviewed relevant BLM policies and guidance, and interviewed BLM’s program contact for its ePlanning initiative. Specifically, we reviewed environmental assessments and other lease sale documents obtained from BLM’s public website that were associated with lease sales held during calendar years 2012 through 2015 by the six field offices included our review. We reviewed the environmental assessments to determine whether public comments had been solicited and if any provided comments related to proposed lease requirements. We reviewed available documentation—for example, protest letters from the public or BLM’s responses to such letters—to determine whether an opportunity for public protest had been made available. To assess the reliability of the lease sale data used for this analysis, we confirmed with BLM state office officials the number of lease sales held by each office during the scope of our review. We determined the data were sufficiently reliable for our purposes. In addition, we conducted follow-up with BLM field office officials to clarify semistructured interview responses related to opportunities for public involvement at various stages of the development of permit requirements. To examine the extent to which the public was involved in BLM’s decisions to grant exceptions to lease or permit requirements, we interviewed BLM officials at the six BLM field offices we visited using our semistructured interview guide. We also asked questions related to this during our interviews with representatives from an oil and gas association, environmentally related nongovernmental organizations, and state wildlife agencies. To examine the extent to which BLM implemented its best management practices policy and assessed its effectiveness to mitigate environmental impacts, we interviewed key program contacts regarding their roles in overseeing BLM’s oil and gas program, best management practices, and ongoing initiatives related to the Automated Fluid Minerals Support System (AFMSS) and employee training. We also used a semistructured interview guide to interview BLM officials in the selected four state offices and six field offices. We also conducted a file review at the six field offices we visited and reviewed monitoring inspection data from BLM’s Performance Management Data System (PMDS), both described in detail below. In addition, we reviewed relevant BLM policies and guidance. The purpose of our file review for this objective was to identify the extent to which selected BLM well files included best management practices as permit requirements and contained documentation that BLM had verified operators’ implementation of the requirements when conducting environmental inspections. To design the methodology for our file review, we (1) identified best practices to include in the scope of our review, (2) developed a data collection instrument, and (3) identified a random sample of well files. Because many best management practices are site-specific, we chose to limit our review to four key practices, described in our report, that BLM policy states should be considered in nearly all circumstances. To develop a data collection instrument, we developed a hard copy form to be used when reviewing each file. This form included fields to document whether the team was able to review the file, whether the four key practices were identified as permit requirements, and whether the four key practices were verified as part of the environmental inspections documented in the file. Following our initial implementation of the file review during our first field office site visit, we confirmed that the data collection instrument functioned as designed. To identify a random sample of well files, we used data from BLM’s AFMSS on approved permits from fiscal year 2006 through 2015. To assess the reliability of the AFMSS data, we interviewed BLM officials and found that the data were sufficiently reliable for our purposes. Using these criteria, we generated a random sample of well files for each of the six BLM field offices included in our review. At each field office, we worked down the randomly ordered list of sampled files to review as many files as possible within the available time. In total, we reviewed 109 files, which included 152 inspection documents. Although this sample is not generalizable to BLM field offices as a whole, it is a statistically unbiased picture of the six field offices we visited. When conducting the file review at each office, two team members reviewed the files, using the prepared data collection instrument, for the allotted period of time. Next, the team members exchanged the files and completed data collection instruments to review the completed forms against the source material. To the extent that discrepancies were noted, the analysts consulted the source documentation onsite and came to agreement regarding the most accurate coding for that circumstance. In some cases, the underlying documentation was limited. For example, in some cases documentation of environmental inspections consisted of a short narrative, and the analysts were required to interpret the narrative to determine whether the four key best management practices were reviewed as part of the inspection. Consequently, there may have been some instances in which another person might have interpreted the source documentation to come to a different conclusion. While this is noted as a limitation, we determined that the process of verifying the file review data collection instruments against the source documentation rendered the findings of the file review to be sufficiently reliable for our purposes. We also reviewed data from BLM’s PMDS related to monitoring inspections. We asked BLM headquarters to provide us with PMDS monitoring data for fiscal years 2010 through 2015. We chose this time frame to coincide with BLM’s monitoring policy, which was implemented in fiscal year 2010. The data indicated the number of monitoring inspections reported by BLM cost centers. BLM cost centers represent organizational units, such as field or district offices. We reviewed the PMDS data to determine whether the six field offices included in our review had reported monitoring inspections in fiscal years 2010 through 2015. In completing this review, we identified certain cost centers that were identified as a program division rather than a field or district office. As a result, it was unclear whether the inspections reported by such cost centers could potentially be associated with one of the offices included in our review. In order to ensure the accuracy of our analysis of the data, we conducted follow-up with officials from each of the six BLM field offices. We provided the PMDS data for all cost centers in the state appropriate for the field office and identified which lines of data we identified as having been reported by the field office. We asked the officials to confirm whether our interpretation of the data was accurate. Officials from four of the offices confirmed that our interpretation was accurate. Officials from one field office identified data reported by their office that we had not identified during our analysis. An official from the remaining office thought that the office had reported monitoring inspections during fiscal years 2010 through 2015 but could not identify inspections associated with the office in the provided data. On the basis of our analysis, we found the data to be sufficiently reliable for our purposes. We conducted this performance audit from June 2015 to April 2017 in accordance with generally accepted government auditing standards. Those standards require that we plan and perform the audit to obtain sufficient appropriate evidence to provide a reasonable basis for our findings and conclusions based on our audit objectives. We believe that the evidence we obtained provides a reasonable basis for our findings and conclusions based on our audit objectives. In addition to the individual named above, Christine Kehr (Assistant Director), Richard Burkard, Mark Braza, Serena Epstein, Gustavo Fernandez, Glenn C. Fischer, Ellen Fried, and Sara Sullivan made key contributions to this report. | BLM is responsible for managing oil and gas development on federal lands while mitigating related environmental impacts. BLM seeks to do so, in part, by applying requirements to the leases and drilling permits it issues to operators. These requirements may include environmental mitigation practices outlined in BLM's best management practices policy. In some cases, operators may request exceptions to lease and permit requirements. GAO was asked to examine BLM's efforts to mitigate environmental impacts from oil and gas development. This report examines the extent to which BLM (1) approved requests for exceptions to lease and permit requirements and how these decisions were made and documented, (2) involved the public in the development of lease and permit requirements and in the approval of exception requests, and (3) implemented and assessed the effectiveness of its best management practices policy. GAO examined laws, regulations, and BLM policies and documents; surveyed and visited BLM field offices; and conducted interviews with BLM officials and other stakeholders. The extent to which the Bureau of Land Management (BLM) approved requests for exceptions to oil and gas lease and permit requirements is unknown, primarily because BLM's process for considering these requests and documenting decisions varied across field offices. Oil and gas operators may request exceptions to a permit requirement, such as prohibition of drilling in an area during times of the year when certain wildlife are present. BLM may approve such a request—allowing the operator to continue to drill during a portion of the normally prohibited time—if, for instance, no wildlife are present. GAO's survey of 42 BLM offices found that fewer than half tracked data on exception requests. Additionally, GAO found that the process for considering these requests and documenting decisions varied. BLM does not have a policy requiring field offices to consistently track exception data or documented procedures specifying how requests should be considered and documented. Because BLM does not consistently track exception request data or have a consistent process for considering requests and clearly documenting decisions, BLM may be unable to provide reasonable assurance that it is meeting its environmental responsibilities. BLM has consistently involved the public in developing lease requirements and, to a lesser extent, permit requirements. For example, GAO reviewed 35 lease sales that occurred from calendar years 2012 through 2015 at the six field offices visited and found that in all cases the field offices provided the public an opportunity to review and comment on lease parcels to be offered for sale. BLM has not generally involved the public in the approval of exception requests. According to BLM's policy, public notification of an exception is not required unless granting it would result in a substantial modification or waiver of a lease requirement, which, according to BLM officials, rarely occurs. BLM has generally implemented its best management practices policy by including key practices as permit requirements, but it has not consistently documented inspections or used inspection data to assess the policy's effectiveness. The policy identifies four key practices that should be considered for inclusion as permit requirements in nearly all circumstances: (1) painting facilities to blend with the environment, (2) constructing roads to certain BLM standards, (3) implementing interim reclamation, and (4) completing final reclamation. During file reviews at six BLM field offices, GAO found that at least one of the four key practices was included as a permit requirement in almost all of the 109 files reviewed. However, in reviewing documentation of inspections, GAO found that documents were not consistent and not always sufficient to determine whether BLM had verified key practices. GAO further found that BLM generally does not use data collected from inspections to assess the effectiveness of permit requirements in mitigating environmental impacts. BLM does not have guidance specifying how inspections should be documented and how inspection data should be used. Without sufficiently detailed documentation of inspections and effective use of data from inspections, BLM is unable to fully assess the effectiveness of its best management practices policy to mitigate environmental impacts. GAO is making six recommendations, including that BLM develop a policy for tracking and documenting exceptions. Interior generally concurred with GAO's recommendations. |
DOD’s directive on personal commercial solicitation establishes the policies and practices governing supplemental life insurance sales on installations in the United States and overseas. Each service provides additional policies and practices regarding on-installation commercial solicitation, and some installations further specify how these DOD and service policies and practices will be implemented locally. Importantly, DOD and the service policies do not cover supplemental life insurance solicitation that occurs off an installation. For example, servicemembers can obtain life insurance through the Internet or from companies that advertise in private-sector publications aimed at military personnel. Also, some life insurance agents might sell supplemental life insurance off the installation after (1) the agents initially generated leads on potential customers through on-installation efforts such as sponsorship of morale, welfare, and recreation events; or (2) other types of initial contacts that include offering servicemembers a free meal at a local restaurant. Although the steps used to obtain permission to solicit on an installation may vary, the DOD directive notes that solicitors must meet the following requirements: be duly licensed, have the permission of the installation commander, and have made a specific appointment with a servicemember and conduct it in family quarters or other areas designated by the installation commander. The supplemental life insurance products offered on installations in the United States must comply with the insurance laws for the applicable state, contain no restrictions by reason of military service or occupation unless the restrictions are clearly stated on the face of the contract, plainly indicate any extra premium charges if they are imposed for reasons of military service or occupation, and contain no variation in the amount of death benefit or premium based on the length of time the contract has been in force unless the variations are clearly described therein. In addition to specifying requirements for the solicitors and the life insurance products, the DOD directive identifies the 14 prohibited practices, shown in table 1. Committing any of the prohibited practices can result in an agent or an agent’s affiliated insurance company being banned. Among the other grounds for banning agents are failure to be duly licensed to sell insurance products under applicable federal, state, or local municipal laws; personal misconduct while on the installation; possession or attempted possession of allotment forms or their facsimiles; and substantiated complaints or adverse reports regarding goods or services and the manner in which they are offered. During the past decade, DOD issued two reports that addressed problems with on-installation supplemental life insurance solicitation. In March 1999, the DOD Inspector General (DODIG) found that improper solicitation practices occurred at all 11 of the sampled installations. The improper practices included presentations by unauthorized personnel, presentations to captive audiences, solicitation during duty hours, solicitation in the barracks, and subjecting servicemembers to sales pressure and misleading sales presentations. The DODIG noted that the personal commercial solicitation directive was adequate but that additional controls were needed to administer and enforce the solicitation process. Among other things, the DODIG suggested there was a need for improved oversight at the installation level, stricter enforcement procedures when improper solicitation practices are substantiated, and additional interface with state regulatory authorities. In May 2000, a report commissioned by the Office of the Under Secretary of Defense for Personnel and Readiness reviewed insurance solicitation practices on DOD installations and identified many of the same concerns and recommendations contained in the DODIG report. In September 2000, DOD’s Office of Force Management Policy established an insurance solicitation oversight working group to develop a strategy for eliminating prohibited life insurance solicitation practices on DOD installations. The working group’s recommended improvements were included in a draft revision of the directive on personal commercial solicitation, and this draft revision was published for public comment in August 2003. An important step in purchasing supplemental life insurance is making the arrangement to pay for it. Some servicemembers pay for the insurance with a payroll allotment, a process that is governed by the DOD’s Financial Management Regulation and individual service policies and is under the responsibility of DFAS. While the process for starting an allotment for supplemental life insurance varies across services and installations, it can be summarized in three steps: 1. Servicemembers or their representatives with a special power of attorney complete an allotment form and submit it either directly to the installation finance office or to the finance office through the servicemembers’ unit administrative office. 2. The installation finance office processes the allotment requests and electronically submits them to DFAS. 3. The first monthly payments are made to vendors more than a month after the forms are submitted, because the processing of the allotment requests takes time and the once-a-month payments result in the need to wait for half of the payments to be taken out of each of the servicemembers’ next two payroll deposits. The allotments for all types of commercial insurance are supposed to be coded as an AI discretionary allotment when they are entered into a DFAS database. The procedure for purchasing SGLI with an allotment is different from that used to purchase private supplemental life insurance with an allotment. One reason is active duty servicemembers are automatically insured for the maximum SGLI coverage. Servicemembers may subsequently elect to reduce their SGLI coverage, or to cancel it entirely. DOD’s effort to revise the directive began in 2002 after reports in 1999 and 2000 documented problems with supplemental life insurance solicitation on installations and made recommendations for improvement. In 2003, DOD obtained public comments on a draft directive during a public forum available to interested parties. Those comments and other input from sources such as DOD’s general counsel served as the basis for a draft directive published in the Federal Register on April 19, 2005, and discussed during a public hearing held on May 6, 2005, to obtain additional comments. DOD does not know the extent to which life insurance agents are violating regulations pertaining to on-installation personal commercial solicitation, and it does not actively disseminate information about all confirmed violations to other portions of DOD and state insurance regulators. Although many of the sources that we contacted for our review identified violations, DOD does not know how widespread the violations are because it has not collected information on the number, types, and severity of the violations. Even when violations have been severe enough to result in commanders banning agents from their installation, DOD did not actively provide that information to other installations or to state insurance regulators. The absence of evaluative and reporting requirements in the solicitation directive, as well as ambiguity in the directive about the dissemination of information, are some of the reasons for these situations that limit DOD’s ability to provide oversight of supplemental life insurance solicitation on installations and prevent violators from having access to servicemembers on installations. Because of the absence of evaluation and reporting requirements, DOD has not collected the data that it needs to monitor the number, types, and severity of life insurance agents’ violations of DOD’s regulations regarding on-installation solicitation. But data from our review suggest that the violations are not restricted to a few installations. Our data regarding alleged violations of the 14 prohibited practices identified in DOD’s commercial solicitation directive came from multiple sources: perceptions expressed in a DOD-wide survey and numerous interviews at six installations; information on the number and geographical dispersion of cases where installation commanders had banned agents during the past 3 years because of violations; and a review of in-depth documentation for four of the cases serious enough to result in banning agents. A survey of personal financial management program managers on installations in the United States indicated that six types of prohibited solicitation practices were perceived to have occurred with varying frequency on their installations during the prior 12 months. More than one-third of the managers indicated that misleading sales presentations regarding supplemental life insurance had occurred occasionally or routinely on their installations, and more than one-quarter said that four of the other five prohibited practices had occurred at least occasionally (see fig. 1). In interviews conducted during our visits to six installations, multiple sources—for example, solicitation coordinators, legal assistance attorneys, servicemembers, and insurance agents—indicated that the types of violations shown in figure 1 had occurred on their installations. For three or more of the six installations, multiple sources told us of agents inappropriately using their military retiree credentials to gain access to servicemembers for life insurance solicitation purposes, life insurance agents possessing or processing allotment forms, and life insurance agents participating in military-sponsored training. The installations had little or no documentation to show that the violations identified in the interviews had been reported or investigated. After we asked DOD if it had a list of insurance agents and companies whose solicitation privileges had been withdrawn, DOD requested the information from the services and installations. As of April 2005, DOD’s request for information identified 51 cases that occurred on installations in the United States from April 1998 through October 2004. Some installations supplied information on enforcement actions that did not result in the banishment of agents or companies. Table 2 provides information on 26 cases in which commanders banned agents—25 from DOD’s list and one additional case we later identified—from October 2001 through October 2004. Examining only the more recent cases minimizes the possibility that a case would have been the basis for findings in the 1999 and 2000 DOD reports on supplemental life insurance. Table 2 shows that the 26 cases occurred on 11 installations in eight states. Our analysis additionally revealed that agents from one life insurance company were involved in 9 (about 35 percent) of the 26 cases, and agents from another company were involved in 6 (about 23 percent) of the cases. Our review also examined the in-depth documentation for two cases from Camp Pendleton, California, and two cases at Fort Benning, Georgia, both of which are listed in table 2. The documentation, sometimes more than 200 pages, illustrates the situations that led to the violations, the types of violations occurring, and the amount of effort required to conduct the investigations. The cases are summarized as follows, and additional details on each are provided in appendix II. Camp Pendleton: In 2003, an insurance agent requested and obtained authorization to teach a class on veterans’ affairs benefits and financial planning to Marines. During the class, the agent said very little about veterans’ benefits but spoke at length about investments. The agent distributed cards for Marines to provide contact information. Using this information, the agent later sold Marines insurance policies at their homes and on duty, sometimes without appointments. During the meetings, Marines were given the impression that the agent represented the Department of Veterans Affairs. This agent’s solicitation privileges were suspended for 2 years by the installation. Camp Pendleton: In 2003, insurance agents requested and obtained permission to teach veterans’ affairs classes to Marines fresh from boot camp. The classes, with required attendance, started as veterans’ benefits discussions but shifted to investment sales pitches after non- commissioned officers left the classrooms. Agents distributed applications, allotment forms, and statements of understanding, encouraging participants to sign quickly, not read the forms, leave the dollar amount lines blank, and provide signed photocopies of their identification cards. The Marines were not allowed to take any paperwork with them and were told that copies would be sent to their home of record. The agents, including at least one retired Marine, were fired by their employer. Refunds were offered to those who purchased policies. Fort Benning: In 2003 and 2004, agents accessed soldiers in a basic combat training brigade through unit non-commissioned officers for the express purpose of providing financial planning classes. In unit classrooms, the agents discussed the value of investing. At the end of the presentations, soldiers who desired additional information completed a form. Weeks later, the agents met with soldiers individually or in small groups in the unit’s area. The agents were fired from the companies they represented, and several officers and enlisted personnel involved in arranging the presentations were reprimanded. The manager for DOD’s personal commercial solicitation program said that he was unaware of any other instance where enforcement included punishment of installation personnel, but added that his office does not track such information. Fort Benning: In 2002, two agents accessed soldiers in the infantry training brigade through unit non-commissioned officers for the express purpose of providing financial management classes. The classes were included on the training scheduled in conjunction with other personal financial affairs presentations and were conducted in unit classrooms. Non-commissioned officers escorted the soldiers to the classrooms. According to the investigation, some of the non-commissioned officers had knowledge of the solicitation actions taking place. These agents later had their solicitation privileges revoked by the installation, and refunds were provided to those who purchased policies. DOD-wide, service-specific, and installation-level factors contribute to the lack of information on violations. The absence of evaluation and reporting requirements in DOD’s directive on personal commercial solicitation is a primary reason why the services and installations do not emphasize assessment and why DOD cannot estimate the extent to which life insurance agents are violating the 14 proscribed practices and other parts of the directive. The absence at the installation level of documentation of confirmed violations by life insurance agents is also caused by several other factors, including: (1) the time it takes for personnel to lodge a complaint and other personnel to investigate it; (2) reluctance to get either the agents or installation personnel in trouble, especially when the agents appear to have the support of someone in the chain of command; and (3) the lack of knowledge about permitted and prohibited practices by both individuals being solicited and other servicemembers who allow life insurance agents to conduct financial training or perform other prohibited practices. The lack of documentation on confirmed violations can result in negative outcomes for both DOD and the life insurance industry. For instance, DOD is unable to identify the extent of specific types or patterns of problems, such as multiple instances of the same violation for agents from a single insurance company. Furthermore, DOD cannot determine whether there are many agents violating the regulations on a few occasions; a small number of agents violating the regulations on many occasions; or many people talking about a relatively few, well-publicized violations. Without knowing the extent of the problem, DOD cannot develop an effective and efficient strategy for curbing the violations. The lack of documentation could also negatively affect the life insurance industry and its agents. “Broad brush” complaints create a negative image of the industry. Some of the agents we interviewed were concerned that the highly publicized cases are painting a negative picture of them and their profession, even though they said they had not violated the regulations on personal commercial solicitation. The DOD policy office responsible for oversight of supplemental life insurance solicitation on installations does not routinely disseminate information on all confirmed violations to installations, to the services, or to state life insurance regulators. Although the DOD solicitation directive provides installation commanders with discretionary authority to report banned agents to their military department, they are not obliged to do so. Specifically, if installation commanders believe it is warranted, they can recommend extending or lifting actions taken against life insurance agents on other installations to their respective military departments. Additionally, the Office of the Secretary of Defense for Personnel and Readiness could, when appropriate, extend or lift the actions for other military departments. Notably, the current solicitation directive does not require the installation commander to routinely report information on all confirmed violations to state insurance regulators. It merely requires installations to notify appropriate state licensing authorities if the grounds for withdrawing solicitation privileges involve the eligibility of the agent or company to hold a state license or meet other regulatory requirements. One indication that installation commanders and DOD policy officials have had only limited communications about violations was the absence of a DOD list of cases where agents had been banned from installations for violating the personal commercial solicitation directive. The DOD policy office did not generate its list of cases until we requested the information for this review. This lack of information sharing occurred even when policy violations were severe enough to warrant the banning of agents. These communications-related problems continued despite three recommendations in the 1999 DODIG report: (1) require that all installations in the local area and the services’ higher commands be notified of “any adverse actions” taken against an insurance agent; (2) require the services to track such actions and report the information to the office with oversight responsibility; and (3) increase the interaction with state life insurance regulators. During our visits to six installations, solicitation coordinators told us that they did not routinely interact with their counterparts on other installations, but several of the insurance agents that we interviewed said they were approved to solicit on multiple bases in multiple states. We found a similar lack of communication between the various parts of DOD and state insurance regulators. In our December 2004 survey of all state insurance commissioners’ offices, only one state reported that DOD had notified it of disciplinary actions taken against a life insurance agent during the prior 12 months, even though several of the 26 cases in table 2 occurred during the same period. Our survey also revealed that 100 percent of the life insurance commissioners’ offices responding to our survey said it would be a good practice if DOD were to notify their offices whenever it took a disciplinary action against a life insurance agent, and 68 percent said they would like more communications with the military. Figure 2 shows the states where installation commanders took 26 enforcement actions to ban agents from October 2001 through October 2004; states where regulators indicated on our survey that the office had an ongoing investigation involving life insurance sales to servicemembers; and the number of active duty servicemembers in the states. State regulators reported in our survey that they had ongoing investigations in nine states: Alaska, California, Colorado, Georgia, Illinois, Iowa, Kentucky, New York, and Texas. Regulators’ investigations were occurring in four states (California, Georgia, Kentucky, and Texas) that have at least 30,000 servicemembers in them. Four states (California, Georgia, Illinois, and Texas) had both an ongoing investigation by the state insurance regulators in December 2004 and an installation where an agent had been banned between October 2001 and October 2004. Since the DODIG made recommendations to improve information sharing 6 years earlier that were not implemented, the absence of oversight by the DOD policy office appears to be the primary reason for the past lack of DOD-wide information sharing on banned agents and the continued lack of information sharing on lesser confirmed violations. Ambiguity in the solicitation directive about who should disseminate violations-related information to state regulators and the types of information that should be disseminated may have contributed to a lack of information sharing. Another reason for the lack of contact relates to uncertainty regarding the states’ ability to govern what occurs on an installation. Several state regulatory officials stated that they were uncertain about whether they had jurisdiction over life insurance sales on military installations. DOD officials informed us that they began meeting with the National Association of Insurance Commissioners in May 2005 to address some of these issues, and legislation has been introduced in Congress to require greater communication between DOD and the association. Additionally, several installation officials stated that their office considered the involvement of state regulators only for serious complaints or problems that involved life insurance products. The failure to disseminate information to other parts of DOD or to state insurance regulators about agents and companies who violate the solicitation policy—especially when the violations were serious enough to ban agents—can enable violators to continue operating on other installations. State insurance regulators in North Carolina told us that by not reporting violations to state regulators, installations prevent the state regulators from determining whether further actions, such as revocation of licenses, are warranted. Maintaining a list only of banned agents does not allow DOD or state regulators to spot patterns of violations by agents or companies that may have committed multiple lesser violations on multiple installations. If present, such patterns would be detectable only when solicitation coordinators are able (1) to identify the other installations where the agents or companies are approved to operate and (2) to communicate with their peers on the other installations about violations committed there by the agents or companies. Limited communications between installations also hinders the promotion of best practices. For example, other installations might be interested in Camp Pendleton’s testing of agents before approving them for on-installation solicitation. When determining whether to ban some agents from Camp Pendleton, investigators were able to show that the agents correctly answered test questions about prohibited practices— yet still committed the prohibited practices. We could not determine the extent to which servicemembers follow DOD’s and the services’ allotment processing policies when purchasing supplemental life insurance because of limitations in the allotment databases and the different ways that finance offices were accepting forms to start the allotments. Even with DFAS assistance, we could not generate reliable monthly estimates of the number of servicemembers with, or the amount of money allotted for, supplemental life insurance. The unreliability of estimates stemmed from longstanding database and computer system constraints, such as the coding used when gathering and entering the life insurance allotments into the databases and computer problems that we have documented in prior reports. Another problem area with supplemental life insurance allotments is the lack of certification that occurred when allotment forms were submitted to and processed by some finance offices. Contrary to financial management regulations, some finance personnel were accepting allotment forms through the mail or from individuals without verifying that the submitter was either the servicemember or that person’s representative with a special power of attorney. We could not substantiate insurance officials’ and agents’ assertion that servicemembers were being prevented from using allotments to purchase life insurance. Several factors suggest that all servicemembers who want to obtain supplemental life insurance can do so. We, with assistance from DFAS, attempted but could not determine with sufficient reliability either the number of servicemembers who have allotments for supplemental life insurance products or the number of dollars that servicemembers pay as allotments to life insurance companies each month. Although DOD’s Financial Management Regulation supplies the primary guidance governing the procedures used to gather allotment information and then electronically enter and store the information, each service has a policy and procedures directing how to implement the DOD regulations. Among other things, the military services’ policies and procedures specify how allotments for supplemental life insurance and other products or services are to be coded, the number of discretionary allotments that each servicemember is allowed, and which forms can be used to initiate allotments. Allotments to purchase life insurance are also governed by the DOD directive on personal commercial solicitation. The directive requires a 7-day cooling-off period between the time when E1s through E3s sign a supplemental life insurance application and the time the allotment is certified. A variety of DFAS database-related constraints limit the visibility that the DOD solicitation policy office, the services, and installations have over servicemembers’ use of and perceived need for supplemental life insurance. These constraints include the following: Although the databases can be used to identify servicemembers with an insurance allotment (an AI code), the allotment could be for servicemembers’ or family members’ life, health, automobile, or other insurance. Conversely, other servicemembers’ insurance allotments are not detectable if they are coded for savings (an AS code) or other types of accounts that the servicemembers also have with the company providing supplemental life insurance. Servicemembers are limited to six allotments in total and one discretionary allotment per company, even if they have multiple accounts (supplemental life insurance, savings, and so forth) with a company. DOD and service regulations permit the use of at least seven different allotment forms, but forms such as the government-wide Standard Form 1199A or DOD-wide DD Form 2558 do not ask whether the allotment is for supplemental life insurance. (See app. III for a copy of each form.) The payroll databases cannot tell how many servicemembers pay insurance companies directly by checks, electronic withdrawals from personal accounts, and so forth. DFAS maintains separate databases for the different military services, and the code used to identify an insurance company is not the same for all services. Creating a DOD-wide list requires additional work to merge the resulting information. DOD was informed about some of these database constraints in the 1999 DODIG report, in which analysts noted that they could not determine what portion of the allotments were made specifically for life insurance. A major cause of these database-related problems is DOD’s systems supporting servicemembers’ pay. In our earlier reports, we documented serious problems with these systems, noting that they were prone to error and required manual data reconciliation, correction, and entry across nonintegrated systems. While a significant system enhancement project is under way to improve the administration of military pay, DOD is likely to continue operating with existing system constraints for several years. The continued use of forms that do not require information and coding specific to life insurance could cause allotment data to continue to be unreliable for oversight purposes, even when the new computer system becomes operational. Information obtained during interviews indicated another cause for data unreliability. Some interviewees suggested that servicemembers might use codes other than AI to avoid the additional requirements encountered when starting allotments for supplemental life insurance. The additional requirements include the cooling-off period and the requirement to submit a paper form for all supplemental life insurance allotments, rather than using the electronic MyPay system. The absence of data regarding which servicemembers do or do not carry supplemental life insurance limits the oversight that DOD policy officials and installation solicitation coordinators can exert. For example, the inability to obtain accurate data prevents the DOD policy office from monitoring increased or decreased perceived needs for supplemental life insurance, an important issue now that new legislation has been enacted to almost double the lump sum death benefits offered through the government. Also, the lack of accurate data prevents the solicitation coordinators from easily checking whether servicemembers on an installation submitted an unusually large number of new allotments for supplemental life insurance during a short period, a possible sign of mass solicitation to recruits or trainees or other prohibited practices. Contrary to regulations, some finance personnel have accepted allotment forms to start supplemental life insurance without verifying that the person submitting the form is authorized to do so or, if applicable, that a cooling-off period has occurred. According to DOD’s Financial Management Regulation, establishment of, discontinuance of, or changes to existing allotments for supplemental life insurance are to be based on a written request by a servicemember or someone with a special power of attorney on behalf of the servicemember. For junior enlisted servicemembers, the DOD directive on personal commercial solicitation provides an additional requirement: “For personnel in pay grades E-1, E-2, and E-3, at least seven days shall elapse for counseling between the signing of a life insurance application and the certification of an allotment. The purchaser’s commanding officer may grant a waiver of this requirement for good cause, such as the purchaser’s imminent permanent change of station.” Nonetheless, DOD personnel and insurance agents indicated that some offices accepted allotment forms personally submitted by insurance agents or through the mail with only the signature on the form serving as proof that the servicemember wanted to start an allotment for supplemental life insurance. For example: A life insurance agent is alleged to have submitted allotment forms at Fort Bragg for servicemembers who later said they had not wanted the policies for which they were paying. Finance office personnel at Naval Station Great Lakes said that about half of all insurance allotment forms submitted to and processed by their office came from insurance agents. DFAS representatives who process allotments for Marines stated that they accepted and processed allotment forms submitted directly from Marines through the mail without the required certification. Finance office personnel at Lackland Air Force Base were concerned about the high number of mailed allotment forms from insurance companies or otherwise on behalf of servicemembers and requested DFAS guidance on processing such forms. Several reasons were suggested for DOD personnel’s acceptance of allotment forms that were not submitted personally by the servicemembers or their representatives with a special power of attorney. DFAS personnel representing the Marines said that they accepted and processed mailed insurance allotment forms from Marines who, due to their transitional status, were unable to properly certify the forms, but wished to promptly initiate policies or to keep policies from lapsing. In addition, Air Force personnel said that servicemembers have tight training schedules that make it more convenient to mail the forms than to hand carry them to the finance office. The Air Force has recently clarified its policies to require contacting servicemembers and verifying the request when allotment forms are received by mail. The causes are different for noncompliance with the requirement to have 7 days elapse between the time junior enlisted servicemembers sign a life insurance application and the time an allotment is certified. On allotment forms such as the governmentwide Standard Form 1199A or the DOD-wide DD Form 2558, no one is asked to certify that the required cooling-off period and, possibly, counseling have occurred. Therefore, these forms do not require finance personnel to determine whether the full 7 days have elapsed before they certify the allotment. Other causes for noncompliance with the required cooling-off period are ambiguities in the directive. First, the requirement for a cooling-off period may be for all life insurance allotments started by junior enlisted servicemembers, but its inclusion in a directive governing only on-installation solicitation could cause finance officials to interpret the requirement as applying only to those allotments for supplemental life insurance sold on an installation to junior enlisted servicemembers. Second, it is unclear whether the counseling is required or optional during the cooling-off period. Further, the directive and the standard allotment forms do not contain procedures for documenting whether the counseling took place. Third, it is unclear when the commanding officer must sign a waiver for the cooling-off period and/or counseling. Starting a supplemental life insurance allotment for servicemembers who do not want one or were not required to allow the cooling-off period to elapse can result in extra expenses for servicemembers who may already be financially challenged. Even if servicemembers receive premium reimbursements like those promised by insurance companies following the incidents at Fort Benning, Fort Bragg, Camp Pendleton, and possibly other places, months can pass between the paying for the allotments and the reimbursements. During that time, servicemembers are without a portion of their income, and this decreased income could result in budgeting difficulties and fees for such things as bounced checks and late payments. As we pointed out in our April 2005 report on the financial conditions of servicemembers and their families, pressure from creditors, falling behind in paying bills, and bouncing two or more checks were negative financial events reported by approximately one-eighth to one-fifth of servicemembers on a 2003 DOD-wide survey. In addition, more than 10 percent of servicemembers answered “in over your head” or “tough to make ends meet but keep your head above water” when the survey asked them to characterize their financial condition. For servicemembers who were already having financial difficulties, unplanned allotments and any extra expenses could result in debt and bad credit histories for servicemembers, as well as adversely affect unit readiness and morale as the chain of command attempts to address any resulting financial problems. Some insurance officials and agents asserted that chains of command prevent servicemembers from purchasing supplemental life insurance, but we were unable to substantiate the assertion. As we have previously mentioned, DOD’s Financial Management Regulation requires that servicemembers or their representative with a special power of attorney complete and submit an allotment form if the supplemental life insurance is to be purchased with a payroll deduction. Also, the previously discussed requirement for a cooling-off period and possibly counseling for junior enlisted personnel is important to examining the life insurance officials’ and agents’ assertion. During a meeting at the start of our review, officials from insurance companies and national insurance associations asserted that some servicemembers were being prevented from purchasing supplemental life insurance. Also, a firm that sells supplemental life insurance on and off multiple installations supplied us with documents on 1,344 servicemembers who completed insurance applications from October 2002 through September 2004 but did not subsequently start a policy through the firm. During site visits to two of the installations where the majority of the 1,344 servicemembers were based at the time of completing their applications, we attempted to conduct focus groups with subgroups of those servicemembers. Our points of contact on the installations indicated that many of the servicemembers had rotated to other installations or were in training that could not be missed. Although we could not determine how representative these 1,344 applications were of all applications completed without a purchase being made, this case study of the experiences at one firm provides some insight into the viability of cost-related alternative reasons why servicemembers might not follow through with the purchase of supplemental life insurance coverage. Our analysis of the 1,344 cases showed that 831 applications were for E1 through E3 servicemembers, and the per person average monthly cost of the products in the applications was $92. For those 831 junior enlisted personnel, 3 percent of the cases contained only an application for life insurance, 52 percent contained only an application for what an official from the firm characterized as “a life insurance product with an accumulation fund,” and 45 percent included both types of applications. Military officials, servicemembers, and insurance officials and agents identified reasons—in addition to being actively prevented from processing a supplemental life insurance allotment form—why servicemembers might not start a policy after completing an application. These other reasons included: The counseling supplied during the 7-day cooling-off period could have been misinterpreted as an implicit order from the chain of command not to purchase the insurance, rather than as advice about the advantages and disadvantages of purchasing supplemental life insurance or a particular type of coverage. The counseling could have resulted in the servicemember’s following through on purchasing a supplemental policy but obtaining it from another vendor, and possibly at a lower price. Some servicemembers may have developed buyers’ remorse when they later considered the competing demands on their compensation. Servicemembers may have completed the application because of high pressure sales practices, knowing they would not later file an allotment form. An allotment may not get started because of a lost or missing allotment form. Although we were not able to determine whether chains of command were intentionally preventing servicemembers from purchasing supplemental life insurance, information of four types suggests that the inability to purchase supplemental life insurance coverage is probably not a widespread problem. First, 85 percent of the state insurance regulators in our survey indicated that no insurance company had filed a complaint regarding the sale of life insurance to servicemembers on installations from October 2003 through December 2004, and the other 15 percent said they did not know. Second, most of the insurance agents identified by the national insurance associations and interviewed during our six installation visits indicated that they had not experienced a problem with the allotment process. In contrast, agents for two life insurance companies typically reported a problem, and the concerns related primarily to the processing of allotments on two installations that were served by the firm that supplied us with the more than 1,000 cases. Third, when we were able to talk with servicemembers identified as having completed insurance applications without starting allotments, they indicated that they did not purchase the supplemental life insurance for reasons other than prevention by the chain of command. Finally, if servicemembers wanted life insurance and were actively prevented by the chain of command from filing allotment forms to make the purchase, they could pay the premiums by check, electronic withdrawals from other financial accounts, or some other means, without further chain of command intervention. DOD’s revised directive on personal commercial solicitation practices on DOD installations incorporates new requirements, but does not address all oversight problems. Numerous changes have been proposed. Some interim policy and practices that are currently in place have been incorporated into the draft revision. Also, requirements for gathering and disseminating information have been proposed, but they do not fully address oversight deficiencies. Still other proposed requirements address issues such as the type of information that life insurance agents will provide to servicemembers to describe the product being offered by the agent. One of the larger sets of additions to the draft directive proposes to incorporate interim policy that DOD issued in 2002 about on-installation financial education presentations. Those additions generally prohibit representatives of commercial loan, finance, insurance, or investment companies from providing such presentations. With certain restrictions, the presentations may, however, be provided by representatives of the following types of organizations: credit unions and banks located on military installations, nongovernmental, noncommercial organizations expert in the field of personal financial affairs, and those that are either tax- exempt (under 26 U.S.C. 501(c)(3) or (c)(23)) or under a contract with the government. Among other things, restrictions require that the presenter and educational materials use disclaimers to indicate clearly that they do not endorse or favor any commercial supplier, product, or service. Also, the installation commander shall consider the company’s history of complying with on-installation commercial sales instructions if the presenting organization is affiliated with a company that sells or markets insurance or other financial products. An additional change to the draft solicitation directive incorporates procedures pertaining to advertising and commercial sponsorship that were already in place at some of the installations we visited. For example, the draft directive notes that solicitors are allowed to provide commercial sponsorship of DOD morale, welfare, and recreation programs or events on installations but are not to contact participants without their written permission. Interviews with insurance agents and installation personnel during our site visits indicated that agents were already generating lists of future contacts through the use of forms that program or event participants completed, indicating their permission for the future contact. DOD has taken some positive steps to improve its oversight of personal commercial solicitation on installations by proposing to add four new sets of requirements that pertain to gathering and disseminating evaluative data. Each of the requirements has associated problems that could limit the usefulness of the gathered and disseminated data. Two sets of proposed changes add requirements for gathering and disseminating information about violations on banned agents. As we noted earlier, continued gathering and disseminating information on only those violations severe enough to result in banning an agent will result in DOD’s continuing to be unable to (1) identify the number, types, and severity of all violations and (2) recognize patterns of violations. Failure to disseminate information on all confirmed violations to all parts of DOD and to state regulators can allow violators to continue operating on installations. As the result of another proposed addition to the draft directive, installation commanders will be required to inquire into any alleged violations of the solicitation regulation or questionable solicitation practices. This step could increase the DOD’s oversight of the number, types, and severity of confirmed violations occurring throughout all military installations if there were also an additional requirement to report all confirmed violations to higher-level commands. Some factors that could keep the number of inquiries into potential violations artificially low are the lack of knowledge about which solicitation practices are prohibited, the steps required to report a violation, and whom to contact when a suspected violation occurs. We reported in April 2005 that only the Army is monitoring the completion of required personal financial management training for junior enlisted personnel, and it estimated that about 18 percent of that group had not received the required training. Our earlier review did not assess the amount or the types of life insurance-related training provided, but we noted that each service administered its personal financial training differently. When we recommended additional DOD oversight by requiring the services to develop and implement plans to monitor the training, the Under Secretary of Defense for Personnel and Readiness partially concurred with our recommendation but noted that the DOD instruction governing personal financial management training had sufficient procedures to let the military departments accomplish their responsibilities. Another proposed addition to the draft directive would require an insurance agent to provide a servicemember with a new DOD-wide questionnaire that would contain questions about the servicemember’s experiences during the prearranged appointment with the agent for solicitation. The value of information obtained from this assessment instrument may be very limited, and might even create an erroneous impression of what has occurred during the typical solicitation appointments. The questionnaire will document interactions that were not described as problem areas during our visits to six installations—that is, life insurance agents who were complying with the requirement to prearrange one-on-one solicitation meetings. Also, the voluntary completion of the forms will result in a lack of transparency, since some forms may not be turned in for a variety of reasons: For example, they were never distributed by an agent, or the servicemembers did not want to take the time to fill in and drop off the form. In addition, the directive includes no requirement to submit the data to higher levels so that service-wide and DOD-wide information can be developed. Another change merits special mention because it could result in servicemembers’ having better information for making decisions about whether or not to purchase a specific amount or type of supplemental life insurance coverage. All financial products that contain insurance features must clearly explain the insurance features of those products. The draft regulation elaborates further about insurance products, stating that if there is a savings component to an insurance product, the agent shall provide the customer written documentation, which clearly explains how much of the premium goes to the savings component per year, broken down over the life of the policy. This document must also show the total amount per year allocated to insurance premiums. The customer must be provided a copy of this document that is signed by the insurance agent. One problem that might be encountered in implementing this proposed requirement is the absence of any guidance about what types of information must be contained in the written description and who (for example, the installation’s solicitation coordinator or the National Association of Insurance Commissioners) would judge whether the information is conveyed clearly. Three other changes in the draft also merit mention. First, solicitors are prohibited from contacting DOD personnel by calling a government telephone or by sending an e-mail to a government computer unless the parties have a pre-existing relationship. Second, solicitors with military identification cards and/or vehicle decals must present documentation issued by the installation authorizing solicitation when entering the installation for that purpose. Third, commercial sponsors may not use sponsorship to advertise products and/or services not specifically agreed to in the sponsorship agreement. A DOD official informed us that DOD plans to review the findings and recommendations of our report and then request more public comments after our report is issued. He also indicated DOD will not publish a final revised directive until at least 90 days after the issuance of our report, consistent with the provisions of Section 8133 of the Department of Defense Appropriations Act for Fiscal Year 2005. DOD cannot identify the extent to which life insurance agents are violating solicitation policies or procedures, the types, severity, or patterns of violations. A proposed new provision in the draft directive would require DOD to maintain and disseminate a master file on banned agents, but this new provision will still not provide DOD with a full picture of the important but missing data outlined in the prior sentence. For example, DOD’s current list (1) is not searchable to help solicitation coordinators quickly check on agents who want to be approved or re-approved for on- installation solicitation, (2) does not provide the same information on every case as is evidenced by the absence of dates for 6 of the 51 cases, (3) does not identify the specific types of violations that occurred—data critical for identifying patterns of violations, and (4) probably does not contain information on all agents who installation commanders have determined violated regulations but have not done something severe enough to be banned. The continued absence of these important data will force DOD, the services, and installations to take actions based on isolated incidents, anecdotes, and other possibly insightful, but non-optimum information. DOD has, however, taken a positive step by including a requirement in the draft directive to maintain a list of contacts for state insurance regulators, but it does not require installation commanders to keep state regulators generally informed about all confirmed solicitation violations occurring on their installation. This ambiguity could result in some relevant violations not getting reported to state regulators. Similarly, ambiguity is present in the wording of the requirement for the cooling-off period for junior enlisted servicemembers who want to purchase supplemental life insurance. While DOD’s draft directive clarified that the period is 7 calendar days, other ambiguities were identified earlier in this report. Failure to address these issues during the current revision could result in inconsistent enforcement of that requirement. The quality of the information in the DFAS payroll databases limits the ability of other parts of DOD in their efforts to (1) monitor servicemembers’ perceived need for supplemental life insurance and (2) detect prohibited group presentations as evidenced by large numbers of new allotments for supplemental life insurance. Continued reliance on multiple generic allotment forms and a generic data entry code that does not distinguish different types of insurance products (for example, life versus automobile) will perpetuate existing data reliability problems. Furthermore, the continued use of generic forms to start a supplemental life insurance allotment results in a missed opportunity for DOD to institute steps to address solicitation requirements whose enforcement has not been assessable. For example, DOD has no current forms or other assessment methods for documenting that the required cooling-off period for junior enlisted personnel occurred, servicemembers received required documents from life insurance agents, and the finance or administrative staff who accepted the allotment form for supplemental life insurance also verified that the person submitting it was either the purchaser or the servicemember’s representative with a special power of attorney. With regard to this last enforcement and documentation issue, our review found some noncompliance with the requirement that only servicemembers or their representatives with special power of attorney could start supplemental life insurance allotments. Even though some of the reasons for the noncompliance may be well-meaning, some of the instances where finance officials have accepted such allotment forms from unauthorized persons have resulted in banning agents, diverting valuable resources away from the military mission to conduct investigations, and possibly placing servicemembers and their families at financial risk when unanticipated allotments begin for unwanted products. Adherence to existing regulations would go far to eliminating these negative effects. We are making five recommendations. We recommend that the Secretary of Defense direct the Under Secretary of Defense for Personnel and Readiness to take the following actions in revising DOD’s solicitation regulation: Develop and implement, with the services, a DOD-wide searchable violations database that uses consistent data elements and coding across services. Solicitation coordinators or others at the installation would then be required to enter the installation name, violating agent’s name, insurance company supplying the product, type(s) of violation(s), date and type of action taken, and other information important for identifying patterns of violations and facilitating efficient data collection and dissemination of information on confirmed violators to all installations and state insurance regulators. Specify in the revised directive that the installation commander is responsible for notifying state insurance regulators, the service secretariat, and DOD, when the commander has determined that agents or companies have violated DOD, service, or installation policies. Requiring installation commanders to contact appropriate state officials regarding all confirmed violations of DOD’s commercial solicitation directive increases the likelihood that state insurance officials will be provided an opportunity to determine if further action such as revocation of a state license is warranted. Clarify the portion of the revised directive that pertains to the cooling-off period that must elapse before junior enlisted personnel can start an allotment to purchase supplemental life insurance. Addressing and eliminating the ambiguities that we have identified about what is required versus optional could result in better compliance with the directive. We recommend that the Secretary of Defense direct the Defense Finance and Accounting Service to take the following actions: Determine what current and future modifications should be made to the regulations, forms, and procedures used to initiate and electronically capture supplemental life insurance allotments so that more useable data are available to the DOD, service, and installation offices responsible for overseeing supplemental life insurance solicitation. This step might include developing and implementing a single code and form that would be used for supplemental life insurance allotments and to document compliance with requirements that DOD has previously had little visibility over. Issue a message to all finance offices and the Defense Finance and Accounting Service offices that process allotments for supplemental life insurance to remind personnel that DOD’s Financial Management Regulation indicates that only servicemembers or their designated representatives with special power of attorney for the prescribed purpose are authorized to start, stop, or modify financial allotments. If deviations from the policy are warranted to allow mailed allotment forms, the Defense Finance and Accounting Service should specify the additional verification required in those situations. DOD’s comments are included in this report as appendix IV. DOD partially concurred with our first two recommendations and fully concurred with the three remaining recommendations. In commenting for DOD, the Principal Deputy for Personnel and Readiness raised three issues concerning the thoroughness and accuracy of our review. First, DOD incorrectly stated that our review was only to look at the complaints of the insurance industry and that after we did not substantiate these complaints, we instead looked at DOD’s oversight of commercial insurance solicitation on DOD installations. While we were aware of the industry’s complaints, we focused our review on broader systemic issues, like the implementation of DOD and service poliies, procedures, and regulations governing the marketing and sale of supplemental life insurance on domestic military installations. Focusing on these systemic issues, however, allowed us to determine whether the complaints had merit. At every stage during our review, we emphasized that we were asked to review compliance with DOD’s regulations and policies on both the marketing and sale of life insurance on installations and the processing of financial allotments for such products. For example, in the letter notifying the Secretary of Defense that we were beginning our review and at our first meeting with DOD and service representatives, we listed the following three researchable questions: 1. What are DOD’s and the services’ policies and procedures for the marketing and sale of life insurance policies to military personnel and the processing of financial allotments for military personnel? 2. How do DOD and service regulations affect the marketing and sale of life insurance policies and the processing of financial allotments to military personnel? 3. How are the processes and procedures for the marketing and sale of life insurance policies and the handling of financial allotments, especially for commercial products like life insurance policies, implemented at Fort Bragg, Fort Lewis, and other military installations? Our report fully addressed solicitation and allotment issues in addition to providing our congressional requesters with an update on the revision of DOD’s personal commercial solicitation directive, as they also requested. Further, DOD stated that our report makes only minor mention of the fact that we did not substantiate the insurance industry’s assertions that servicemembers were being prevented from using allotments to obtain life insurance. To the contrary, we devoted a section of our report to the issue, but that issue was only one of many allotment-related concerns that we addressed in that portion of the report. Second, DOD expressed concern about our use of survey data in examining the extent to which insurance solicitation violations were occurring on installations. The most significant reason for using the survey was the incompleteness and other problems associated with the data that DOD maintains on violations. The problems with those data are addressed more fully in our later response to DOD’s partial concurrence with our first recommendation. Because we were aware that survey data are unsubstantiated, we supplemented that information with data gathered from other sources such as DOD’s list of banned agents and information gathered from a wide variety of individuals during our six visits to military installations. DOD similarly conduits surveys to monitor other personnel issues. For example, the Office of the Under Secretary of Defense for Personnel and Readiness conducted a survey of over 75,000 servicemembers asking for unsubstantiated perceptions about racial/ethnic discrimination and harassment and these data could be combined with compliance-related information from DOD’s investigations of alleged violations to give the department a more complete view of the issue. DOD also stated that we should have disclosed the wording used in the survey. The information that DOD reviewed in our figure 1 is the exact wording of our survey items. Although the wording for the overall question, “During the past 12 months, how often have the following practices concerning supplemental life insurance taken place on the installation?” was changed to a declarative sentence to increase readability, our paraphrasing is a true representation of what we asked. Finally, the response rate of 75 percent for our survey of all personal financial management program managers on U.S. installations is higher than the rate obtained on recent DOD-wide surveys such as the August 2004 survey which had a response rate of 40 percent. Given these facts, we believe that our discussion about the extent of solicitation policy violations was appropriate, especially since DOD had information on only the subset of violations serious enough to merit banning an agent from an installation. Lastly, DOD maintained that we made a false statement about the department not knowing the extent of personal solicitation policy violations. DOD’s point is incorrect on several grounds. First, early in our review in May 2004, we asked DOD officials whether a DOD-wide database existed that the services could use to report to DOD insurance agents or companies that have had their solicitation privileges withdrawn. DOD officials told us that while there was such a system, it was up to the services to provide updated information. DOD officials said at the time there was no comprehensive information available to document such actions. In October 2004—approximately 5 months after we asked for a list of all banned agents—DOD provided us with information similar to that provided on its Commanders Page Web site as of April 2005. At the time we received this information, the Director of the program that oversees personal commercial solicitation told us that the list may not be complete and accurate—which we found to be true—but that it provided all of the information that the services had reported. Second, DOD’s list of banned agents did not include all cases where insurance agents or companies were banned. As we reported, personnel at Fort Bliss, Texas, indicated that the installation commander had banned an agent who was not included on DOD’s Commanders Page Web site as of April 2005. Third, unless DOD bans every agent who violates in any way the solicitation policy regardless of the severity of the violation, its data on banned agents are not equivalent to knowing the extent of all confirmed violations. Regarding DOD’s comments about our recommendations, DOD partially concurred with our first recommendation to develop and implement a searchable violations database, but DOD’s explanation of its partial concurrence does not identify any additional steps to address the deficiencies that we identified with their current procedures. As we noted in our report, the monitoring system should focus on all confirmed violations of solicitation policies and not just on those severe enough to result in agents being banned. By establishing a database on all confirmed violations, DOD would have a more complete picture of solicitation violation activities to better identify patterns, types, and severity of confirmed violations. If patterns are found, they could serve as the basis for identifying actions to eliminate the recurring or systemic problems. Our proposed database would also provide installation solicitation officers with a resource to check whether agents requesting solicitation approval or re-approval at their installations were involved in prior violations at other locations. DOD partially concurred with our second recommendation that installation commanders notify state insurance regulators of confirmed violations of solicitation policies. DOD’s position is that such reporting by installation commanders should only be required when the violations involve the eligibility of the agent to hold a state license and to meet other regulatory requirements. We believe that DOD should report all confirmed violations to state regulators. Installation commanders and their legal advisers may not have the expertise needed to determine whether a solicitation violation involved license-eligibility or regulatory requirements. Having installation commanders report all confirmed violations to state regulators would allow the regulators to decide whether further action is appropriate. As we pointed out in our report, state insurance officials from North Carolina were concerned that DOD’s lack of reporting violations prevented them from determining whether further actions, such as revocation of licenses, are warranted. DOD concurred with our third recommendation and stated that it had identified an additional ambiguity in the current revised directive regarding who is responsible for monitoring and enforcing the cooling-off period for supplemental life insurance purchases. DOD’s proposed revision addresses the concerns that we raised. DOD concurred with our fourth recommendation and stated that they will consider our proposed changes for a future enhancement of their pay system. In addition, DOD said that it will review its regulations and forms to determine what current and future modifications should be made. DOD concurred with our fifth recommendation and stated that it will issue a message identifying who can start, stop, or modify allotments to all finance offices and Defense Finance and Accounting Service offices that process allotments. As agreed with your office, unless you publicly announce its contents earlier, we plan no further distribution of this report until 30 days after its issue date. At that time, we will provide copies of this report to interested congressional committees and the Secretary of Defense. We will also make copies available to others upon request. This report will be available at no charge on GAO’s Web site at http://www.gao.gov. If you or your staff have any questions regarding this report, please contact me at (202) 512-5559 or [email protected]. Contact points for our Offices of Congressional Relations and Public Affairs may be found on the last page of this report. GAO staff members who made major contributions to this report are listed in appendix V. In addressing the objectives of our engagement, we reviewed reports that had been issued by GAO, DOD, and others, including the life insurance industry. We interviewed officials from DOD, life insurance companies and associations, and other organizations, such as the Consumer Federation of America, to identify the many perspectives on the issues being studied. In connection with another report, we constructed, pre-tested, and administered insurance- and allotment-related survey questions to all 175 installation-level managers of DOD’s personal financial management programs located in the United States. We received completed surveys from 131 installations, yielding an overall response rate of 75 percent, which ranged from a low of 62 percent for the Air Force to 93 percent for the Marine Corps. We also constructed, pre-tested, and administered an e-mail survey to the insurance commissioners for the 50 states, the District of Columbia, and four territories: American Samoa, Guam, Puerto Rico, and the Virgin Islands. We received completed surveys from 46 states, the District of Columbia, and one U.S. Territory, yielding an overall response rate of 87 percent. We did not receive surveys from four states (California, Delaware, Florida, and Idaho) and three territories (American Samoa, Guam, and the Virgin Islands). We later contacted the four non-responding states to verify if they had any investigations on insurance sales practices on military installations, and only California responded to our inquiries. In addition, we interviewed personnel from the state insurance commissioner’s office for four of the six states where we conducted site visits to military installations, as well as personnel for the commissioner’s office in Georgia. We also asked insurance companies and two national insurance associations to identify agents and company representatives who could be interviewed about solicitation and allotment practices at the six installations. During site visits, we requested materials related to the marketing and sale of supplemental life insurance and the establishment of allotments for that purpose. Those materials included a list of life insurance agents approved for on-installation solicitation, handouts distributed to assist servicemembers in determining their need for supplemental life insurance, documentation for violations of personal commercial solicitation and insurance-related policies, and complaints related to insurance solicitation and allotments. While on the site visit, we conducted individual interviews or focus groups with the following types of individuals: installation leaders; the coordinator for the installation’s commercial solicitation program; servicemembers; legal assistance attorneys from the Judge Advocate General corps; finance department personnel who managed and processed allotments; family support center staff responsible for personal financial management training and counseling activities; staff from morale, welfare, and recreation; and representatives of on-installation banks and credit unions. We limited our scope to the sale—marketing, solicitation, and purchase— of life insurance to active duty servicemembers on installations in the United States. Emphasis was given to findings pertaining to junior enlisted servicemembers since DOD and insurance officials have indicated that this subgroup is more likely to encounter problems with the marketing and sale of supplemental life insurance and establishment of an allotment for such a purchase. During the course of our work, we visited six installations (see table 3). We selected the installations based on inputs from DOD and insurance officials, and with due consideration for the large number of Army personnel deployed to Iraq and Afghanistan. We did obtain additional information on completed and ongoing large-scale investigations of violations that occurred on other installations: Fort Benning, Georgia, and Fort Stewart, Georgia, although we did not conduct site visits to these installations. To address the extent to which agents were violating DOD’s policies governing the solicitation of supplemental life insurance to active duty servicemembers on domestic installations, we reviewed and analyzed DOD, service, and selected installations’ policies and directives governing personal commercial solicitation, primary among these was the DOD directive on personal commercial solicitation on DOD installations. We also reviewed DOD reports on commercial life insurance sales; materials provided by insurance association and company officials, as well as insurance agents; and state government announcements such as those from the office of the Georgia state insurance commissioner about investigations of and enforcement actions against some companies and agents who sold supplemental life insurance to servicemembers. We contacted the Federal Trade Commission to ascertain whether its Military Sentinel system contained any information on complaints or investigations on supplemental life insurance sales to servicemembers. We obtained a wide range of perspectives about the sale of supplemental life insurance to servicemembers during meetings with DOD and service headquarters officials, officials from companies and two life insurance associations (the American Council of Life Insurers and the National Association of Insurance and Financial Advisors), and a representative of the Consumer Federation of America. In addition to interviewing staff from the insurance commissioners’ offices in four of the six states where we visited installations and in the state of Georgia, we constructed, pre-tested, and administered an e-mail survey to the insurance commissioners for the 50 states, the District of Columbia, and four territories. We also used responses about supplemental life insurance-related issues from a survey of all DOD personal financial management program managers, professional staff employed on most installations who were responsible for coordinating the financial management training, counseling, and other assistance provided to servicemembers. During our site visits, we asked that the command point of contact provide us with the following types of materials: a list of life insurance agents approved for on-installation solicitation, handouts distributed to assist servicemembers in determining the need for supplemental life insurance, documentation for violations of personal commercial solicitation and insurance-related policies, and complaints related to insurance solicitation. While on the installation, we conducted individual or focus group interviews with the following types of installation personnel or offices: installation leadership, the coordinator for the installation’s commercial solicitation program, legal assistance attorneys from the Judge Advocate General corps, and family support center staff responsible for financial training and counseling activities. We also asked the life insurance associations and company officials for the names of agents that we could interview while on our site visits. As part of our site visits, we conducted interviews with on-installation bank and credit union officials, asking about current and planned efforts to offer supplemental life insurance through their financial institution. To address how effectively DOD personnel are adhering to DOD’s regulations that govern how active duty servicemembers establish payroll allotments to purchase supplemental life insurance, we interviewed officials from DFAS at their headquarters and field offices associated with each service. We also reviewed and analyzed guidance documents governing servicemembers’ use of allotments that DFAS, the services, and selected installations provided to us. We interviewed finance officials at the installations we visited and observed the data entry process used to electronically transmit data from the installation to the payroll accounting system maintained by DFAS. At several installations, we also interviewed officials at administrative units that serve as intermediaries in the processing of servicemembers’ allotments and asked questions as personnel demonstrated the procedures used in submitting, processing, and confirming allotment transactions. To assess the extent to which the draft revision of DOD’s directive will address ongoing problems with supplemental life insurance policies on DOD installations, we reviewed the Department of Defense Appropriations Act for Fiscal Year 2005 to determine the restrictions on when the draft directive could be issued. We conducted interviews with DOD program officials to discuss proposed changes, the reasons for the proposed changes, and other issues related to the draft directive. Also, DOD provided us with a copy of the draft directive as of January 2005 so that we could compare and contrast it to the current version of the directive. We compared that version to the one printed in the April 19, 2005, Federal Register announcement. We subsequently contacted DOD policy officials to determine whether DOD intended to again request comments after our report was issued. We performed our work from May 2004 through May 2005 in accordance with generally accepted government auditing standards. We are providing synopses of the reports that investigators prepared after they completed gathering data on alleged violations. We did not independently attempt to verify the allegations or the weight of the evidence supporting decisions reached by installation commanders. Instead, we merely summarize the information provided in the investigative reports. Installation: Camp Pendleton, California Period when the violations occurred: October through November 2003 Description of the violations: An insurance agent approached an officer requesting authorization to teach a class on veterans’ affairs benefits and financial planning to squadron Marines. The officer believed the class would benefit Marines and included the agent on the training schedule. During the class, the agent spoke little about veterans’ benefits, focusing more on investments. The agent distributed cards to obtain contact information and later met with Marines while they were on duty or in their homes to sell them policies. The agent described the policy as an investment plan, rather than an insurance policy, guaranteed, as stated by the agent, to provide Marines “$500,000 to $1,000,000 by the time they reached their sixties.” The agent also tried to sell the investment plan to Marines without appointments. During the meetings, Marines were given the impression that the agent was a representative of the Department of Veterans’ Affairs and was able to assist them in obtaining their benefits. On one occasion, the agent tried to obtain a MyPay personal identification number from a Marine. Investigators determined that these actions violated prohibited solicitation practices including providing financial planning and insurance classes without prior approval; attempting to solicit or sell insurance without an appointment; attempting to sell insurance in an unauthorized area; using unfair, deceptive, misleading, or fraudulent schemes to encourage sales; and soliciting to trainees. Documentation to assess the scope of the problem: The investigation report included sworn statements from 12 Marines who met with the agent as well as two other Marines approached by the agent. Estimated number of affected servicemembers: The initial class included 15 to 25 Marines, and the agent conducted the class at least one other time. By the installation: Solicitation privileges for the agent were suspended for two years for all Western area Marine Corps installations. By the insurance company: The insurance company returned the agent’s solicitation pass and ceased all operations on the installation with no plans of reopening. Installation’s interaction with state insurance commissioner’s office: The installation recently provided copies of the investigation to the state insurance commissioner. Installation: Camp Pendleton, California Period when the violations occurred: May through September 2003 Description of the violations: Under the guise of presenting information on veterans’ affairs benefits, two insurance agents obtained permission from a commanding officer to provide the classes to Marines arriving from boot camp, at which attendance was required. Four people conducted the classes, including three insurance agents and the wife of one agent. According to participants, the classes started with normal veterans’ benefit discussions, but shifted into an investment and life insurance sales pitch after non-commissioned officers left the room. The product was identified as a “can’t lose proposition” and participants were told that participation would earn them about $500,000 in just over 21 years. During the sales pitch, agents distributed paperwork, including applications, allotment forms, and statements of understanding, to the Marines. Participants were encouraged not to read the forms and sign them quickly, leave the amounts on the allotment forms blank, provide the insurance company representatives access to MyPay personal identification numbers, and provide signed photocopies of their identification cards. The agents brought portable printers to the meetings to obtain the necessary information. The Marines were not allowed to take paperwork with them, being told that copies would be sent to their home of record. Investigators determined that these actions violated prohibited solicitation practices including soliciting military personnel who are in an on-duty status; soliciting without appointment in areas utilized for the housing and processing of transient personnel and in unit areas; using manipulative, deceptive, or fraudulent devices, including misleading advertising and sales literature; soliciting recruits, trainees, and other personnel while in a “mass” or “captive” audience; and violating the requirement that at least seven days elapse between the signing of a life insurance application and the certification of an allotment for personnel in pay grades E1 through E3. Documentation to assess the scope of the problem: The investigation report included interviews from 26 Marines in the five classes. Additional information, such as direct deposit forms and statements of understanding, was also included. Estimated number of affected servicemembers: 345 By the installation: Solicitation privileges for the agents were revoked for Camp Pendleton and all Western region Navy and Marine Corps installations. By the insurance company: The insurance company shut down its operations at Camp Pendleton and has no plans to reopen. The company terminated the three agents involved, at least one of whom was a retired Marine. Refunds were provided to 110 Marines before the June 8, 2004 cutoff date. Installation’s interaction with state insurance commissioner’s office: The investigation report recommended the California Department of Insurance be notified of the report results. The installation recently provided copies of the report to the state insurance commissioner. Installation: Fort Benning, Georgia Period when the violations occurred: December 2003 through July 2004 Description of the violations: Four agents, two who were on Fort Benning’s list of authorized insurance and investment agents, gained access to soldiers in the Basic Combat Training Brigade through unit non- commissioned officers under the pretext of providing financial planning or financial management classes. The agents conducted their briefings in unit classrooms, discussing the value of investing and providing examples of wealth accumulation. At the end of these presentations, soldiers wanting additional information were asked to complete an informational form. Following up on leads generated from the forms, the agents returned to the unit area a few weeks later and met individually or in a small group with soldiers. These follow-on meetings, involving the use of laptop computers and direct deposit forms, took place in unit classrooms or unit dayrooms. Fort Benning officials found that officers and non-commissioned officers contributed to the solicitations and a number of drill sergeants knew of the insurance presentations in the unit area. Investigators determined that these actions violated prohibited solicitation practices including soliciting during enlistment or induction processing or during basic combat training; soliciting to mass, group, or captive audiences; and misusing the allotment of pay system. Documentation used to assess the scope of the problem: The investigation report included sworn statements from a number of soldiers who met with the agents. Additional information, such as direct deposit forms, was also obtained. Estimated number of affected servicemembers: 377 By the installation: Installation solicitation privileges for the agents were revoked. Three officers and seven enlisted personnel involved were reprimanded for failing to adequately safeguard the soldiers for whom they had responsibility. By the insurance company: The agents involved were fired from the insurance companies they represented. The insurance company from which most of the policies appear to have been sold has agreed to provide refunds to soldiers. Installation’s interaction with state insurance commissioner’s office: The investigation report recommended that findings be shared with the state licensing agencies. Installation officials have provided information to the state of Georgia regarding these incidents. Installation: Fort Benning, Georgia Period when the violations occurred: July 2002 through October 2002 Description of the violations: Two agents conducted financial management briefings to soldiers in the infantry training brigade. The agents gained access to soldiers through unit non-commissioned officers under the pretext of providing financial management classes. The classes were imbedded into the training schedule with other personal and financial affairs presentations and were conducted in unit classrooms on the installation. The soldiers were escorted to the classrooms by non- commissioned officers, and according to the investigation, some of the non-commissioned officers had knowledge of the solicitation actions taking place. In addition to the financial management classes, one of the agents allegedly made insurance presentations in training areas to non- commissioned officers. During these presentations, some trainees met with the agent and subsequently purchased life insurance policies. Investigators determined that these actions violated prohibited solicitation practices including soliciting during enlistment or induction processing or during basic combat training; soliciting to mass, group, or captive audiences; making appointments with or soliciting military personnel who are in an “on duty” status; and using manipulative, deceptive, or fraudulent devices or schemes to sell products, including misleading advertising and sales literature. Documentation used to assess the scope of the problem: The investigation report included sworn statements from involved non- commissioned officers, soldiers who attended the briefings, and Army community affairs officials who received complaints from two of the soldiers involved. Estimated number of affected servicemembers: 906 By the installation: Installation solicitation privileges for the two agents were revoked. By the insurance company: The agents involved were fired from the insurance company they represented. The insurance company offered refunds to affected persons, and as of May 2005, about 20 percent of the soldiers received refunds. Installation’s interaction with state insurance commissioner’s office: Installation officials have provided information to the state of Georgia regarding these incidents. In addition to the individual named above, James Cook, Jack Edwards, Lynn Johnson, David Mayfield, Terry Richardson, Arnett Sanders, Cheryl Weissman, and Kristy Williams made key contributions to this report. Military Personnel: DOD Comments on GAO’s Report on More DOD Actions Needed to Address Servicemembers’ Personal Financial Management Issues. GAO-05-638R. Washington, D.C.: May 11, 2005. Defense Base Act Insurance: Review Needed of Cost and Implementation Issues. GAO-05-280R. Washington, D.C.: April 29, 2005. Military Personnel: More DOD Actions Needed to Address Servicemembers’ Personal Financial Management Issues. GAO-05-348. Washington, D.C.: April 26, 2005. Military Personnel: DOD’s Tools for Curbing the Use and Effects of Predatory Lending Not Fully Utilized. GAO-05-349. Washington, D.C.: April 26, 2005. Credit Reporting Literacy: Consumers Understood the Basics but Could Benefit from Targeted Educational Efforts. GAO-05-223. Washington, D.C.: March 16, 2005. DOD Systems Modernization: Management of Integrated Military Human Capital Program Needs Additional Improvements. GAO-05-189. Washington, D.C.: February 11, 2005. Highlights of a GAO Forum: The Federal Government’s Role in Improving Financial Literacy. GAO-05-93SP. Washington, D.C.: November 15, 2004. Military Personnel: Survivor Benefits for Servicemembers and Federal, State, and City Government Employees. GAO-04-814. Washington, D.C.: July 15, 2004. Military Personnel: Active Duty Benefits Reflect Changing Demographics, but Opportunities Exist to Improve. GAO-02-935. Washington, D.C.: September 18, 2002. Military Banking: Solicitations, Fees, and Revenue Potential. GAO/NSIAD-99-72. Washington, D.C.: April 15, 1999. | Servicemembers are engaged overseas in hostile actions that threaten their lives and possibly the future financial security of their families, should they die. To address their financial security needs, some servicemembers have purchased additional life insurance to supplement that offered by the government. Concerns have been raised, though, about solicitation violations, as well as problems in the system for setting up payroll allotments for such insurance. The Department of Defense (DOD) recently published a revised draft directive on solicitation but will not implement the directive until at least 90 days following this GAO report. GAO addressed three primary issues: (1) the extent to which DOD solicitation regulations are being violated; (2) the extent to which DOD personnel are adhering to allotment regulations for the purchase of supplemental life insurance; and (3) the extent to which the new directive addresses ongoing problems in supplemental life insurance solicitation policies. DOD does not know the extent to which life insurance agents violate on-installation commercial solicitation regulations and does not actively disseminate information on all confirmed violations to other parts of DOD or to state insurance regulators. GAO found that violations are occurring. For example, in responses to GAO's 2004 survey of personal financial management program managers, one-quarter said prohibited practices such as misleading sales presentations had occurred occasionally or routinely on their installations in the prior 12 months. Also, between October 2001 and October 2004, DOD revoked agents' on-installation solicitation approval at least 26 times. The reason DOD does not have complete data on violations is that it does not have adequate mechanisms for ensuring the systematic tracking of violations. The dissemination problem is attributable to a lack of oversight by the DOD policy office and an ambiguity in its guidance. DOD cannot develop an effective and efficient process for curbing violations without maintaining accurate data on the number, types, and severity of violations and disseminating confirmed violation data to relevant parties. DOD cannot determine the extent to which DOD personnel adhere to allotment regulations because of problems with DOD's payroll databases and the different ways in which regulations are implemented. DOD's Financial Management Regulations, among other things, restrict who can submit an allotment form for supplemental life insurance. GAO could not determine the number of servicemembers with supplemental life insurance allotments due to database limitations, such as all insurance allotments (for example, for life and automobile) sharing the same code. Contrary to regulations, GAO found finance personnel accepting allotment forms without confirming they came from authorized sources. Some said they did this to ensure that policies started promptly. Database problems limit DOD's visibility over prohibited practices, such as those for group solicitation and the acceptance of allotment forms without proper authorization. In addition, GAO could not substantiate the assertion that servicemembers are prevented from using allotments to purchase supplemental life insurance and has identified reasons why this is probably not a widespread problem. DOD's revised directive on commercial insurance solicitation practices on DOD installations adds new requirements, but does not fully address oversight deficiencies. The revised directive will incorporate the interim policy and practices now in place and, to partially address the problems cited above, will add requirements for gathering and disseminating information on confirmed violations. Those requirements, however, will focus on banned agents only, rather than all confirmed violations. The result will be DOD's continuing inability to identify the number, types, and severity of all violations, or to recognize patterns of violations. The directive will also add requirements that installation commanders inquire into alleged violations of the solicitation regulation. |
USPS’s mission is to provide reliable, affordable, and universal mail delivery and postal retail services to the entire U.S. population as nearly as practicable, regardless of where people live. In the past 5 years, USPS’s delivery workload has increased on average by about 1 million delivery points, or addresses, per year—from 126 million in fiscal year 2006 to about 131 million in fiscal year 2010. USPS organizes its delivery points into city and rural routes. Most city routes fall into one of three main types, as shown in table 1. In its two most recent contracts with the National Rural Letter Carriers Association, USPS agreed to provide about 40,000 right-hand-drive vehicles for many of its rural routes from 2004 to 2013. As of December 31, 2010, USPS had provided rural letter carriers with 33,060 of the contractually required vehicles. According to USPS officials, USPS expects to provide the remaining vehicles by the end of December 2013. According to USPS officials, USPS provides the vehicles to rural carriers with low mileage routes and based on other considerations, such as the vehicle’s proximity to fuel and a USPS vehicle maintenance facility and the adequacy of security for the vehicle. While these agreements significantly expanded the number of rural letter carriers who operated USPS vehicles, as of March 11, 2011, 41,026 rural letter carriers still used their personal vehicles for USPS mail deliveries. USPS is an independent establishment of the federal government, with a Board of Governors, which has responsibilities similar to a corporation’s board of directors, that oversees its operations and expenditures, including those for major capital investments. Over the past 4 years, capital investments declined from $2.7 billion in fiscal year 2007 to $1.4 billion in fiscal year 2010. According to USPS officials, most capital expenditures since fiscal year 2008 have been for investments that are expected to provide cost savings, such as automated mail sorting equipment, and none of these expenditures have been for delivery vehicles. However, as a result of appropriations to GSA under the American Recovery and Reinvestment Act of 2009, USPS received about 6,500 new, more fuel-efficient vehicles from GSA in 2009 and 2010 in a one- for-one exchange for older, less fuel-efficient USPS vehicles. To help address its financial challenges, in March 2010, USPS issued a 10- year action plan, or strategy, in which it proposed, among other things, reducing mail delivery from 6 days to 5 days a week and enhancing its ability to close underutilized postal offices. The plan did not include a strategy for addressing the agency’s delivery fleet needs. USPS also has made operational changes to reduce costs, such as deploying a new system that automatically sorts and sequences large envelopes and magazines into the order in which they are to be delivered. According to USPS, this system reduces the time letter carriers must spend preparing mail for delivery and allows for consolidation of delivery routes into fewer, but longer, routes. USPS is also working to enhance its revenues through initiatives such as the introduction of flat-rate boxes for Priority Mail and volume-based rate incentives to stimulate additional mail use. Operational changes will affect USPS’s future fleet needs. USPS is subject to certain provisions of EPAct 1992 related to federal agency vehicle fleets. The act—designed to improve energy efficiency— requires that 75 percent of light-duty vehicles acquired for federal fleets in major metropolitan areas be capable of using alternative fuels. Alternative fuel vehicles must be capable of using one of a variety of fuel types, such as ethanol, natural gas, propane, biodiesel, electricity, or hydrogen. Legislation subsequently expanded the definition of alternative fuel vehicles to include hybrid vehicles and any other type of vehicle that can achieve a significant reduction in petroleum consumption, as demonstrated by the Administrator of the U.S. Environmental Protection Agency. Legislation also subsequently required that all dual-fuel vehicles use alternative fuel unless they have received a waiver from DOE. DOE grants waivers to agencies that operate vehicles in areas where alternative fuel is unavailable, not available within 5 miles or 15 minutes of travel, or more expensive per gallon than gasoline at the same fuel station. In February 2011, USPS had 306 vehicle maintenance facilities distributed among its seven area offices. According to USPS officials, the agency also uses contractors at private maintenance facilities, such as garages, to perform some of its vehicle maintenance, and their use has increased in recent years, partly because the number of USPS technicians has declined under a hiring freeze. USPS tracks its vehicles’ performance and costs, including maintenance work and costs, through VMAS, according to USPS officials. Field and headquarters offices get periodic VMAS reports on various vehicle performance indicators, and data on vehicle accidents are kept in a separate database. USPS’s Office of Vehicle Programs, which is under the Vice President of Delivery and Post Office Operations, is responsible for fleet management, leasing, maintenance policies and procedures, parts, vehicle research, development and testing, and new vehicle acquisitions. In addition, USPS’s Office of Sustainability coordinates and establishes energy and environmental goals for the fleet. Consistent with legislative requirements, by fiscal year 2015 (compared with a fiscal year 2005 baseline), USPS’s goals are to reduce petroleum fuel use by 20 percent and increase alternative fuel use by 10 percent annually (for an overall increase of 100 percent over the 10-year period). In its fiscal year 2010 Strategic Sustainability Performance Plan, USPS reported that it did not expect to meet its 2015 petroleum reduction goal. Specifically, USPS reported that from fiscal years 2005 through 2009, its delivery fleet’s use of petroleum increased because of growth in the number of its delivery addresses. According to USPS, its proposal to reduce delivery from 6 days to 5 days a week has the largest petroleum reduction potential, but even if Congress approves the proposal, it would not be likely to meet its fiscal year 2015 goal. In contrast, USPS reported that it had already met its second goal because, from fiscal years 2005 through 2009, its use of alternative fuel increased by 114 percent. The number of half ton and smaller vehicles in USPS’s delivery fleet— mostly LLVs, flex-fuel vehicles (FFV), and minivans—has remained relatively constant over the past 5 fiscal years, ranging from 182,517 to 189,712 vehicles, despite about 13,400 fewer delivery routes. The number of delivery vehicles peaked in fiscal year 2008, before falling slightly, and grew overall by 3,487 vehicles, or about 2 percent, over the 5-year period. Despite some recent vehicle purchases, the majority of USPS’s fleet consists of LLVs, which are approaching the end of their 24-year expected operational lives. Produced by Grumman, the LLVs were acquired from 1987 through 1994, before EPAct 1992’s light-duty vehicle acquisition percentage requirements went into effect in fiscal year 1996. The LLVs have light-weight and long-lasting aluminum bodies mounted on a General Motors chassis and are powered by a 4-cylinder gasoline engine. USPS acquired the second major segment of the delivery fleet, FFVs, in 2000 and 2001, after EPAct 1992’s acquisition requirements went into effect. The FFVs have an aluminum body that is similar to that of the LLV. According to USPS officials, FFVs are mounted on a Ford Explorer platform and are powered by a 6-cylinder engine that is “flex-fuel” capable, meaning that it can use gasoline or E85, a mixture of gasoline and ethanol (85 percent). LLVs and FFVs, which together make up about 84 percent of USPS’s delivery fleet, are easily identifiable as mail delivery vehicles (see fig. 2). These vehicles are built on a light truck chassis (light-duty vehicles) and have a cargo capacity of 1,000 pounds with 108 cubic feet of cargo space. Key features of both include right-hand drive, an open interior for storing mail, and sliding doors. According to USPS, right-hand-drive vehicles are necessary for curbline delivery so that letter carriers can safely deliver mail directly to mail boxes without leaving their vehicles. Because right- hand-drive vehicles can be used for all routes, they also provide operational flexibility, allowing managers to move them to any route when, for example, another right-hand-drive vehicle is out of service for maintenance. In addition, Vehicle Programs officials told us that a standardized design minimizes training requirements and facilitates the establishment of partnerships with part suppliers. The LLVs’ and FFVs’ bodies were made to withstand harsh operating conditions. USPS officials explained that the typical delivery operating cycle is extremely hard on vehicles because of the large number of stops and starts each day (an average of about 500 stops and starts per delivery route). In addition, when the letter carrier frequently exits and re-enters the vehicle, doors are opened and closed, and keys are turned in the door locks and ignition far more often than in a typical personal vehicle. The third major segment of the delivery fleet, shown in figure 3, consists of commercially available minivans. While USPS modified these minivans for use as delivery vehicles, according to USPS officials, they do not have right-hand drive and therefore cannot be used on all routes, reducing operational flexibility. In addition, commercially available vehicles are not built to withstand the harsh operating conditions of mail delivery and, consequently, the minivans have an expected operating life of 10 years. Most of USPS’s minivans are E85-capable, meaning that they can operate on either E85 or gasoline. Table 2 provides a profile of the three main types of delivery vehicles that collectively account for about 96 percent of USPS’s 192,305 delivery vehicles. Other types of vehicles are used to deliver mail in certain areas. These vehicles include sport utility vehicles and larger 2-ton trucks, which typically are used for mail collection, not deliveries. According to Vehicle Programs officials, USPS leased some delivery vehicles (minivans) in the past, but it now owns all of its delivery vehicles. In part, this is because USPS’s custom-built LLVs and FFVs are not commercially available through leasing programs. However, even when vehicles are commercially available, Vehicle Programs officials stated that, according to USPS’s lease-versus-buy analyses for recent purchases, such as its fiscal year 2008 acquisition of minivans, purchasing these vehicles has been more cost-effective than leasing them because USPS intends to own the vehicles for a long time. About 78 percent of USPS’s delivery vehicles use gasoline or diesel exclusively, while the other 22 percent are capable of operating with an alternative fuel. As shown in table 3, E85-capable vehicles (FFVs and minivans) make up about 20 percent of the delivery fleet while, collectively, the other alternative fuel vehicles—typically, converted LLVs—account for about 2 percent of the delivery fleet. According to Vehicle Programs officials, a typical LLV uses an equivalent of about two gasoline gallons of fuel a day. According to USPS officials, while USPS has a variety of pilot programs underway to explore other alternative fuel vehicle technologies (other than E85-capable vehicles), almost all of its other alternative fuel vehicles are capable of using compressed natural gas in addition to gasoline. Since 2000, USPS has consistently purchased E85-capable delivery vehicles to satisfy the legislative requirement that at least 75 percent of its vehicle acquisitions be alternative fuel vehicles, and it had a total of 39,149 E85-capable vehicles in its delivery fleet as of September 30, 2010. According to Vehicle Programs officials, USPS purchased E85-capable vehicles because even though prior to 2004 each vehicle cost about $300 to $500 more than a comparable gasoline-only vehicle when they were acquired, purchasing E85-capable vehicles allowed USPS to meet the requirements of EPAct 1992 for less than it would have had to spend to acquire other types of alternative fuel vehicles. In addition, according to Vehicle Programs officials, the agency expected that E85 eventually would be widely available throughout the United States. However, according to DOE data, E85 suppliers are concentrated in a few regions of the country (see fig. 4.) and, as of December 2009, E85 was not available at 99 percent of U.S. fueling stations. USPS increased its use of E85 from about 324,000 gasoline gallon equivalents in fiscal year 2005 to about 822,000 gasoline gallon equivalents in fiscal year 2009—an increase of about 154 percent—but the limited availability of E85 nationwide has hindered its greater use of this fuel. For example, according to USPS officials, letter carriers who drive the 720 E85-capable vehicles USPS deployed around Minneapolis and St. Paul, Minnesota, face few problems because E85 is widely available there (see fig. 5). However, because of operational requirements, many E85-capable delivery vehicles are used in other areas, such as New England, that currently have very limited E85 availability. According to Vehicle Programs officials, to increase E85 use, USPS has redeployed some E85- capable vehicles within local areas so that they could be fueled with E85. However, Vehicle Programs officials said that USPS has not undertaken large-scale redeployments of these vehicles because a cross-country move costs about $1,500 to $2,500 per vehicle. Because of E85’s limited availability, USPS has sought annual waivers from DOE and, according to USPS data for fiscal year 2010, obtained waivers that permit it to operate 21,495 of its 40,072 E85-capable vehicles—or about 54 percent—exclusively on gasoline. The remaining 18,577 E85-capable vehicles operate without waivers (unwaived vehicles) and, thus, are expected to operate exclusively on E85. However, as described below, because operational costs are higher for using E85 than for using gasoline, even when E85-capable vehicles are located in areas where E85 is available, USPS does not always use E85, as acknowledged by Vehicle Programs officials. According to DOE officials, apart from cost considerations, DOE will not grant a waiver to the requirement to use alternative fuel when E85 is available within 5 miles or 15 minutes of travel. In January 2009, USPS issued a policy stating that vehicles should be fueled with E85 when (1) E85 is available either to an entire delivery unit or on a specific route when no deviation from the route or no additional travel time is required to acquire E85 and (2) E85 costs the same or less than gasoline. In July 2009, based on DOE’s draft guidance on E85 waivers, USPS issued a related memo requesting delivery programs managers to determine where E85 was located within 15 minutes or 5 miles of E85-capable vehicles and priced equal to or less than regular unleaded gas. The memo advised the managers that E85 must be used if these conditions were met. However, Vehicle Programs officials acknowledged that, due to operational requirements and cost issues, this latter requirement is not always followed. Instead, according to a USPS official, managers are expected to take into account the language in both the January 2009 policy and July 2009 memo while considering operational requirements, such as additional labor costs, that may be incurred by letter carriers who must deviate from their routes to fuel with E85. DOE officials are aware that USPS’s E85 policy varies from DOE’s criteria for approving waivers and that USPS is not fully complying with legislative requirements to fuel unwaived E85-capable vehicles with E85. However, they acknowledged that, unlike other agencies that receive appropriations for fuel expenditures, USPS must pay for its fuel costs through income earned from its operations. USPS’s use of E85-capable vehicles has resulted in higher operating costs regardless of whether the vehicles are fueled with E85 or gasoline. First, when USPS contracted to purchase its FFVs in 2000, E85 capability was available only in vehicles with 6-cylinder engines. According to USPS officials, the FFVs’ 6-cylinder engines are heavier and less fuel efficient than the LLVs’ 4-cylinder engines, resulting in higher fuel consumption and costs—regardless of the type of fuel used. Second, because of E85’s lower energy density, USPS’s FFVs are about 27 to 30 percent less fuel efficient when fueled with E85 than when fueled with gasoline, according to Vehicle Programs officials. Thus, it takes more gallons of E85 than gasoline to drive the same number of miles. Furthermore, although E85 generally costs less per gallon than gasoline, the difference in cost generally has not been sufficient to offset the higher costs associated with E85’s lower fuel efficiency (see fig. 6). Based on USPS’s information that it consumed about 587,000 gallons of E85 in fiscal year 2010, we estimate that USPS incurred about $135,700 more in costs in fiscal year 2010 by using E85, instead of gasoline. The reasons that USPS decided to purchase E85-capable vehicles to meet legislative requirements and the challenges it faces in fueling these vehicles with E85 are similar to those of many other federal agencies. For example, according to DOE data, 87 percent of federal alternative fuel vehicles acquired to meet EPAct 1992 requirements in fiscal year 2009 were E85-capable vehicles. Furthermore, in fiscal year 2010, approximately 55 percent of E85-capable vehicles acquired to meet EPAct 1992 requirements in all federal fleets received a waiver, allowing them to operate exclusively on gasoline, according to DOE. In addition, according to DOE officials, a recent DOE analysis—currently in draft—has found that the majority of federal agencies are not in compliance with the requirement to fuel unwaived E85-capable vehicles with E85. Officials from UPS and FedEx Express—companies with missions similar to USPS’s—told us that they see few benefits to owning and operating E85- capable vehicles and, as a result, they have not purchased any E85-capable vehicles. Instead, they said that despite higher acquisition costs, their companies have purchased small numbers of other alternative fuel vehicles—electric, hybrid, and compressed-natural-gas-capable vehicles— to lower their companies’ fuel costs, reduce their emissions, and enhance their corporate image. Apart from its experiences with E85-capable vehicles, USPS has a variety of limited experiences with other types of alternative fuel delivery vehicles. Collectively, these vehicles accounted for about 2 percent (3,490 vehicles) of its delivery fleet as of September 30, 2010. These vehicles include 3,401 LLVs and 2-ton trucks converted to run on compressed natural gas, 34 LLVs converted to run on propane, 11 conventional hybrid electric vehicles, 42 plug-in electric vehicles, and 2 hydrogen fuel cell vehicles. According to Vehicle Programs officials, while USPS has integrated these alternative fuel vehicles into its delivery fleet, it has not invested more heavily in alternative technologies for several reasons. First, the officials stated that USPS is the only U.S. agency that requires right-hand-drive vehicles to fulfill its mission and, because these vehicles are not available commercially, the requirement limits vehicle choices, regardless of how the vehicles are fueled. Second, USPS officials and other experts explained that purchasing alternative fuel vehicles instead of gasoline- powered vehicles likely would result in higher estimated lifecycle costs, largely because their acquisition costs would be significantly higher. While purchasing some types of alternative fuel vehicles could reduce USPS’s fuel costs, they said, the fuel savings would be unlikely to offset the higher acquisition costs of the vehicles over their operating lives because, on average, USPS’s delivery vehicles travel only about 17 miles a day. Third, Vehicle Programs officials told us that the limited availability of alternative fuels and the high costs of installing fueling infrastructure for them—such as on-site charging stations for electric vehicles—have made it difficult to elect to invest in or operate these vehicles. Finally, they noted that USPS has experienced problems obtaining technological support and parts for alternative fuel vehicles. For example: High acquisition costs have prohibited larger purchases of hybrid vehicles. When we conducted our site visits, USPS had 12 hybrid vehicles in its delivery fleet: two 2-ton hybrid trucks in New York state that were converted to a hybrid power train that USPS received in 2009, and 10 Ford Escape hybrids in California that were purchased in 2005. The 2-ton vehicles were converted to hybrid vehicles through partnerships with manufacturers at no cost to USPS, and it was able to purchase the 10 Ford Escape hybrids at a cost of about $27,700 in 2010 dollars. According to USPS officials, all of these vehicles have significantly better fuel economy than similar nonhybrid vehicles in its delivery fleet. However, Vehicle Programs officials stated that because hybrid vehicles typically cost more to acquire—$9,000 more in the case of a 2011 Ford Escape hybrid compared to the nonhyrid version of the same vehicle—USPS has not invested heavily in these vehicles. Limited fueling infrastructure and difficulty obtaining parts have caused USPS to scale back its use of compressed natural gas in delivery vehicles. In the 1990s, USPS converted about 7,300 LLVs to operate on compressed natural gas. However, because of fueling infrastructure issues and parts supply challenges, as of September 30, 2010, USPS had removed this capability from all but 3,372 of these vehicles. At the conclusion of our review, 42 of these vehicles were being operated in Corpus Christi, Texas, where the city, to increase the use of this fuel, helped install needed fueling infrastructure and provided $400 of fuel for each of these 42 compressed-natural-gas-capable vehicles (about 200 days of fuel per vehicle, according to Vehicle Programs officials). The manager of the local vehicle maintenance facility told us that operating these vehicles on compressed natural gas has reduced USPS’s fuel costs and, consequently, in January 2011, he was in the process of obtaining 37 additional compressed-natural-gas-capable vehicles from other locations in Texas. In contrast, USPS’s experience in Huntington, New York, illustrates what Vehicle Programs officials described as more typical challenges related to USPS’s use of compressed natural gas. Specifically, in the mid-1990s, all of the LLVs at the Huntington post office were converted to run on compressed natural gas. USPS officials said the vehicles were run on this fuel for only about 6 months because—almost immediately—the vehicles had reliability issues and they faced challenges obtaining replacement parts. Parts supply issues caused Ford to recall 500 electric vehicles soon after their deployment as USPS delivery vehicles. In 1999, USPS, through a partnership with DOE and several regional and local agencies in California and New York state, acquired 500 plug-in electric vehicles from Ford. However, Ford recalled the vehicles soon afterwards because the vehicle battery manufacturer stopped making the needed batteries. Ford replaced them with gasoline-powered minivans. For additional information on USPS’s experiences with various types of alternative fuel vehicles, see appendix II. USPS’s current approach is to sustain operations of its delivery fleet— through continued maintenance—for the next several years, while planning how to address its longer term delivery fleet needs. The current approach also anticipates purchasing limited numbers of new, commercially available minivans, as necessary, to meet its operational requirements. According to Vehicle Programs officials, USPS adopted its current approach in December 2005 after senior management and a Board of Governors subcommittee decided not to initiate a major replacement or refurbishment of the delivery fleet. At that time, USPS estimated that fleet replacement—one of the five options considered—would cost $5 billion for about 175,000 vehicles. Planning and executing a custom-built vehicle acquisition would take 5 to 6 years from initially identifying the vehicles’ specifications and negotiating with manufacturers through testing and deploying the vehicles, according to Vehicle Programs officials. USPS also elected not to refurbish its fleet, another option considered. According to a USPS contractor, the agency could have delayed purchasing new vehicles for at least 15 years if it refurbished its existing LLVs and FFVs (i.e., replaced nearly all vehicle parts subject to the effects of wear and aging) over a 10-year period. In 2005, the contractor estimated that refurbishing these vehicles would cost $20,000 per vehicle—a total cost of about $3.5 billion, assuming that 175,000 vehicles were refurbished. According to Vehicle Programs officials, USPS chose to sustain its operations through continued vehicle maintenance pending operational and financial developments and evolving advancements in vehicle technologies. Several senior USPS officials told us the agency does not intend to begin a major vehicle acquisition until 2018 at the earliest, largely because of financial constraints. As discussed earlier, USPS’s financial condition has since declined substantially and although USPS issued a 10-year action plan in March 2010 for improving its financial viability, the plan did not describe a strategy for addressing its delivery vehicle needs. Federal capital planning principles emphasize the importance of strategically linking agency goals and objectives, such as those outlined in USPS’s action plan, to an agency’s capital investment needs; evaluating the capacity of existing agency assets; and identifying alternatives to bridge gaps between current and needed capabilities. USPS has not analyzed how operational changes proposed in its 10-year plan, including a potential shift in delivery from 6 days a week to 5 days, would affect its fleet needs or the consequences of its decision to delay the fleet’s replacement or refurbishment. In addition, it has not developed a plan for financing the strategy it eventually chooses. However, without the inclusion of this major capital investment need in its action plan or other documented analysis, USPS’s future fleet needs are unclear, as is USPS’s assessment of how urgently it should replace, or refurbish, much of its aging delivery fleet and how it can finance such a major capital investment. According to Vehicle Programs and senior USPS officials, the Vehicle Programs office is in the early stages of developing a new proposal for addressing the agency’s delivery fleet needs. These officials stated that the proposal will likely explore several alternatives, including continuing to maintain the current fleet, refurbishing the LLVs and FFVs, or, possibly, undertaking a major acquisition of new vehicles. The proposal also is expected to address a June 2010 USPS Office of Inspector General recommendation that USPS replace about 20,000 delivery vehicles whose maintenance costs exceeded $5,600 during each of 2 consecutive fiscal years. Furthermore, Vehicle Programs officials stated that the proposal will discuss strategies for incorporating alternative fuel capabilities into USPS’s next major fleet acquisition. According to Vehicle Programs officials, USPS expects to present its proposal for consideration by the USPS Capital Investment Committee later this fiscal year. While USPS intends to examine ways to comply with EPAct 1992’s acquisition requirements in its next large-scale acquisition of vehicles, according to Vehicle Programs officials, life-cycle costs are significantly higher for nearly all currently available alternative fuel vehicles than for gasoline-powered vehicles. This is largely because, given the delivery fleet’s low annual mileage, the savings on fuel associated with alternative fuel vehicles would not be sufficient to offset the vehicles’ higher acquisition costs. Consequently, these officials told us a large-scale acquisition of alternative fuel vehicles (other than E85-capable vehicles) is not likely to be financially viable for USPS. In addition, as discussed earlier, USPS has concerns about undertaking a large-scale acquisition of most alternative fuel vehicles because of their potentially higher infrastructure and operating costs and uncertainties about the availability of parts and long-term support for rapidly evolving alternative vehicle technologies. For example, USPS expressed concern about two recent bills introduced in Congress. One of these bills would have authorized about $2 billion for, among other purposes, the purchase of at least 20,000 electric delivery vehicles and the installation of 24,000 charging stations, while the other bill would have required USPS to ensure that within 5 years at least 75 percent of its fleet would consist of electric vehicles but did not authorize funding. USPS stated that it is concerned about operating a large portion of its fleet exclusively on electricity because of the potential for mail delivery disruptions if local electric grids fail. In addition, USPS expressed concerns about the availability of parts and potentially high vehicle acquisition, infrastructure, and battery- replacement costs. Because of these concerns, USPS commented that if legislation related to the electrification of its fleet is enacted, it would prefer funding for a pilot program of roughly 1,000 electric vehicles that it would conduct in consultation with DOE. USPS may be able to meet EPAct 1992’s light-duty vehicle acquisition requirements in future vehicle acquisitions by purchasing E85-capable vehicles without incurring the additional costs that it faced in its previous acquisitions of these vehicles. According to DOE officials, more E85- capable vehicles are now available with 4-cylinder engines, and these engines now can be acquired commercially for little to no additional cost. However, as discussed earlier, USPS and other federal agencies often have faced challenges fueling vehicles with E85. Other federal agencies also face challenges complying with fleet requirements. As we recently reported, conflicting statutes limit federal fleet managers’ flexibility to reduce their fleets’ petroleum use and greenhouse gas emissions. For example, we reported that federal requirements to purchase alternative fuel vehicles can undermine the requirement to reduce petroleum consumption because the fuels’ limited availability results in agencies using gasoline to fuel alternative fuel vehicles. In other work, we reported that federal fleet requirements do not provide agencies with a means to set priorities between conflicting requirements. As a result, we recommended that the Secretary of Energy, in consultation with other federal agencies, propose legislative changes to resolve the conflicts and set priorities for complying with the multiple federal fleet requirements and goals for reducing petroleum consumption, reducing emissions, managing costs, and acquiring advanced technology vehicles. DOE and GSA are working with other federal agencies to create a broader, performance-based approach to improve fuel efficiency and thereby reduce petroleum consumption and greenhouse gas emissions. The new performance-based approach is intended to provide federal managers with greater flexibility in improving the fuel efficiency of their agencies’ vehicle fleets. Vehicle Programs officials stated that, in their view, the best way for USPS to meet national sustainability requirements for reduced emissions without incurring significant costs may be to invest in highly fuel-efficient gasoline-powered vehicles. Such an outcome could be possible for future USPS delivery fleet acquisitions given increased legislative flexibility in the definition of what constitutes an alternative fuel vehicle. Specifically, the National Defense Authorization Act of 2008 expanded this definition by permitting federal agencies to meet EPAct 1992’s fleet acquisition requirements for light-duty-alternative-fuel vehicles by purchasing vehicles that the Environmental Protection Agency has demonstrated would achieve a significant reduction in petroleum consumption. Based on the agency’s demonstration, any low-greenhouse-gas-emitting vehicle in locations that qualify for a DOE waiver would be considered an alternative fuel vehicle. According to manufacturers, environmental organizations, and other experts we interviewed, gasoline-powered vehicles are becoming more fuel efficient and producing fewer emissions. As a result, newer gasoline- powered vehicles are likely to be more fuel-efficient than USPS’s LLVs and FFVs. In addition, purchasing highly efficient gasoline vehicles would eliminate the fueling infrastructure and parts supply challenges USPS has faced with some alternative fuel vehicles. However, because the Environmental Protection Agency evaluates only commercially available vehicles, at present, there are no low-greenhouse-gas-emitting right-hand- drive vehicles available that have been determined to meet EPAct 1992’s fleet acquisition requirements for light-duty vehicles. Consequently, if USPS decides to pursue such a vehicle in its next acquisition of custom- built delivery vehicles, it would need to work with the manufacturer and the Environmental Protection Agency to determine if such a vehicle could meet its operational needs while being considered a low-greenhouse-gas- emitting vehicle. Recognizing that vehicles have become more fuel efficient, in February 2011, USPS issued two solicitations to “repower” two existing LLVs by installing new fuel efficient engines; new transmissions; and all related equipment, such as new cooling and exhaust systems. One of the solicitations is for the repowerment of an existing LLV with a fuel-efficient gasoline engine, while the other is to replace another LLV’s existing gasoline engine with a fuel-efficient diesel engine. According to the solicitations, each of the two repowered vehicles must have (1) one of the best fuel economy ratings possible compared to similar commercially available vehicles and (2) operate on commercially available fuel. A Vehicle Programs official told us that USPS expects to award these contracts in April 2011 and to receive the vehicles in late 2011. According to a Vehicle Programs official, through operating these vehicles, USPS hopes to gain experience on how new, more fuel efficient engines would affect the agency’s fuel efficiency and delivery operations. USPS’s well-established maintenance program has allowed it to continue to meet its delivery mission with its current fleet of delivery vehicles. The program requires a minimum of two preventive maintenance inspections annually for each of USPS’s delivery vehicles. Parts that are determined to be sufficiently worn or are not expected to last until the next inspection are expected to be replaced. In addition to regularly scheduled maintenance, unscheduled maintenance occurs on the vehicles when needed to (1) resolve problems discovered when letter carriers perform daily inspections of vehicles prior to beginning their routes or (2) fix vehicles that break down while carriers are delivering mail. So that letter carriers have vehicles available to use while their vehicle is being serviced, about 3 percent of USPS’s delivery vehicles are held in a maintenance reserve. According to USPS Finance officials, USPS incurred about $1.05 billion in maintenance and fuel costs for its delivery fleet in fiscal year 2010—which comes to about $18 per vehicle per day. This estimate includes about $750 million in maintenance costs and about $300 million in fuel costs. The USPS Office of Inspector General, which frequently reports on the vehicle maintenance program, recently reported that USPS’s approach of continuing to maintain its current delivery fleet is operationally viable and generally cost-effective, given USPS’s financial circumstances. Similarly, our custom query of USPS’s VMAS found that delivery vehicles’ direct maintenance costs (costs that can be directly attributed to work on a particular vehicle) have risen only slightly over the past 5 fiscal years, from a low of about $2,453 per vehicle in fiscal year 2007 to a high of $2,587 per vehicle in fiscal year 2010 (see fig. 7). These direct maintenance costs are somewhat understated because, according to USPS data, about 6 percent of USPS’s total maintenance costs—all due to maintenance performed by contractors—are not entered into VMAS. USPS’s success in keeping its aging delivery fleet operational is also due to a steady supply of parts for its LLVs and FFVs, according to Vehicle Programs officials. Since USPS owns more than 160,000 of these vehicles, it has worked with suppliers to ensure that parts for these vehicles continue to be available. During our site visits, USPS’s vehicle maintenance managers and technicians routinely informed us that this steady parts supply will enable them to maintain both types of vehicles well into the future. According to Vehicle Programs officials, because of the age of the vehicles, nearly all the LLVs have had their engines and transmissions replaced at least once, and often twice, and some of the LLVs have had nearly all their parts replaced, including their frames. USPS officials stated that it is more cost-effective to replace delivery vehicle parts as they are needed than to undertake a general vehicle refurbishment, in which all major parts are replaced at one time, because replacing parts as needed avoids costs resulting from premature replacements. While none of the other fleet operators we spoke with keep their vehicles as long as USPS plans to keep its LLVs and FFVs, most agreed that replacing parts as needed can keep vehicles operational at less cost than purchasing new vehicles. According to numerous USPS headquarters and field officials at vehicle maintenance facilities and post offices, as well as letter carriers, USPS’s vehicle maintenance program has thus far supported USPS’s requirements to deliver mail 6 days a week. In part this is because, according to officials at a number of vehicle maintenance facilities, the LLV is a well-designed, highly functional vehicle that is easy for mechanics to work on, and its long-lived aluminum body has held up well. While some vehicle maintenance facility officials noted problems with the FFVs—such as engine issues that led to the early replacement of some engines—in general, they stated that the FFVs also continue to be reliable and operational. USPS employees at a majority of the eight vehicle maintenance facilities and some post offices we visited told us that the delivery vehicles in their locations are in good condition and that, in their view, the vehicles can continue to deliver mail without major operational interruptions for at least several more years. Vehicle maintenance facility managers, technicians, and letter carriers routinely stressed that they had no safety concerns about the vehicles despite their advanced age. The primary advantage of USPS’s current approach for addressing its delivery fleet needs is that it has allowed USPS to avoid a near-term, major capital expenditure that it cannot afford. However, this approach has a number of trade-offs. One trade-off is that USPS has incurred high costs to maintain some of its delivery vehicles. Our custom query of VMAS showed that, while most delivery vehicles (about 77 percent) incurred less than $3,500 in annual maintenance costs in fiscal year 2010, about 3 percent (or 5,349) of these vehicles had more than $7,000 in maintenance costs. In addition, 662 vehicles had more than $10,500 in maintenance costs in fiscal year 2010—more than one-third the $31,000 per vehicle replacement cost USPS currently estimates (see fig. 8). According to USPS officials, in most cases, they repair an LLV or FFV rather than replace it with a commercially available minivan because of the continuing need for right- hand-drive vehicles, which are not commercially available. Another reason that some vehicles are incurring high maintenance costs is that USPS is replacing the frames of LLVs that have significantly corroded, especially in locations with severe winter weather, such as the Midwest. In 2008, USPS began requiring that the frames of all LLVs in high-corrosion locations be visually inspected and measured annually, using an ultrasonic device that determines the thickness of the frames at certain points. Frames with holes through the metal were to be replaced immediately, while frames with less than a desired thickness at certain key points were expected to be replaced within 6 months. According to Vehicle Programs officials, at least 4,489 LLV frames have been replaced from fiscal years 2008 through 2010. Replacing a frame is relatively expensive, not only because of the cost of the frame but also because a replacement is labor- intensive, since every part of the vehicle must be removed and reinstalled (see fig. 9). According to Vehicle Programs officials, it typically costs about $5,000 to replace an LLV frame. None of the other nonpostal fleet managers we spoke with have replaced their vehicles’ frames, and some of these managers suggested that the need to do so is a key indication that it is time to replace—not repair—a vehicle. In addition to its overall maintenance costs, USPS’s unscheduled maintenance costs have increased steadily, according to data from its VMAS reports. Unscheduled maintenance can result in delays in mail delivery and operational costs, such as overtime expenses. To reduce operational costs, USPS, like other fleet operators, attempts to minimize unscheduled maintenance. USPS’s goal is to ensure that no more than 20 percent of its total annual maintenance costs are for unscheduled maintenance. However, according to a September 30, 2010, VMAS report, about 31 percent of USPS’s annual maintenance costs were for unscheduled maintenance—11 percentage points more than USPS’s goal. Furthermore, USPS has not met its unscheduled maintenance goal in any of the last 6 fiscal years. USPS’s unscheduled maintenance costs also are likely to be higher than the amounts reflected in VMAS because, according to headquarters officials and some vehicle maintenance facility managers we spoke with, nearly all of the 6 percent of maintenance costs that are currently not captured in VMAS are for unscheduled maintenance. Thus, for fiscal year 2010, USPS’s unscheduled maintenance costs could have been as high as about 37 percent of its total maintenance costs. During our site visits, several local postal officials told us they are experiencing more operational issues due to vehicle breakdowns, which can lead to increased overtime costs. USPS could not provide us with the costs of these operational issues because USPS’s time-keeping systems do not link costs such as overtime incurred by postal supervisors and letter carriers to vehicle breakdowns. We discussed the feasibility of capturing these costs with Vehicle Programs officials. They said that VMAS performance indicator reports track unscheduled maintenance, and management is aware of the operational impacts and costs. In addition to the increasing rate of unscheduled maintenance, we identified some instances of maintenance issues during our site visits. For example: We saw two rusted and partially missing body mounts on an LLV in Florida, which was on a lift when we visited in October 2010. While the frame bolts, which hold the frame to the vehicle, were intact, the lower half of the body mounts and retaining washers were missing. A maintenance assistant at the site indicated that, given the severity of the rust (see fig. 10), the problem could not have occurred in the 5 months since the LLV’s last scheduled inspection in May 2010. Additionally, while we did not observe this issue, this individual told us that nearly all 31 LLVs at his post office had bald tires when he assumed the maintenance assistant position in 2009. When we visited a vehicle maintenance facility in New York state, technicians were replacing two severely corroded LLV frames with holes through the metal. The manager of this facility informed us that frames in this condition (see fig. 11) should have been replaced during a previous preventive maintenance inspection. According to the manager, this did not occur, possibly because the inspections were done by contractors who did not follow USPS’s requirements for inspecting frames. According to the manager, the vast majority of the 2,800 delivery vehicles at this vehicle maintenance facility are sent to contractors for maintenance because he has chosen to focus his facility’s limited resources on servicing USPS- owned tractor trailers used for hauling mail. Similarly, officials at a Minnesota vehicle maintenance facility told us that they are not following USPS’s requirements for replacing frames whose thickness in key spots indicates weakness; instead, they said, facility personnel replace frames only when they have one or more holes through the metal. According to officials at this facility, given the state’s severe winter weather, the facility has a large number of vehicles with thin frames. While these vehicles meet USPS’s frame replacement requirements, officials at the maintenance facility told us that they do not have the resources (typically $5,000 per vehicle) to replace them all in the short term. USPS’s current approach for dealing with its aging delivery fleet has significantly increased the number of left-hand-drive vehicles in the delivery fleet over time. Specifically, because USPS does not currently have the funds available to acquire new custom-built, right-hand-drive vehicles, it now has 22,100 left-hand-drive minivans in its delivery fleet. According to Vehicle Programs officials and officials at two post offices that had a mix of minivans and right-hand-drive vehicles, minivans can pose a problem because, since they cannot be effectively used on the more than 50,000 delivery routes that require right-hand drive, they reduce USPS’s operational flexibility. Furthermore, during our site visits, officials at several vehicle maintenance facilities stated that, unlike for LLVs and FFVs, USPS has encountered maintenance challenges for its minivans. According to these officials, maintaining the older minivans—some of which have met or exceeded their expected 10-year operating lives—has become increasingly difficult, and they are experiencing problems securing parts. According to Vehicle Programs officials, manufacturers typically produce parts for commercially available vehicles for 10 years, and officials told us that USPS does not have sufficient numbers of minivans to maintain its own market for parts for subsequent years, as it does for the LLVs and FFVs. Consequently, some of the older minivans are being used as salvage for parts for operational vehicles (see fig. 12). While new USPS delivery vehicles could potentially provide environmental benefits such as reduced emissions and increased fuel efficiency, it is not possible to quantify these benefits because USPS has not decided when, what type of vehicles and how many it may acquire, or how many old vehicles it may replace. Furthermore, such an analysis would depend on other factors, such as the relative extent to which USPS uses these new vehicles compared to the retired vehicles. Nevertheless, it is likely that new delivery vehicles would (1) be more fuel efficient than the LLVs and FFVs, and thus to some extent produce lower greenhouse gas emissions, and (2) meet more stringent federal light-duty emissions standards for carbon monoxide and other particulate matter. According to Vehicle Programs officials, USPS’s current fleet approach also makes it more challenging and costly to incorporate design improvements into its fleet that could provide operational benefits. Such improvements could include design features that could increase letter carriers’ comfort and safety, such as features designed to reduce blind spots when the carriers merge from the right side of the road. USPS’s financial condition poses a significant barrier to its ability to fund a major acquisition of its delivery fleet—a cost USPS recently estimated would be about $5.8 billion to replace about 185,000 delivery vehicles with new gasoline-powered custom-built vehicles, at a cost of about $31,000 per vehicle (in 2011 dollars). As we have reported, continuing operational losses have constrained funding for USPS’s capital investments. USPS’s annual purchases for property and equipment have steadily declined over the past 4 years, from $2.7 billion in fiscal year 2007 to $1.4 billion in fiscal year 2010. For fiscal year 2011, USPS budgeted $1.3 billion for capital investments and reported that expenditures for these investments will continue to decline as USPS seeks to conserve its cash. USPS projects an end-of-year cash shortfall of $2.7 billion for fiscal year 2011, meaning that it does not expect to have sufficient cash to meet all of its financial obligations, jeopardizing its operations. At the same time, while federal capital planning principles emphasize the importance of, among other actions, evaluating the capacity of existing assets and identifying alternatives to bridge the gap between current and needed capacities, as discussed previously, USPS has not developed a strategy for how and when it will invest in a major acquisition of new delivery vehicles. In the past, USPS funded major capital investments through a combination of (1) net income from its earnings from postage and other postal products and services, (2) rate increases designed to increase its income, or (3) debt financing. However, these methods are likely to be inadequate to finance a major delivery fleet replacement in the foreseeable future, for the following reasons: Net income. Although USPS can retain earnings that could be used to finance a major acquisition of delivery vehicles, such earnings appear unlikely because it projects a $6.4 billion loss for fiscal year 2011 and continuing large financial losses for the foreseeable future. USPS expects revenues to stagnate in the next decade with losses due to continued declines in mail volumes—particularly for profitable First-Class Mail, its core product. This means that USPS can no longer rely, as it once did, on growth in mail volumes to help cover its costs. Meanwhile, USPS’s progress in reducing its costs through rightsizing its operations and realigning its workforce is limited by a combination of stakeholder resistance and statutory requirements, as we have previously reported. Rate increases. Rate increases also appear unlikely to generate sufficient revenues to fund a major delivery fleet replacement because under the Postal Accountability and Enhancement Act of 2006, such increases are now generally limited by an inflation-based price cap on USPS’s market- dominant products—products that generate close to 90 percent of its revenue. Moreover, even if the price cap did not constrain rate increases, large rate increases could be self-defeating because they could potentially trigger large, permanent declines in mail volumes. Debt financing. USPS’s outstanding debt at the end of fiscal year 2010 was $12 billion, and it expects to use the remaining $3 billion of its $15 billion in borrowing authority in fiscal year 2011 to fund non-vehicle-related expenditures. By statute, USPS is generally not subject to federal contracting and budgeting laws. As a result, USPS officials told us that USPS has the authority to accept grant funding and to enter into joint procurements and other partnerships to assist in a major delivery fleet replacement. However, USPS’s use of federal or state grants could have public policy implications, because USPS is supposed to be self-sustaining and to cover its operating costs with post-related revenues. In addition, fair competition issues or concerns about sharing sensitive procurement information could arise if USPS actively pursued a partnership or joint procurement. USPS and DOE officials stated that there are few opportunities for USPS to receive federal grant funding to help it purchase vehicles, in part because federal grants are typically targeted to state, local, or city governments, or to nonprofit or educational organizations. In the past, USPS has obtained state or local grants for limited numbers of alternative fuel vehicles or related infrastructure, and in one case it received some financial assistance from DOE. Specifically, in 1999, USPS partnered with a number of entities, including the California South Coast Air Quality Management District, DOE, and others, on an agreement formed to reduce air pollution in California. This agreement included about $9 million in funding subsidies from these entities to purchase 500 electric vehicles from the Ford Motor Company (Ford) as well as to install charging stations for these vehicles. USPS paid an additional $11.6 million to Ford for these vehicles. According to USPS officials, the $9 million in outside funding—a small fraction of the estimated $5.8 billion to replace the largest portion of its delivery fleet—is the largest amount of outside funding USPS has received for vehicle acquisitions. The project was terminated after about 2 years because of battery problems, as discussed previously in this report. Senior USPS officials also stated that there is little likelihood that a joint procurement arrangement could help finance a delivery fleet replacement. According to USPS, UPS, and FedEx Express officials, a primary barrier to a joint procurement is USPS’s need for customized, right-hand-drive delivery vehicles similar in size to the LLV and FFV (UPS and FedEx Express typically use larger vehicles and do not need right-hand-drive capability). Officials from DOE, private companies related to vehicle manufacturing and fuel, and an environmental organization that works on vehicle fleet issues confirmed USPS’s assessment, indicating that it is unlikely that USPS would be able to obtain financial help through existing mechanisms for acquiring new delivery vehicles. USPS officials also stated that they are not actively pursuing grants, joint acquisitions, or other partnership agreements. Finally, according to a senior USPS attorney, it is unlikely that it would be feasible for USPS to enter into an energy savings performance contract to help finance a major delivery fleet acquisition. Such contracts are used to privately finance improvements in energy efficiency. Under an energy savings performance contract, federal agencies enter into a long-term contract (up to 25 years) with a private energy services company under which the company installs energy-efficiency improvements financed from private funds. The agency then repays the company out of the estimated annual savings expected to be generated from the improvements. USPS officials stated that the agency used this type of financing for building improvements and has considered their applicability to a major fleet acquisition. However, USPS officials said that USPS has largely stopped using these contracts. Furthermore, given the low annual mileage of USPS’s delivery fleet, USPS and DOE officials stated that it is unlikely that the fuel savings generated from a more efficient fleet (whether consisting of gasoline-only vehicles or alternative fuel vehicles) would be sufficient, compared with the acquisition cost of the vehicles, to interest a private investor. In April 2010, we reported that Congress and USPS need to reach agreement on a package of actions so that USPS can become financially viable, and we recommended that in doing so, Congress consider providing financial relief, such as by revising its retiree health benefit funding and requiring any binding arbitration to take USPS’s financial condition into account, as well as consider all cost cutting options. Agreeing on a package of actions will involve difficult public policy issues and trade-offs. However, depending on the specific actions adopted, USPS’s follow-up, and the results, such an agreement could help enable the funding of a major acquisition of delivery vehicles. Although USPS is authorized to request appropriations for costs related to “public service,” it has not received an appropriation for operational costs since fiscal year 1982. USPS receives annual appropriations to fund statutorily required mail services at free or reduced rates, such as free mail for the blind and overseas voting, but these funds represent a very small percentage of its revenues. However, USPS has benefited from taxpayer funding in special circumstances. For example, Congress appropriated $587 million in 2002 and $507 million in 2004 to help pay for safety measures after letters containing anthrax contaminated the mail in 2001. Providing appropriations would be another alternative to fund the multi- billion-dollar replacement of USPS’s delivery fleet. Such appropriations could ensure the future viability of USPS’s delivery fleet, and—if alternative fuel vehicles are specified by legislation or chosen by USPS— could potentially yield additional benefits, particularly for manufacturers and suppliers of alternative fuel vehicles. In addition, regardless of the technology selected, new vehicles likely would be more fuel efficient and produce lower environmental emissions than USPS’s current vehicles. However, this option also has difficult public policy trade-offs and would raise questions about whether the economic benefits would be sufficient to justify the costs. For example, appropriations would raise the federal budget deficit, would reduce incentives for USPS to be self-supporting, and could further limit USPS’s flexibility in determining the best vehicles for its fleet. USPS faces severe financial challenges and, for the foreseeable future, cannot afford to replace or refurbish a large portion of its aging fleet. USPS’s March 2010, 10-year action plan for addressing its financial challenges did not (1) describe a strategy for addressing its delivery fleet needs or (2) identify how the operational changes proposed in this plan would affect its future fleet needs. The trade-offs of continuing to maintain USPS’s delivery fleet until USPS decides how to address its longer term delivery fleet needs are numerous and include somewhat higher maintenance costs overall. For each of 662 delivery vehicles in fiscal year 2010, USPS incurred maintenance costs of more than $10,500—more than one-third the $31,000 per-vehicle replacement cost USPS estimates as of 2011. Furthermore, these high vehicle costs were experienced in each of the four prior fiscal years that we analyzed. These costs largely arise from USPS’s need for right-hand-drive vehicles at a time when it cannot purchase these vehicles, yet remains contractually required to supply thousands of them to rural letter carriers. Related to this, delays in acquiring new delivery vehicles have caused USPS to replace about 4,500 thin and, in some cases, severely corroded LLV vehicle frames in fiscal years 2008 through 2010—at a cost of $5,000 per vehicle. If not for the critical need for right-hand-drive vehicles, the need to replace these frames may have caused USPS to replace—not repair—them. USPS’s approach also has resulted in increasing unscheduled maintenance costs, which create operational difficulties. Finally, delays in acquiring custom-built, right-hand-drive vehicles have increased the number of left- hand-drive vehicles in the delivery fleet by more than 19,000 since 2006, even though these vehicles cannot effectively operate on more than a quarter of USPS’s delivery routes. Despite these operational impacts, USPS’s approach of continued maintenance has been reasonable given its pressing need to defer an estimated $5.8 billion capital outlay for a major vehicle replacement or a major refurbishment, estimated at $3.5 billion in 2005. However, the time soon will come when the cost and operational consequences of this approach will not allow further delays. When that time comes, USPS will need to know how it can best comply with federal requirements for acquiring alternative fuel vehicles while also meeting its operational requirements. Consequently, USPS must develop a comprehensive strategy for dealing with this inevitability. As we have reported, Congress and USPS need to reach agreement on a package of actions to restore USPS’s financial viability, which will enable USPS to align its costs with revenues, manage its growing debt, and generate sufficient funding for capital investment, including the inevitable replacement or refurbishment, of its delivery fleet. However, until USPS defines its strategy for a major capital investment for its delivery vehicles, neither USPS nor Congress has sufficient information to fully consider its options. Given USPS’s need to ensure that its delivery fleet remains operationally viable and maintain its legal mandate to purchase alternative fuel vehicles and use alternative fuel in them, we recommend that the Postmaster General develop a strategy and timeline for addressing USPS’s delivery fleet needs. This effort should address: the effects of USPS’s planned operational changes and continuing changes in customers’ use of the mail on future delivery fleet requirements; the range of strategic options available (including continuing to maintain, not replace, its fleet), as well as the costs and time frames for these options; an analysis of any safety consequences associated with extending the vehicles’ operational lives; and alternative ways to comply with federal fleet requirements, including an analysis of how USPS can best meet these requirements, given its budget constraints. USPS provided written comments on a draft of this report by letter dated April 13, 2011. These comments are summarized below and are reprinted in appendix III. USPS agreed with our findings and recommendation to develop a strategy and timeline for addressing its delivery fleet needs. In commenting on our recommendation, USPS stated that it is developing a strategy to address the immediate and long-term needs of its delivery fleet, and that it planned to complete the strategy and timeline by the end of December 2011. USPS also stated that, while many alternatives exist for future delivery vehicles, ultimately, operational requirements and the total cost of ownership—including investment costs, infrastructure, life cycle maintenance, and support costs—will be the drivers behind any technology selection decision. In addition, USPS emphasized that given its current financial condition, the availability of capital funds also will be a primary factor in any investment decision. USPS also provided minor technical comments via email, which we incorporated as appropriate. As agreed with your offices, unless you publicly announce the contents of this report earlier, we plan no further distribution until 30 days from the report date. At that time, we will send copies to appropriate congressional committees and USPS. We will also make copies available to others on request. In addition, the report will be available at no charge on the GAO Web site at http://www.gao.gov. If you or your staff have any questions about this report, please contact me at [email protected] or (202) 512-2834. Contact points for our Offices of Congressional Relations and Public Affairs may be found on the last page of this report. Key contributors to this report are listed in appendix IV. In response to interest in issues related to the United States Postal Service’s (USPS) vehicle fleet, the objectives of this report were to answer the following key questions: (1) What is the profile of USPS’s delivery fleet? (2) How has USPS responded to requirements for alternative fuel vehicles, what experiences has it had with alternative fuel vehicles, and what has it learned from its experiences? (3) What, if any, approach has USPS adopted to address its delivery fleet needs, and what are the trade- offs of this approach? (4) What options exist to help USPS fund a major acquisition of delivery vehicles? The following sections describe the procedures we undertook to answer these questions. In addition, we conducted background research to inform our review. We reviewed prior GAO reports, including our work on USPS’s financial condition and options Congress could consider to address USPS’s financial condition; federal vehicle fleets; alternative fuel vehicles; capital planning; internal controls; and energy savings performance contracts. We analyzed financial and operating information from USPS, including its annual reports, audited financial reports, 10-year action plan, strategic sustainability performance plan, contractual obligation to provide right-hand-drive vehicles to rural carriers, and fleet management handbook. We reviewed analyses of USPS’s fleet conducted by USPS officials, private consultants to USPS, and the USPS Office of Inspector General. In addition, we reviewed documents prepared by the Department of Energy (DOE) and the General Services Administration on issues related to federal vehicle fleets as well as presentations and reports provided at an annual federal fleet conference and at monthly meetings of federal fleet managers. We reviewed USPS and DOE data on the number of waivers USPS applied for and received exempting it from fueling its alternative fuel vehicles with alternative fuel. Furthermore, we reviewed federal legislation that establishes requirements related to federal fleets, including the Energy Policy Act of 1992, the Energy Policy Act of 2005, the Energy Independence and Security Act of 2007, and the National Defense Authorization Act of 2008. In addition, we reviewed executive orders related to federal vehicle fleets. To determine the profile of USPS’s delivery fleet, the fleet’s maintenance costs, and the trade-offs of the agency’s approach for addressing its delivery fleet needs, we obtained and analyzed data from a custom query of USPS’s Vehicle Management Accounting System (VMAS), the database the agency uses to manage its vehicle fleet. We assessed the reliability of the data by performing electronic testing and visual review of data elements for obvious errors and inconsistencies, reviewing reports related to VMAS, and interviewing agency officials knowledgeable about VMAS system controls and vehicle data procedures. Through discussions with knowledgeable USPS and USPS Office of Inspector General officials, we learned that USPS staff enter data manually into VMAS and, as a result, some contractor costs for maintenance are not entered into VMAS, which has the effect of understating USPS’s vehicle maintenance costs in VMAS. USPS and USPS Office of Inspector General officials agreed that manual data entry is a major limitation of VMAS. To identify the contractor costs that were not reported in VMAS, and were therefore missing from our custom query of this database, we compared the total contractor costs reported in VMAS with the total contractor costs reported in another USPS data system, the Enterprise Data Warehouse system. According to USPS finance officials, the Enterprise Data Warehouse captures data from accounts payable, feeds into the general ledger, and is used to supply information to the financial reporting system USPS uses for its audited financial statements. Thus, according to these officials, it provides the most reliable information available on USPS’s costs. To assess the reliability of the Electronic Data Warehouse’s data, we (1) interviewed officials knowledgeable about the data and (2) compared our results to those of the USPS Office of Inspector General, which had previously reported on discrepancies between data in the Electronic Data Warehouse and VMAS. Based on this assessment, we determined that the VMAS data were sufficiently reliable for the purposes of this report, as long as we clearly noted the percentage of maintenance costs missing from VMAS as determined by comparing the total maintenance costs recorded in VMAS with the total maintenance costs recorded in the Electronic Data Warehouse. Using a custom query, we obtained VMAS data for all USPS vehicles for fiscal years 2006 through 2010, including the vehicles’ annual maintenance costs. To analyze information on the delivery fleet, we defined this fleet as all vehicles with one of eight function codes based on the advice of knowledgeable USPS officials. USPS officials agreed that the universe established through this process resulted in an accurate representation of its delivery fleet. In addition to analyzing the VMAS data we obtained through a custom query, we reviewed reports generated by VMAS (VMAS reports) and other USPS documentation, including information on the number of alternative fuel vehicles in USPS’s delivery fleet. USPS officials stated that they typically use VMAS reports to manage the fleet. Because these reports categorize vehicles by make and model rather than by function, the total universe of delivery vehicles represented in these reports is slightly different from the universe we obtained through our analysis of the custom query and, thus, the numbers cannot be directly compared. USPS officials recommended that we use the information from the agency’s VMAS reports, rather than our custom query, to determine the number of delivery vehicles in past fiscal years, because the accuracy of the VMAS reports has been tested over time whereas the custom query was a new capability. Consequently, we used data from the VMAS reports to analyze changes in the numbers of delivery vehicles for fiscal years 2006 through 2010. On the other hand, Vehicle Programs officials agreed that the information we obtained through the custom query was sufficiently reliable to develop average per vehicle maintenance costs over the past 5 fiscal years and to analyze the number and maintenance costs of delivery vehicles in fiscal year 2010. Using both the data obtained through our custom query and the data provided by USPS from its VMAS reports, we developed a profile of USPS’s delivery fleet from fiscal years 2006 through 2010, including maintenance costs. To analyze maintenance costs, we excluded costs related to fuel and accidents. To exclude costs related to accidents, we obtained information on the number and causes of vehicle accidents from USPS’s accident reporting database for fiscal years 2006 through 2010. We assessed the reliability of these data by (1) performing electronic testing and visual review of data elements for errors, (2) reviewing existing USPS information about the accident reporting database, and (3) interviewing agency officials knowledgeable about the data. We determined that these data were sufficiently reliable for the purposes of this report. Because USPS’s accident reporting database and VMAS use unique vehicle identification numbers to identify each vehicle, we were able to cross match these numbers in the two databases to identify vehicle maintenance costs due to accidents. We subtracted these costs from USPS’s total maintenance costs to obtain the total maintenance costs not related to accidents, as reported in VMAS. Finally, we worked with USPS Finance and Vehicle Programs officials to get an agency estimate of the total costs attributable to delivery fleet maintenance and fuel in fiscal year 2010. USPS officials used a combination of VMAS reports and data in the Enterprise Data Warehouse to develop this estimate, which includes all direct costs and some indirect costs related to the delivery fleet’s maintenance and fuel use in fiscal year 2010. We compared this estimate with cost summaries provided by USPS Finance officials and other USPS documentation supporting amounts reported in the agency’s audited financial statements for fiscal year 2010 and determined that the agency’s estimate of $1.05 billion in total maintenance and fuel costs for its delivery fleet in fiscal year 2010 was reasonable. USPS’s estimate of $1.05 billion includes about $750 million in identifiable direct and indirect maintenance costs, or a total of about $3,900 in maintenance-related costs per vehicle. Our custom query of VMAS showed about $497 million in direct maintenance costs in fiscal year 2010, or about $2,600 per vehicle. Several factors account for the difference in costs between the agency’s estimate and the results of our custom query. First, VMAS does not capture indirect maintenance costs and, instead, tracks only costs that can be directly associated with the vehicles’ maintenance. Thus, the lower maintenance cost figure produced from our analysis does not include costs that can not be specifically allocated to maintenance on a delivery vehicle. For example, VMAS includes costs for parts and direct labor to inspect a vehicle and replace brakes and other equipment, but does not include supervisory and management labor costs, or the benefits it pays to these employees. Second, while VMAS includes a large portion of its direct labor costs for technicians who service delivery vehicles, unlike USPS’s estimate, VMAS does not account for these employees’ full labor costs. Third, according to USPS data, about 6 percent of USPS’s total maintenance costs—all due to maintenance performed by contractors—are not entered into VMAS, but are included in the agency’s $750 million estimate of total maintenance costs for fiscal year 2010. Finally, while costs related to accidents are contained in USPS’s total cost estimate, we removed these costs from our analysis of maintenance costs. To inform our understanding of USPS’s delivery fleet profile, its experiences with alternative fuel vehicles, and its approach to its aging fleet, we conducted site visits to three regions: Minneapolis and St. Paul, Minnesota; New York City, New York; and southern Florida. We judgmentally selected these regions because they are geographically diverse and their climates vary—two of the three regions experience severe winter weather. In addition, the three regions use different types of alternative fuel vehicles and a variety of gasoline-fueled delivery vehicles. During each site visit, we visited a combination of vehicle maintenance facilities and post offices. We toured facilities, observed the maintenance activities occurring on vehicles at the facilities, and interviewed managers, supervisors, mechanical technicians, and carriers about their experiences with the delivery fleet. Finally, while we did not visit the vehicle maintenance facility in Corpus Christi, Texas, we selected this site for a telephone interview because, according to Vehicle Programs officials, it is one of the few areas where compressed natural gas is still being used in delivery vehicles that have been converted to use this fuel. To inform all of our objectives, we interviewed a wide range of USPS officials as well as officials from DOE, General Services Administration, and the Postal Regulatory Commission. In addition, we interviewed representatives from 22 nonfederal entities, including alternative fuel associations, automobile manufacturers and associations, environmental groups, companies that operate large delivery fleets, and consulting firms with experience evaluating vehicle fleets. To identify appropriate parties to interview, we spoke with knowledgeable GAO staff, USPS officials, and others about which entities would have information most relevant to our objectives. Table 4 identifies the nonfederal organizations whose representatives we interviewed. We conducted this performance audit from February 2010 to May 2011 in accordance with generally accepted government auditing standards. Those standards require that we plan and perform the audit to obtain sufficient, appropriate evidence to provide a reasonable basis for our findings and conclusions based on our audit objectives. We believe that the evidence obtained provides a reasonable basis for our findings and conclusions based on our audit objectives. USPS has had the following experiences with alternative fuel vehicles (other then E85-capable vehicles). USPS currently has more compressed-natural-gas-capable vehicles than any other kind of alternative fuel vehicle (except E85-capable vehicles), but its use of these vehicles has greatly diminished in recent years. Beginning in 1990, USPS began converting long-life vehicles (LLV) in selected locations to run on both compressed natural gas and gasoline. USPS converted about 7,300 LLVs over 6 years at a cost of about $2,000 each in the 1990s. Local utility companies, DOE’s Clean Cities program, and others installed the fueling infrastructure. According to a Vehicle Programs official, only in limited instances did USPS actually fund any portion of these costs. However, because of parts supply challenges, limited fuel availability, and expiring compressed natural gas fuel tanks, USPS removed this capability from all but about 3,400 of these LLVs. About 1,000 of these LLVs are currently running on compressed natural gas. According to USPS, 42 of the approximately 1,000 compressed-natural-gas- capable vehicles are being operated in Corpus Christi, Texas, because the city created the necessary fueling infrastructure and helped pay USPS’s fuel costs. For example, according to a local vehicle maintenance facility official, the city built a gas line connecting a nearby compressed natural gas station to the city’s post office and provided the post office with $400 worth of free compressed natural gas (about 200 days of fuel, according to a Vehicle Programs official) for each of the vehicles there. According to an official at the local vehicle maintenance facility, these vehicles have been reliable and have reduced USPS’s fuel costs because (1) the city provided free fuel and (2) compressed natural is cheaper than gasoline for those vehicles that have already used their supply of free fuel. According to this official, because of USPS’s fuel cost savings, as of January 2011, the official was in the process of swapping 37 of the facility’s gasoline-only LLVs for compressed-natural-gas-capable LLVs (from other USPS locations) increasing the number of LLVs operating on this fuel to a total of 79 vehicles at two post offices in Corpus Christi, Texas. In contrast, USPS’s experience with compressed natural gas in Huntington, New York, highlighted challenges that led USPS to abandon its use of compressed natural gas in this area. In the mid-1990s, USPS converted all of the LLVs at the Huntington post office to run on compressed natural gas and installed associated fueling infrastructure (one pump per vehicle). However, within 6 months of using these vehicles, USPS experienced vehicle reliability problems, two of the three manufacturers of vehicle conversion kits went out of business, and USPS experienced difficulties in obtaining parts needed for maintenance and repairs. As a result the fueling infrastructure is unused (see fig. 13). While Vehicle Programs officials recognize that the use of compressed natural gas has been successful in some parts of Texas, they stated that they see limited potential for USPS’s future use of this fuel in delivery vehicles, largely because the natural gas infrastructure is not available in much of the United States and parts supplies remain uncertain. As of September 30, 2010, USPS operated 34 LLVs in Key West, Florida, that are capable of running on propane in addition to gasoline. According to USPS local officials, these vehicles have been well received by the community because of their reduced emissions and USPS has faced few challenges operating and fueling the vehicles. However, according to USPS officials, USPS did not expand its use of propane because of the lack of propane infrastructure. USPS has been using limited numbers of plug-in electric vehicles for many years. In 1999, for example, USPS entered into a partnership with DOE and several state, regional, and local agencies in California and New York state and invested $11.6 million to purchase 500 plug-in electric vehicles from Ford. However, Ford recalled the vehicles about 2 years later because the vehicle battery company stopped manufacturing the batteries. As of September 30, 2010, USPS operated about 30 plug-in electric 2-ton vehicles in New York City, New York, as well as 12 T-3 plug-in electric personal mobility delivery vehicles that USPS purchased in 2008 at an average cost of about $11,200 in 2010 dollars (see fig. 14). While USPS reports that the T-3 vehicles cost less than 5 cents per mile to operate, operational challenges, such as letter carrier exposure to the elements, a tendency to stall in the rain, and low operating speed limit their applicability on USPS routes. Furthermore, USPS is currently testing four neighborhood electric vehicles and recently initiated a program called the Electric LLV Program under which five suppliers are converting gasoline LLVs to plug-in electric LLVs that USPS intends to use for deliveries. When we conducted our site visits, USPS’s use of hybrid vehicles was limited to 12 vehicles, including two 2-ton hybrid trucks in New York state that it had received in 2008 and 2009 at no cost to USPS because the manufacturers agreed to provide these vehicles to USPS in order to obtain information on their use on the delivery cycle (see fig. 15). In addition, USPS had 10 Ford Escape hybrids in California that it purchased in 2005 at an average cost of about $27,700 in 2010 dollars. However, hybrid vehicles typically have much higher up-front costs than the nonhybrid version of the same vehicle—about $9,000 more in the case of a 2011 Ford Escape hybrid. As a result, USPS officials said that the increased costs that likely would be associated with acquiring a custom-built hybrid vehicle (compared with a comparable nonhybrid vehicle) would, in all likelihood, far outweigh the potential fuel cost savings given a delivery vehicle’s low annual mileage. USPS is currently piloting two hydrogen fuel cell Chevrolet Equinox vehicles on delivery routes. Both vehicles were provided by General Motors in 2008 with funding from DOE. As part of the pilot program, USPS is assessing the vehicles’ potential usefulness as delivery vehicles. According to USPS, the two vehicles are meeting the demands of USPS’s daily operational drive cycle as delivery vehicles. However, according to Vehicle Programs officials, hydrogen fuel cell technology is in the early stages of its development and, consequently, it likely will be a number of years before such vehicles are available in large quantities. In addition to the contact above, Kathleen Turner (Assistant Director), Nicola Clifford, Bess Eisenstadt, Laura Erion, Tim Guinane, Kenneth John, Alexander Lawrence, Joshua Ormond, Robert Owens, Matthew Rosenberg, Kelly Rubin, Karla Springer, James Ungvarsky, Crystal Wesco, and Alwynne Wilbur made key contributions to this report. | The United States Postal Service (USPS) has the world's largest civilian fleet, with many of its delivery vehicles reaching the end of their expected 24-year operational lives. USPS is subject to legislative requirements governing the federal fleet, including a requirement in the Energy Policy Act of 1992, which provides that 75 percent of USPS's vehicle acquisitions be alternative fuel vehicles, capable of operating on a fuel other than gasoline. USPS is also facing serious cost pressures in maintaining a national network of processing and retail operations. Asked to review USPS's delivery fleet, GAO (1) profiled the fleet; (2) assessed USPS's response to alternative fuel vehicle requirements and described its experiences with these vehicles; (3) identified USPS's approach for addressing its delivery fleet needs, including trade-offs; and (4) determined options to fund a major acquisition of delivery vehicles. GAO analyzed USPS data; visited USPS facilities in three locations; and interviewed officials from USPS, the Department of Energy, and other organizations, including fleet operators and manufacturers. USPS's delivery fleet is largely composed of custom-built, right-hand-drive vehicles designed to last for 24 years, including about 141,000 gasoline-powered vehicles 16 to 23 years old and 21,000 flex-fuel vehicles capable of running on gasoline or 85-percent ethanol (E85) that are about 10 years old. The fleet also includes 22,000 left-hand-drive minivans, many of which are also capable of running on E85, and 3,490 delivery vehicles capable of running on other alternative fuels. Delivery vehicles are driven an average of about 17 miles per day and cost about $1 billion to maintain and fuel in fiscal year 2010. USPS met the 75 percent acquisition requirement for alternative fuel vehicles by purchasing about 40,000 flex-fuel vehicles and minivans that can operate on E85 or gasoline. However, USPS does not always use E85 in these vehicles because E85 is not readily available and can cost more to use due to less fuel efficiency, according to USPS officials. USPS has a variety of limited experiences with other alternative fuel vehicles, such as compressed natural gas and plug-in electric vehicles, most of which have higher life-cycle costs than gasoline vehicles. USPS's approach for addressing its delivery fleet needs is to maintain its current fleet until it determines how to address its longer term needs. USPS has incurred small increases in direct maintenance costs over the last 5 years, which were about $2,600 per vehicle in fiscal year 2010. However, it is increasingly incurring costs for unscheduled maintenance because of breakdowns, which can disrupt operations and increase costs. In fiscal year 2010, at least 31 percent of USPS's vehicle maintenance costs were for unscheduled maintenance, 11 percentage points over USPS's 20 percent goal. USPS's financial challenges pose a significant barrier to a major delivery vehicle replacement or refurbishment, estimated to cost $5.8 billion and (in 2005) $3.5 billion, respectively. USPS and other federal and nonfederal officials see little potential to finance a fleet replacement through grants or partnerships. GAO has reported that Congress and USPS need to reach agreement on a package of actions to move USPS toward financial viability. Depending on the specific actions adopted, USPS's follow-up, and the results, such an agreement could enhance its ability to invest in new delivery vehicles. USPS should develop a strategy for addressing its delivery fleet needs that considers the effects of likely operational changes, legislative fleet requirements, and other factors. USPS agreed with GAO's recommendation. |
Risk management has been endorsed by the Congress, the President, and Secretary of DHS as a way to direct finite resources to those areas that are most at risk of terrorist attack under conditions of uncertainty. The purpose of risk management is not to eliminate all risks, as that is an impossible task. Rather, given limited resources, risk management is a structured means of making informed trade-offs and choices about how to use available resources effectively and monitoring the effect of those choices. Thus, risk management is a continuous process that includes the assessment of threats, vulnerabilities, and consequences to determine what actions should be taken to reduce or eliminate one or more of these elements of risk. Risk management includes a feedback loop that continually incorporates new information, such as changing threats or the effect of actions taken to reduce or eliminate identified threats, vulnerabilities, and/or consequences. Because we have imperfect information for assessing risks, there is a degree of uncertainty in the information used for risk assessments (e.g., what the threats are and how likely they are to be realized). As a result, it is inevitable that assumptions and policy judgments must be used in risk analysis and management. It is important that key decision makers understand the basis for those assumptions and policy judgments and their effect on the results of the risk analysis and the resource decisions based on that analysis. Since fiscal year 2006, DHS has applied a three-step process which incorporates analyses of risk and effectiveness, to select eligible urban areas and allocate UASI and SHSP funds (see fig. 1): 1. Implementation of a risk analysis model to calculate scores for states and urban areas, defining relative Risk, as the product of Threat, Vulnerability, and Consequences. 2. Implementation of an effectiveness assessment, including a peer review process, to assess and score the effectiveness of the proposed investments submitted by the eligible applicants. 3. Calculation of a final allocation of funds based on states’ and urban areas’ risk scores as adjusted by their effectiveness scores. As a result of the Post-Katrina Emergency Reform Act, FEMA is now responsible for the nation’s homeland security preparedness effort to define what needs to be done, where, and by whom (roles and responsibilities); how it should be done; and how well it should be done— that is, according to what standards. This is a complex but critically important responsibility. The principal national documents designed to address each of these are, respectively, the National Response Framework (and its associated annexes), the National Incident Management System, and the National Preparedness Guidelines. To develop preparedness goals and determine the tasks and capabilities needed by first responders on a nationwide basis, DHS used an approach known as capabilities-based planning to develop the national Target Capabilities List. The list includes specific goals, requirements, and metrics for 36 capabilities needed at the local, state, or federal level to prepare for, respond to, and recover from natural or man-made disasters. DHS defined these capabilities generically and expressed them in terms of desired operational outcomes and essential characteristics, rather than dictating specific, quantifiable responsibilities to the various jurisdictions. Because no single jurisdiction or agency would be expected to perform every task, possession of a target capability could involve enhancing and maintaining local resources, ensuring access to regional and federal resources, or some combination of the two. The original list has since been refined, and FEMA released the most recent version of the list, with 37 capabilities, in September 2007. The Implementing Recommendations of the 9/11 Commission Act (9/11 Act) of 2007 further defined FEMA’s role and coordination processes for working with states and urban areas in awarding homeland security grants. For example, the 9/11 Act requires FEMA to provide eligible metropolitan areas with the opportunity to submit relevant information prior to FEMA’s initial assessment of the relative threat, vulnerability, and consequences each area faces from acts of terrorism. This opportunity is to allow potential grantees to correct any erroneous or incomplete information that will be the basis of FEMA’s initial assessment. DHS has used an evolving risk-based methodology to identify the states and urban areas eligible for HSGP grants and the amount of funds they receive. For example, the fiscal year 2005 risk analysis model largely relied on measures of population and population density to determine the relative risk of potential grant recipients. The fiscal year 2006 process introduced assessments of threat, vulnerability and consequences of a terrorist attack in assessing risk. The fiscal year 2006 risk analysis model estimated relative risk from two perspectives—asset-based and geographic—then combined the assessments, assigning twice as much weight to geographic as asset-based risk. In DHS’s view, asset-based and geographic risks are complementary and provide a “micro- and macro-” perspective of risk, respectively. In calculating these relative risk scores and addressing the uncertainties in estimating relative risk, policy and analytic judgments were required. For example, according to DHS officials, DHS made the judgment to assign geographic risk a weight of 1.0 and asset-based risk a weight of 0.5, since a potential loss of lives within an area would contribute to how geographic risk is assessed. Some of the factors used in the fiscal year 2006 risk analysis model included: the number of specific types of reports or events, such as reports of suspicious incidents; the number of visitors a state or urban area received from countries of interest; and population. In addition to modifications to DHS’s risk analysis model, DHS adopted an effectiveness assessment for fiscal year 2006 to determine the anticipated effectiveness of the various risk mitigation investments urban areas proposed, which affected the final amount of funds awarded to eligible areas. The risk analysis method for fiscal year 2007—which is largely unchanged for fiscal year 2008, according to our ongoing work—was changed substantially from the fiscal year 2006 process, and further exemplifies the continuing evolution in DHS’s approach to its risk methodology for grant allocation. Given the uncertainties inherent in risk assessment, the methodology uses a combination of empirical data (e.g., population, asset location) and policy judgment (e.g., the nature of the threat for specific areas and the weights to be assigned to specific variables in the model such as critical infrastructure, and population and population density). According to DHS officials, the fiscal year 2007 risk analysis model integrates the separate analyses for asset-based and geographic-based risk used in fiscal year 2006, and includes more sensitivity analysis in determining what the final results of its risk analysis should be. DHS officials said the primary goal was to make the process more transparent and more easily understood, focusing on key variables and incorporating comments from a variety of stakeholders regarding the fiscal year 2006 process. Figure 2 provides an overview of the factors included in the risk analysis model for fiscal year 2007 and, according to our ongoing work, for fiscal year 2008 and their relative weights. The maximum relative risk score possible for a given area was 100. The Threat Index accounted for 20 percent of the total risk score; Vulnerability and Consequences accounted for 80 percent. For the purposes of the model, DHS considered all areas of the nation equally vulnerable to attack and assigned every state and urban area a vulnerability score of 1.0. Thus, as a practical matter, the final risk score for fiscal years 2007 and 2008 is determined by the threat and consequences scores. Threat: The Threat Index accounted for 20 percent of the total risk score, which was calculated by the intelligence community by assessing threat information for multiple years (generally, from 9/11 forward) for all candidate urban areas and categorizing urban areas into one of four tiers. Tier I included those at highest threat, relative to the other areas, and tier IV included those at lowest threat relative to the others. DHS’s Office of Intelligence and Analysis performed this review and provided these threat assessments and corresponding threat values for each urban area. In contrast, for the 2006 grant cycle, DHS used total counts of threats and suspicious incidents and incorporated these into its model. The final threat assessments are approved by the intelligence community—the Federal Bureau of Investigation, Central Intelligence Agency, National Counter- Terrorism Center, and the Defense Intelligence Agency—along with the DHS Under Secretary for Intelligence & Analysis and the Secretary of DHS, according to DHS officials. Vulnerability and Consequences: Vulnerability and Consequences accounted for 80 percent of the total risk score and were represented by the following four indices: Population Index (40 percent): This variable included nighttime population and military dependant populations for states and urban areas, based upon U.S. Census Bureau and Department of Defense inputs. In addition, for urban areas, population density, commuters, and visitors were also factored into this variable, using data from private entities. Economic Index (20 percent): This variable considered the economic value of the goods and services produced in either a state or an urban area. For states, this index was calculated using U.S. Department of Commerce data on their percentage contribution to Gross Domestic Product. For UASI urban areas, a parallel calculation of Gross Metropolitan Product was incorporated. National Infrastructure Index (15 percent): This variable focused on over 2,000 Tier I and Tier II critical infrastructure/key resource assets that were identified by DHS’s Office of Infrastructure Protection. Tier I assets or systems are those that if attacked could trigger major national or regional impacts similar to those experienced during Hurricane Katrina or 9/11. Tier II assets are other highly consequential assets with potential national or regional impacts if attacked. National Security Index (5 percent): This variable considered the presence of three key national security factors: whether military bases are present in the state or urban area; how many critical defense industrial base facilities are located in the state or urban area; and the total number of people traversing international borders. Information on these inputs comes from the Department of Defense and DHS. To assess vulnerability and consequences, DHS specifically wanted to capture key land and sea ports of entry into the United States and the location of defense industrial base facilities and nationally critical infrastructure facilities. For fiscal year 2007 and, according to our ongoing work, for fiscal year 2008, DHS considered most areas of the country equally vulnerable to a terrorist attack, given freedom of movement within the nation; and focused on the seriousness of the consequences of a successful terrorist attack. Nationwide more than 2,000 critical infrastructure assets were included in the risk model and selected on the basis of analysis by DHS infrastructure protection analysts, sector- specific federal agencies, and the states. According to DHS, these critical infrastructure assets were grouped into two tiers: Tier 1 assets encompassed those that if attacked could cause major national or regional impacts similar to those from Hurricane Katrina or 9/11, while Tier 2 assets were those with potential national or regional impacts if attacked. On the basis of DHS’s Office of Infrastructure Protection analysis, Tier I assets were weighted using an average value three times as great as Tier II assets. According to DHS officials, defense industrial base assets were included in the national security index and all other assets in the national infrastructure index. Effectiveness Assessment Used to Adjust Risk Scores Since fiscal year 2006, DHS has also implemented an Effectiveness Assessment to assess and score the effectiveness of the proposed investments submitted by grant applicants in addition to determining relative risk using the risk analysis model. This effectiveness assessment process has remained largely unchanged since it was first introduced by DHS. To assess the anticipated effectiveness of the various risk mitigation investments that states and urban areas proposed, DHS required states and urban areas to submit investment justifications as part of their grant application. The investment justifications included up to 15 “investments” or proposed solutions to address homeland security needs, which were identified by the states and urban areas through their strategic planning process. DHS used subject-matter experts as peer reviewers to assess these investment justifications. The criteria reviewers used to score the investment justifications included the following categories: relevance to the National Preparedness Guidance and to state and local homeland security plans, anticipated impact, sustainability, regionalism, and the implementation of each proposed investment. Reviewers on each panel assigned scores for these investment justifications, which according to DHS officials were averaged to determine a final effectiveness score for each state and urban area applicant. DHS then used these effectiveness assessment scores to calculate the final allocation of funds to states and urban areas. According to DHS officials and HSGP grant assistance documents we reviewed, DHS communicates with its state and local stakeholders by: (1) providing to each state and urban area the individual threat assessments that DHS is using to calculate the risk analysis model’s Threat Index; (2) validating the nonpublic, critical infrastructure assets that comprise the risk analysis model’s National Infrastructure Index; (3) providing midpoint reviews of states’ and urban areas’ draft investment justification proposals that are later reviewed during DHS’s effectiveness assessment process; (4) providing technical assistance as states and urban areas prepare the documentation for their grant applications; and (5) convening conferences to solicit stakeholder feedback. DHS provides threat assessments for state and urban areas. DHS’s Office of Intelligence and Analysis (I&A) officials said they develop and provide threat assessments to the states’ and urban areas’ grant applicants prior to the grant application process for their review. State and urban area strategic planning and grant planning officials use this information to develop their grant investment justifications, according to DHS officials. I&A officials said they provide secret and nonsecret versions of the information so that state or urban area officials who do not have the appropriate clearances required to view the secret version of their threat assessments will still have access to some of the threat information. They said they are working with local law enforcement agencies on a way to address such clearance issues. DHS validates the nonpublic, critical infrastructure assets used in the risk analysis model. DHS officials also said that the agency uses a collaborative, multistep process to create a list of national critical infrastructure assets for use in the National Infrastructure Index, one of the four indices that comprise the Vulnerability and Consequences component of the risk analysis model. According to DHS officials, they use a step-by-step process to identify the nation’s Tier 1 and Tier 2 critical infrastructure assets. First, DHS’s Office of Infrastructure Protection (OIP) works with sector-specific agencies to develop criteria used to determine which assets should be placed in a threat tier. Second, private-sector companies vet the criteria through sector-specific councils that review the criteria and provide feedback to DHS OIP. Third, the infrastructure office finalizes the criteria list and provides the list to the sector-specific agencies and asks states to nominate assets within their jurisdictions that match the criteria. Finally, the infrastructure office and the sector-specific agencies review nominated assets to decide which assets comprise the final Tier 1/Tier 2 list. In 2007, DHS began to allow sector-specific agencies to resubmit for reconsideration assets that are not initially selected for the list to ensure the consideration of potential critical infrastructure assets in future years. Enacted in August 2007, the 9/11 Act required DHS to provide eligible metropolitan areas with the opportunity to submit information that they believe to be relevant to the determination of the threat, vulnerability, and consequences they face from acts of terrorism, prior to FEMA conducting each initial assessment, so that any erroneous or incomplete information can be corrected. According to FEMA officials, DHS implemented this provision mainly through the outreach and communication efforts described above. DHS provides midpoint reviews of states’ and urban areas’ investment proposals. FEMA officials said that, for the fiscal year 2007 effectiveness assessment process, DHS offered a midpoint technical review of states’ and urban areas’ draft 2007 Investment Justifications prior to the formal submission of these proposals to FEMA’s peer review process. DHS officials said that they performed an after-action analysis of this effort and found states and urban areas that made use of the midpoint reviews had effectiveness scores that on average were 6 percent higher than those for states and urban areas that did not take advantage of this DHS service. DHS provides technical assistance as states and urban areas prepare investment documentation. DHS also provides Program Management Technical Assistance, and Investment Planning Technical Assistance workshops to assist states and urban areas. For example, the Program Management Technical Assistance service is designed to help the State Administrative Agency with day-to-day program management in planning, managing, and evaluating state programs in the context of the National Preparedness Guidance, according to DHS. They said Program Management Technical Assistance helps state administrators use DHS’s Program Management Handbook to manage programs that span agencies, jurisdictions, and disciplines, including the private sector. DHS also offers guidance on how to enhance existing state and urban area Homeland Security Strategies and Enhancement Plans. DHS convenes conferences to solicit stakeholder feedback. Finally, DHS has convened conferences in an effort to solicit stakeholder feedback after the fiscal years 2006 and 2007 grants were awarded. In July 2006, DHS convened a Homeland Security Grant Program After-Action conference to gather feedback on the UASI grant award process. DHS also assembled working groups to discuss and assess homeland security planning, the HSGP guidance and application, the risk assessment, and the effectiveness assessment. DHS officials told us that the conference provided a feedback loop intended to bolster stakeholder support and promote transparency. The state and local partners who participated in the working groups at the conference developed 32 recommendations to improve the HSGP process. For example, one of the risk assessment working group’s recommendations was that DHS should provide detailed briefings to state and local partners on the core components of the risk methodology used in the fiscal year 2006 process as one step to improve the transparency of the risk analysis process. DHS also convened a similar after-action conference in early August 2007 to solicit stakeholder feedback on the fiscal year 2007 HSGP and hosted three regional conferences in the fall of 2007 to foster collaboration among regional partners and seek additional feedback. From fiscal years 2002 through 2007, DHS obligated about $19.6 billion in grants, the purpose of which was to strengthen the capabilities of state, local, and tribal governments and others to prepare for and respond to major disasters of any type or cause. About $7 billion of this total was unexpended as of January 2008. As might be expected, the more recent the fiscal year, the higher the unexpended balance (see fig. 3). For example, the Homeland Security and UASI grant awards are announced in May or June of each year—or about 3 to 4 months before the end of the fiscal year. The awards for fiscal year 2007 were announced in May 2007. Thus, one would expect large unexpended balances for the most recent fiscal year because the grant recipients would have had only a few months to use their funds prior to the end of the fiscal year. In 2005, we reported on DHS’s efforts to distribute grants and found that the Congress, DHS, states, and localities had acted to expedite grant awards and distribution by setting time limits for the grant application, award, and distribution processes and by instituting other procedures. We concluded that the ability of states and localities to spend grant funds expeditiously was complicated by the need to fulfill state and local legal and procurement requirements, which in some cases added months to the purchasing process. We also reported that some states had modified their procurement practices and DHS was identifying best practices to aid in the effort, but challenges remained, such as continuing legal and procurement requirements that slowed the process. For example, once the grant funds are awarded to the states and then subgranted to the local jurisdictions or urban areas, certain legal and procurement requirements may have to be met, such as a city council’s approval to accept grant awards. Or, if the state legislature must approve how the grant funds will be expended and is not in session when the grant funds are awarded, it could take as long as 4 months to obtain state approval to spend the funds. We reported a variety of steps that had been taken by states, DHS, and the Congress to streamline the expenditure of grant funds. For example: Some states, in conjunction with DHS, had modified their procurement practices to expedite the procurement of equipment and services by establishing centralized purchasing systems that allow equipment and services to be purchased by the state on behalf of local jurisdictions, freeing them from some local legal and procurement requirements. Several states had developed statewide procurement contracts that allow local jurisdictions to buy equipment and services using a prenegotiated state contract. DHS had enhanced equipment procurement options through agreements with the U.S. Department of Defense’s Defense Logistics Agency and the Marine Corps Systems Command, to allow state and local jurisdictions to purchase equipment directly from their prime vendors. These agreements provide an alternative to state and local procurement processes and, according to DHS, often result in a more rapid product delivery at a lower cost. The fiscal year 2005 DHS appropriations legislation included a provision that exempted formula-based grants (e.g., the State Homeland Security Grant Program grants) and discretionary grants, including the Urban Areas Security Initiative and other grants, from requirements in the Cash Management Improvement Act that provide for reimbursement to states and localities only after they have incurred an obligation, such as a purchase order, to pay for goods and services. Subsequent DHS guidance allowed states and localities to draw down funds up to 120 days prior to expenditure. We do not know the extent to which the actions that states and localities have taken to address the obstacles that affected their ability to use funds expeditiously (but effectively) have succeeded. We were unable to examine trends in expended and unexpended obligations for individual grants across fiscal years due to limitations in the budget data provided by FEMA for this hearing. For example, we were unable to track HSGP funding data across multiple fiscal years, such as the amount of fiscal year 2005 funds that were expended in fiscal years 2005, 2006, and 2007. In addition, we found that reporting categories were not consistent across fiscal years. Grant program data were collapsed in one fiscal year and compiled differently in another year. According to one DHS official, while the consolidation of all DHS grant programs into FEMA provides FEMA with an opportunity to standardize and enhance its management of grant allocation and distribution, this administrative transition has also resulted in some reorganization of accounting functions, and institutionalizing the maintenance of grant funding data is still being addressed at this time. Whatever the cause, the inconsistency in reporting on grant expenditures across fiscal years could hinder FEMA’s ability to provide the Congress with information on trends in expenditures over time for specific grants. As part of our ongoing work in reviewing DHS grant allocation and management efforts, we plan to determine whether the data FEMA maintains on grant expenditures across fiscal years allows FEMA to analyze trends in grant obligations and expenditures. While DHS has distributed over $19 billion in federal emergency preparedness funding to states, localities, and territories since fiscal year 2002, and taken steps to gather information, establish goals and measures, and measure progress, we still know little about how states have used federal funds to build their capabilities or reduce risks. Nor do we know how effective this national investment has been because DHS’s monitoring of homeland security grant expenditures does not provide a means to measure the achievement of desired program outcomes to strengthen the nation’s homeland security capabilities. In March 2007, we testified before this Committee that a comprehensive and in-depth oversight agenda requires assessing state and local capabilities and the use of federal grants in building and sustaining those capabilities. However, all levels of government are still struggling to define and act on the answers to basic— but hardly simple—questions about emergency preparedness and response: What is important (that is, what are our priorities)? How do we know what is important (e.g., risk assessments, performance standards)? How do we measure, attain, and sustain success? On what basis do we make necessary trade-offs, given finite resources? DHS has limited information on which to base the answers to these questions. We have identified the need for such capabilities-based assessment and reporting of the effectiveness of federal grant investments in several DHS grant programs. For example, in our review of cargo tanker emergency response in December 2007, we recommended that the Secretary of Homeland Security work with federal, state, and local stakeholders to develop explicit performance measures for emergency response capabilities and use them in risk-based analyses to set priorities for DHS grant programs in acquiring needed response resources. DHS responded that it was taking the recommendation under advisement and was exploring approaches to address our recommendation. Similarly, in our review of DHS’s efforts to improve interoperable communications in April 2007, we reported that no process has been established for ensuring that states’ grant requests are consistent with their statewide plans and long- term objectives for improving interoperability. We recommended that DHS assess how states’ grant requests support their statewide communications plans and include the assessment as a factor in making DHS grant allocation decisions. Although DHS did not comment on this recommendation at the time, in August 2007 DHS officials told us they were working to ensure that all grant funding is tied to statewide interoperable communications plans. In a May 2007 testimony, we noted that more immediate congressional attention might focus on evaluating the construction and effectiveness of the National Preparedness System, which is mandated under the Post- Katrina Reform Act. DHS has taken steps to develop and issue key components of the system, including a national domestic all-hazards preparedness goal and readiness metrics and standards for preparedness in the form of target capabilities. Specifically, in September 2007, DHS issued a goal for national preparedness, now referred to as the National Preparedness Guidelines. According to DHS, the guidelines establish “a vision for national preparedness and provide a systematic approach for prioritizing preparedness efforts across the Nation,” and generally define a goal for the National Preparedness system. The guidelines are based on a capability-based planning process that identified target capabilities that are to be then used to establish measures for preparedness. According to DHS officials, one way DHS is attempting to monitor the development of emergency preparedness capabilities is through the Effectiveness Assessment described above, that began as part of DHS’s fiscal year 2006 HSPG grant guidance. According to program requirements, eligible recipients must provide an “investment justification” with their grant application that links their investments to the initiatives outlined in their state’s Program and Capability Enhancement Plan. DHS officials have said that they cannot yet assess how effective the actual investments from grant funds are in enhancing preparedness and mitigating risk because they do not yet have the metrics to do so and there is insufficient historical information from the grant monitoring process to assess the extent to which states and urban areas are building capabilities. The Post-Katrina Reform Act established a requirement to create another source of information on state capabilities. The act calls for an annual preparedness report from all states by January 4, 2008, and annually thereafter, but FEMA has extended the deadline for this requirement. In December 2007, FEMA extended the State Preparedness Report deadline from January 4 to March 31, 2008 and requested that each state administrative agency submit a brief letter providing a status update on its State Preparedness Report by early this year. The state reports are to include assessments of: State compliance with the national preparedness system, the National Response Framework, the National Incident Management System, and other related plans and strategies. Current capability levels and a description of target capability levels. Resource needs to meet the preparedness priorities established in conjunction with the Target Capabilities List, including (1) an estimate of the amount of expenditure required to attain the preparedness priorities, and (2) the extent to which the use of federal assistance during the preceding fiscal year achieved the preparedness priorities. Beginning in October 2007, DHS is also responsible for an annual federal preparedness report that is to include, among other things, an assessment of the extent to which the use of federal assistance during the preceding fiscal year achieved the preparedness priorities established under the act. Since 2005, DHS has produced an Annual Report on Preparedness Funding, which includes data on the obligation, expenditure status, and use of funds for all major federal preparedness grants—including non-DHS grants—awarded to states, localities, and other nonfederal entities. According to DHS, this effort is designed to provide decision makers with critical preparedness funding information as they determine how to best allocate resources to achieve target levels of capability to prevent, prepare, respond to, and recover from major events, especially terrorism. However, the report notes the information is of limited usefulness because federal departments and agencies interpret and define the terms obligation, expenditure status, and use of funds differently. The report provides a national-level summary of the use of grant funds such as equipment or training, rather than an assessment of state capability enhancements provided as a result of federal grant funding. According to DHS, subsequent reports may provide more detailed analysis and findings, as consistent procedures and definitions are implemented across grant programs and departments. The task of enhancing first responder capabilities across the nation is a complex and daunting one. DHS must continue to support FEMA’s efforts to work with state, local, and tribal governments, and the private sector on the tasks it has begun. At the same time, these stakeholders must recognize that the process is iterative, will include periodic adjustments and refinements, and that risks are not equally distributed across the nation. As the principal federal agency now responsible for preparedness and response, FEMA has a unique opportunity to evaluate how it can most effectively target and integrate grants with its other efforts to enhance the nation’s all-hazard disaster preparedness and response system. This can best be done by viewing these grants collectively, rather than individually. It is also important that FEMA and grant recipients be able to assess and report on how the grants have been used to enhance emergency preparedness and response capabilities and reduce risk. We look forward to working constructively with this Committee, FEMA, and DHS in the future to continue to build a national emergency preparedness system that we all want and our nation deserves. Mr. Chairman, this concludes my statement. I would be pleased to answer any questions that you or other members of the Subcommittees may have at this time. For further information about this statement, please contact William O. Jenkins Jr., Director, Homeland Security and Justice Issues, on (202) 512- 8777 or [email protected]. In addition to the contact named above, the following individuals from GAO’s Homeland Security and Justice Team also made major contributors to this testimony: Chris Keisling, Assistant Director; John Vocino, Analyst- in-Charge; Michael Blinde, Analyst; and Linda Miller, Communications Analyst. Department of Homeland Security: Progress Report on Implementation of Mission and Management Functions. GAO-07-454. Washington, D.C.: August 17, 2007. Homeland Security: Observations on DHS and FEMA Efforts to Prepare for and Respond to Major and Catastrophic Disasters and Address Related Recommendations and Legislation. GAO-07-1142T. Washington, D.C.: July 31, 2007. Homeland Security: Observations on DHS and FEMA Efforts to Prepare for and Respond to Major and Catastrophic Disasters and Address Related Recommendations and Legislation, GAO-07-835T Washington, D.C.: May 15, 2007. Homeland Security: Observations on DHS and FEMA Efforts to Prepare for and Respond to Major and Catastrophic Disasters and Address Related Recommendations and Legislation. GAO-07-835T. Washington, D.C.: May 15, 2007. First Responders: Much Work Remains to Improve Communications Interoperability, GAO-07-301 Washington, D.C.: Apr. 2, 2007. Homeland Security: Preparing for and Responding to Disasters. GAO-07- 395T. Washington, D.C.: March 9, 2007. Passenger Rail Security: Federal Strategy and Enhanced Coordination Needed to Prioritize and Guide Security Efforts. GAO-07-583T. Washington, D.C.: March 7, 2007. Homeland Security: Applying Risk Management Principles to Guide Federal Investments. GAO-07-386T. Washington, D.C.: February 7, 2007. Homeland Security Grants: Observations on Process DHS Used to Allocate Funds to Selected Urban Areas. GAO-07-381R. Washington, D.C.: February 7, 2007. Homeland Security First Responder Grants: Cash Management Improvement Act Exemption and Cash Advance Funding Require Additional DHS Oversight. GAO-07-68. Washington, D.C.: December 22, 2006. Emergency Preparedness and Response: Some Issues and Challenges Associated with Major Emergency Incidents. GAO-06-467T. Washington, D.C.: February 23, 2006. Homeland Security: Managing First Responder Grants to Enhance Emergency Preparedness in the National Capital Region. GAO-05-889T. Washington, D.C.: July 14, 2005. Homeland Security: DHS’ Efforts to Enhance First Responders’ All- Hazards Capabilities Continue to Evolve. GAO-05-652. Washington, D.C.: July 11, 2005. Homeland Security: Management of First Responder Grant Programs and Efforts to Improve Accountability Continue to Evolve. GAO-05-530T . Washington, D.C.: April 12, 2005. Homeland Security: Management of First Responder Grant Programs Has Improved, but Challenges Remain. GAO-05-121. Washington, D.C.: February 2, 2005. Homeland Security: Effective Regional Coordination Can Enhance Emergency Preparedness. GAO-04-1009. Washington, D.C.: September 15, 2004. Homeland Security: Federal Leadership Needed to Facilitate Interoperable Communications Between First Responders. GAO-04-1057T . Washington, D.C.: September 8, 2004. Homeland Security: Coordinated Planning and Standards Needed to Better Manage First Responder Grants in the National Capital Region. GAO-04- 904T. Washington, D.C.: June 24, 2004. Homeland Security: Management of First Responder Grants in the National Capital Region Reflects the Need for Coordinated Planning and Performance Goals. GAO-04-433. Washington, D.C.: May 28, 2004. Emergency Preparedness: Federal Funds for First Responders. GAO-04- 788T. Washington, D.C.: May 13, 2004. This is a work of the U.S. government and is not subject to copyright protection in the United States. It may be reproduced and distributed in its entirety without further permission from GAO. However, because this work may contain copyrighted images or other material, permission from the copyright holder may be necessary if you wish to reproduce this material separately. | Since 2002, the Department of Homeland Security (DHS) has distributed over $19 billion in homeland security grants to enhance the nation's preparedness and response capabilities. The Federal Emergency Management Agency (FEMA) is responsible for all preparedness efforts including allocating and managing these grants. This testimony examines (1) the process and methods to allocate homeland security grants to state and local governments, (2) how DHS communicates with states and localities in making grant allocation decisions, (3) what challenges affect the expeditious spending of DHS grant funds by states and localities; and (4) the extent that DHS measured program outcomes as part of its efforts to monitor the expenditure of grant dollars. GAO's testimony is based on products issued from April 2005 through July 2007 on DHS's grant management system, and on GAO's ongoing mandated work related to FEMA's risk-based grant distribution processes for fiscal years 2007 and 2008. To conduct this work, GAO reviewed relevant documents on FEMA's risk analysis model and interviewed agency officials. DHS uses an evolving risk-based methodology to identify the urban areas eligible for homeland security grants and the amount of funds states and urban areas receive. DHS designed the methodology to measure the relative risk of a given state or urban area using a risk analysis model that defined Risk as the product of Threat times Vulnerability and Consequences (R = T * (V & C)). Given the uncertainties inherent in risk assessment, the methodology uses a combination of empirical data (e.g., population, asset location) and policy judgment (e.g., the nature of the threat for specific areas and the weights to be assigned to specific variables in the model such as critical infrastructure, population, and population density). According to FEMA officials and GAO's review of homeland security grant assistance documents, FEMA communicates with its state and local stakeholders by (1) providing individual threat assessments that DHS is using for its risk analysis model to each state and urban area, (2) validating the nonpublic national infrastructure data that are also part of the risk analysis model, (3) reviewing states' and urban areas' draft investment proposals that are later submitted and rated during DHS's effectiveness assessment process, (4) providing technical assistance as states and urban areas prepare grant applications, and (5) holding post-award conferences to solicit stakeholder feedback. In April 2005, GAO reported that the ability of states and localities to spend grant funds expeditiously was complicated by the need to fulfill legal and procurement requirements, which in some cases added months to the purchasing process. GAO also reported a variety of steps that had been taken by states, DHS, and the Congress to streamline the expenditure of grant funds. However, GAO was unable to examine trends in obligations and expenditures for grant programs across fiscal years because the budget data FEMA provided did not specify grant expenditures by fiscal year and reporting categories were not consistent across fiscal years. Although DHS has taken some steps to establish goals, gather information, and measure progress, its monitoring of homeland security grant expenditures does not provide a means to measure the achievement of desired program outcomes. FEMA's current efforts do not provide information on the effectiveness of those funds in improving the nation's capabilities or reducing risk. DHS leadership has identified this issue as a high priority, and is trying to develop a more quantitative approach to accomplish the goal of using this information for the more strategic purpose of monitoring the achievement of program goals, according to FEMA officials. |
Section 5164 of the Omnibus Trade and Competitiveness Act of 1988 amended the Metric Conversion Act of 1975 and designated the metric system as the preferred system of weights and measurements for U.S. trade and commerce. The major reasons given for converting to metric are international trade competitiveness and ease of use. Since the United States is part of a global economy, the metrication of its manufacturing sector is viewed as an important factor in remaining competitive in world markets. Critics argue that although manufacturing may convert, there seems to be no compelling reason for converting highway signs. The American Association of State Highway and Transportation Officials (AASHTO) has stated that it is difficult to determine that metrication would yield any substantial benefits to the highway industry. Others argue that the metric system is simpler and, once learned, more efficient than English measurement. Section 5164 establishes a policy that requires each federal agency to use the metric system in its procurements, grants, and other business-related activities to the extent economically feasible by the end of 1992. However, conversion may not be required if it is impractical or if it is likely to cause significant inefficiencies, or loss of markets to U.S. firms. The act requires each federal agency to establish guidelines to carry out the policy. In addition, Executive Order No. 12770, signed in July 1991, requires, among other things, that executive branch departments and agencies formulate a metric transition plan by November 30, 1991. The Department of Transportation (DOT) issued its metric conversion plan in 1990 and established policy and administrative procedures for changing to the metric system. DOT required each of its nine agencies to develop a conversion plan and include specific dates for the changeover to metric. In addition, DOT’s policy guidance requires that if an agency identifies an area in which metric conversion is deemed to be impractical or inefficient, it can make an exception to the law if the exception is supported by an analysis justifying such action. Any requested exception is submitted to the Secretary of Transportation for coordination with the other DOT agencies before approval is given. To date, FHWA has not analyzed any aspects of its proposed metric conversion plan, including converting signs to metric units, to determine if an exception was warranted. Only one of DOT’s modal agencies—the Federal Aviation Administration (FAA) has—requested program exceptions to metric conversion. FHWA established a metric work group in December 1990 to develop a conversion plan and timetable. The work group proposed a 5-year transition plan with complete metric conversion by September 30, 1996. After this date, all construction contracts advertised for bids for federal lands, highways, and federal-aid construction would have to contain only metric measurements. As a result, highway and bridge contractors, engineers, equipment and materials manufacturers and suppliers, and state and local governments will have to perform their work in metric units or will be ineligible for federal dollars for highway construction projects. Target dates were set for several key program elements and activities, including converting highway signs, as shown in table 1. By the end of 1995, full conversion is expected for data collection and reporting systems such as the Highway Performance Monitoring System, which collects state-level data on the condition and performance of highways. Furthermore, 39 state departments of transportation will have converted, to metric units, their manuals and procedures that guide highway construction and maintenance. According to FHWA, most state DOTs will meet FHWA’s target dates for most elements of metric conversion. Although FHWA was moving forward on other aspects of converting its highway program to metric, on June 27, 1994, it issued a Federal Register notice apprising the public that the agency had postponed the September 30, 1996, deadline for highway sign conversion until at least after 1996. FHWA officials said that they would establish revised implementation requirements sometime after 1996 and that sign conversion is still an agency goal. The officials said that postponement was necessary because of recent legislative prohibitions on the use of federal-aid highway funds for this activity and because of negative comments received on FHWA’s August 31, 1993, Federal Register notice. During the last 2 fiscal years, the Congress included provisions in DOT’s appropriations bills that prohibited the use of federal-aid funds for placing metric signs on our nation’s roads. Concerns about the cost of conversion have also led to several other legislative actions. For example, the bill to designate the National Highway System (NHS) introduced in the Senate in February 1995 prohibits DOT from requiring states to convert highway signs to metric. In the last session of the Congress, the House passed an NHS bill that included a similar provision. While an NHS bill has not been introduced in the House in this session, HR 1173 has been introduced to prohibit the expenditure of federal funds for constructing or modifying highway signs that are expressed only in metric units. At least one state—Virginia—also passed a law in 1994 that prohibits the use of state funds for converting highway signs to metric units. Negative responses to FHWA’s August 1993 notice also contributed to the agency’s postponement of the metric signage requirement. Overall, about 85 percent of the respondents (2,288 out of 2,731) were opposed to converting English measurement signs to metric units. Most respondents cited the cost involved in converting, and a majority said that the funds could be better used to repair roads and bridges. Several local officials commented that the conversion was another federal mandate without thought of how it would be locally financed. Furthermore, several states that responded requested special funding and an education/public information program before implementing metric signage. Most states have not taken any action to convert their signs to metric units. However, Alabama and Arizona are planning for full conversion of highway signs to metric units. In addition to changing highway signs, such as speed limit and direction signs, to metric units, the Alabama DOT’s strategy includes changing milepost markers to kilometer posts. The state DOT has recently received approval from FHWA to use federal-aid funds to install kilometer posts as a reference system to be used for the collection of highway data. Since this is a reference system and will not replace the milepost markers, FHWA determined that the use of federal-aid funds for the reference system would not violate the prohibition in the fiscal year 1995 appropriations act. Although FHWA has postponed the requirement for states to convert their highway signs to metric units, it continues to be an agency goal. As such, activities that support sign conversion continue. For example, FHWA is currently converting the Manual on Uniform Traffic Control Devices into dual units—English and metric. This manual provides federal guidance to the states on all aspects of road signs. FHWA detailed three options for converting highway signs in an August 31, 1993, Federal Register notice to obtain public comment. Option 1: Replace highway signs through routine maintenance over 4 to 7 years. Some signs would be in metric and some in English until all signs were replaced. Option 2: Convert all highway signs over a 6-month to 1-year period. Priority roads would be converted quickly while other roads would be phased in over a longer period of time. Option 3: Carry out a two-phase transition with dual metric and English measurement signs posted by October 1996 and move to metric-only signs at some time in the future. Although most respondents opposed conversion, about 15 percent voted for one of DOT’s three options for sign conversion. About 70 percent of the 443 respondents supported option 2, about 27 percent supported option 3, and the remaining 3 percent supported option 1. If FHWA requires conversion and federal funds are available, AASHTO’s position is that at least a 2-year lead time is needed to plan the highway sign conversion. After the 2-year lead time, AASHTO proposes that FHWA select a 6-month period for the quick conversion of all highway signs and milepost markers, which is similar to option 2. Furthermore, AASHTO’s proposal would require that, during this 6-month period, all signs containing English units (distances, speed limits, clearances, weights, etc.) be modified to equivalent metric units. An official of the American Trucking Association—a lobbying organization for the trucking industry—told us that while it does not have an official position on highway sign conversion, there are safety considerations associated with the conversion options. For example, if all signs are not converted during the same time period, as AASHTO suggests, drivers might be confused when they see a speed limit sign in metric units, then one in English units. FHWA officials told us that, in implementing sign conversion, they hope to minimize the driving public’s confusion and safety concerns by suggesting ways that states can call attention to the new metric signs. While no guidelines have been completed, FHWA officials said that one approach they are considering is to put metric units in yellow to differentiate them from the English unit signs drivers are used to. For any option, the American Trucking Association official told us that without a nationwide educational process before the conversion occurs, commercial truck drivers and the general driving public may not be familiar with metric units. This lack of education could result in safety concerns related to speed and also clearance heights on bridges and tunnels. Alabama has begun to convert its highway signs. In a manner similar to FHWA’s option 1, Alabama is replacing highway signs with metric signs through routine maintenance and for other reasons such as construction. However, Alabama plans, unlike option 1, to put an English measure overlay on the signs. Under this approach, the state believes that it will save money because the signs need to be replaced anyway, and since signs and overlays are fabricated in the state’s shop, all the overlays could be made now and would not be affected by the cost of future inflation. Moreover, unlike FHWA’s option 1, this approach would also allow for the signs to be changed to metric concurrently over the same short period as overlays are removed or metric unit overlays are added for those English-unit signs that had not been replaced during maintenance. One open question concerning Alabama’s approach is whether the state will remove the overlays and convert to metric if FHWA decides not to require conversion. From a safety standpoint, it may not be prudent for one state to convert and the surrounding states to keep their signs in English units. FHWA officials said that they had not decided on a course of action if conversion were not mandatory and some states converted and others did not. FHWA has not estimated the nationwide costs of highway sign conversions. However, on the basis of Canada’s experience in metric sign conversion as well as the work done to date by Alabama, “ballpark” estimates of about $334 million and $420 million can be calculated. In 1977, the Canadian Ministries changed about 241,000 signs (using overlays) on 300,000 miles of highway, which is about the number of highway miles in California and Texas. The conversion took 2 months and cost about $13.4 million in 1995 U.S. dollars, or $55.70 per sign ($6.1 million or $25.43 per sign in 1977 Canadian dollars). The number of Canadian signs is a fraction of FHWA’s estimate that about 6 million signs on the nation’s state and local roads would need to be changed. Using Canada’s cost data, the United States conversion could cost about $334 million. However, this estimate could vary depending on the length of implementation and the replacement method chosen. In 1993, AASHTO issued its “Guide to Metric Conversion.” The guide included a case study on Alabama that used information on the number and types of signs from one area of the state to develop conversion cost estimates. Initially, Alabama estimated that it would cost $2.7 million to convert its state highway signs, using the quick-conversion option, to metric units by October 1995. After the initial estimate, Alabama increased its estimate to $3.8 million (at about $70 per sign), to include an additional $1.1 million to install kilometer markers for data collection purposes.Assuming that nationwide conversion costs would be similar to Alabama’s, changing the nation’s 6 million highway signs on state and local roads could cost about $420 million. We termed this a ballpark estimate because there are a number of factors that could affect the estimate. For example, the validity of FHWA’s estimate of 6 million signs, as well as the mix of signs—large ones, small ones, or milepost markers—could be important in determining costs. Eight of the nine states that we contacted provided very preliminary cost estimates, ranging from a low of $1 million to a high of $20 million, for changing their highway signs on state roads. The difference in estimates depends on the method and number of signs for conversion. Because FHWA postponed the conversion, FHWA officials told us that most states have not developed cost estimates. Many states do not have information on the number of signs that they would need to change on local roads or the costs involved. Several state officials noted in the 1993 Federal Register notice that since there are many more miles on local roads than state roads, the sign conversion costs could be quite substantial. According to an FHWA official, about 70 percent (or 2.7 million) of the nation’s 3.9 million miles of public roads are classified as local roads. In January 1995, FHWA hired a contractor—Battelle—to develop national cost estimates for each of the three conversion options (and variations of those options) spelled out in the August 31, 1993, notice. To develop national cost estimates, Battelle plans to use information from state and local jurisdictions that have computerized sign inventories. According to an FHWA official, obtaining information at the local level may be difficult because local road sign inventories may not be maintained. If local inventories are not available, Battelle may have to rely on other methodologies, such as statistical sampling techniques, to provide a basis for estimating costs of changing local road signs to metric. The study is just getting started and is scheduled for completion in January 1996. State and local officials, AASHTO, and an American Trucking Association official all said that an important component to highway sign conversion is public education. Without a more comprehensive national conversion effort that would seek to educate all parts of our society on the metric system, FHWA and state DOTs might have to establish and fund an education program before signs are converted. According to AASHTO’s 1993 “Guide to Metric Conversion,” careful planning and a public information campaign are largely credited for Canada’s smooth transition to metric units. The public had been prepared for the conversion through displays of the new signs, full-page newspaper advertisements, radio and TV spots, and informational pamphlets. Moreover, since highway sign conversion was just one part of Canada’s overall effort to convert the country to the metric system, the program began with several years of close cooperation and careful planning among government agencies. AASHTO’s 1993 guide also states that while public information programs are essential to conversion, a large part of educating the public can be handled better by means other than those at the immediate disposal of the highway agency. The guide points out that the Secretary of Commerce has been given the lead to establish a metric education program, and AASHTO believes that the Subcommittee on Public Education and Awareness, established by the Secretary of Commerce, is a “very appropriate mechanism for conducting a national awareness campaign.” However, our January 1994 report on federal metric conversion activities raises questions about the limited actions that have been taken at the federal level to foster metric education. Furthermore, the report points out that the federal government by itself cannot achieve the goal of metric conversion. The government must depend upon support from its private sector suppliers and from the public; therefore, a national dialogue is critical to defining the next steps in decision-making about a national metric conversion effort. If the federal government, under the leadership of the Department of Commerce, does not actively lead a nationwide conversion education effort, FHWA and state DOTs would be taking the lead in educating the public on the metric system. While FHWA is planning for public awareness and education as part of the sign conversion process, being the lead agency for public awareness out of necessity, rather than being part of an overall national conversion education effort, is a very different matter. However, unless FHWA and the state DOTs take the lead, it will be difficult for the driving public to become educated or, at a minimum, aware of the differences between metric and English highway signs. However, FHWA has not required Battelle to determine the cost of educating the driving public under each option. The Congress designated the metric system as the preferred measurement system in 1988; however, it passed appropriations legislation in 1994 and 1995 that prohibited federal funding of converting highway signs to metric units. As a result, FHWA has postponed requiring states to implement the conversion. The majority of comments on FHWA’s conversion options opposed conversion because of the costs. While implementation is on hold, FHWA has an opportunity to revisit the safety and cost implications of highway sign conversion to metric units. Battelle’s cost study could provide the information needed for such an assessment. Canada’s experience and Alabama’s estimate provide the basis for developing ballpark national estimates to convert highway signs on state and local roads of $334 million and $420 million, respectively. FHWA has tasked Battelle with developing a more comprehensive, data-driven estimate for various conversion options. However, there is concern that little data may be available to estimate the cost of converting signs on local roads. Moreover, it is unclear who is responsible for metric education and how it will be paid for. To help to ensure that the Federal Highway Administration has sufficient information to analyze the implications of the metric conversion of highway signs, we recommend that the Secretary of Transportation direct the Administrator, Federal Highway Administration, to expand the national cost estimate study to include the potential costs of educating the public about converting highway signs to metric units. We met with the Chiefs of the Contract Administration and Technical Development Branches, FHWA, and the Assistant for Energy Policy from the Office of the Secretary to obtain their views on a draft of this report. FHWA disagreed with our proposed recommendation that it expand Battelle’s cost estimate study to include potential education costs for sign conversion. FHWA said that it intends to play a role in metric education and that the states could use the material that it develops or build on those materials with an educational plan of their own. Since it is uncertain how education will be handled or how much it will cost nationwide, we continue to believe that developing such an estimate will help to ensure that the cost estimates developed by Battelle will include all potential costs of conversion. To evaluate the status and costs of converting the nation’s highway signs to metric units, we interviewed responsible officials from FHWA, Ontario’s Ministry of Transportation, the Transportation Association of Canada, the Transportation Research Board, and AASHTO. We also discussed highway sign conversion and its cost with officials from nine state highway departments—Alabama, Colorado, Florida, Georgia, Illinois, Indiana, North Carolina, Tennessee, and Virginia. These states were identified by FHWA as being the furthest along with metric signage and could provide a range of cost estimates for converting highway signs to metric units. We also reviewed the laws and regulations pertinent to metric signage, such as the Metric Conversion Act, as amended; FHWA’s Metric Conversion plan; Federal Register notices; and DOT’s appropriations bills for fiscal years 1994 and 1995. We conducted our review between October 1994 and April 1995 in accordance with generally accepted government auditing standards. As agreed with your office, unless you publicly announce its contents earlier, we plan no further distribution of this report until 7 days after the date of this letter. At that time, we will send copies to interested congressional committees; the Secretary of Transportation; the Administrator, Federal Highway Administration; and the Director, Office of Management and Budget. We will also make copies available to others upon request. If you have any questions concerning this report, I can be reached at (202) 512-2834. Major contributors to this report are listed in appendix I. Gary L. Jones Susan A. Fleming Katherine Chenault The first copy of each GAO report and testimony is free. Additional copies are $2 each. Orders should be sent to the following address, accompanied by a check or money order made out to the Superintendent of Documents, when necessary. Orders for 100 or more copies to be mailed to a single address are discounted 25 percent. U.S. General Accounting Office P.O. Box 6015 Gaithersburg, MD 20884-6015 Room 1100 700 4th St. NW (corner of 4th and G Sts. NW) U.S. General Accounting Office Washington, DC Orders may also be placed by calling (202) 512-6000 or by using fax number (301) 258-4066, or TDD (301) 413-0006. Each day, GAO issues a list of newly available reports and testimony. To receive facsimile copies of the daily list or any list from the past 30 days, please call (301) 258-4097 using a touchtone phone. A recorded menu will provide information on how to obtain these lists. | Pursuant to a congressional request, GAO provided information on the Federal Highway Administration's (FHwA) metric conversion plan, focusing on the: (1) status of federal and states' efforts to convert highway signs to metric units; and (2) possible costs involved in implementing the conversion. GAO found that: (1) in June 1994, FHwA announced that it was postponing the deadline for converting highway signs until at least after 1996 and as a result, most states have deferred their sign conversion activities; (2) FHwA postponed the conversion because recent legislative requirements have prohibited the use of federal-aid highway funds for this activity, and it received negative comments regarding the costs of the conversion; (3) since sign conversion remains a goal, FHwA is continuing with activities to support conversion, such as converting its manual on highway signs into English and metric units; (4) there is no comprehensive estimate of the costs to convert highway signs to metric units, but Alabama has determined that it would cost about $420 million to convert the signs in state and local roads; and (5) an FHwA contractor will be developing a comprehensive estimate, but there is concern that little data are available to estimate sign conversions on local roads, since inventories of local signs may not exist. |
VA’s 157 medical centers serve about 2.3 million veterans each year at a cost of about $14 billion. The Albuquerque medical center provides a wide range of inpatient and outpatient care to about 31,000 veterans who reside primarily in New Mexico, the southern part of Colorado, and the western part of Texas. The center spends about $65 million annually. VA medical centers are authorized to enter into affiliation agreements with nearby medical schools. Through these agreements, VA centers and medical schools may share excess services as a means of improving efficiency of operations and providing patients access to advanced technologies. This may be done through joint acquisition of equipment or contracts that require one party to reimburse the other for the costs of services shared. According to hospital officials, the Albuquerque center currently shares more than 150 medical services, including lithotripsy, with the UNM medical school (see app. II for a detailed discussion of VA’s authority to share services with medical schools). Lithotripsy (in Greek, “stone crusher”) is a process that uses shock waves to fracture kidney stones into pieces small enough to pass through a patient’s urinary tract. While patients may be able to pass smaller stones on their own, many stones are too large to pass through the ureter, which is a gradually narrowing tube within the urinary tract. Before lithotripsy, surgical procedures were often used to remove such stones, requiring a hospital stay. Lithotripsy, by contrast, is generally performed as an outpatient procedure. A specialized piece of equipment—an extracorporeal shock-wave lithotripter—produces the shock waves that break up the kidney stone. Medical personnel needed for the procedure may include a technician to operate the lithotripter, a urologist to monitor and supervise the procedure, and an anesthesiologist or anesthesiology certified registered nurse to administer pain medications and monitor the patient’s overall health during the procedure. Two public and three private hospitals provide lithotripsy in Albuquerque. The Albuquerque VA center provides lithotripsy services to veterans who meet VA’s eligibility criteria. Veterans choosing not to use VA services and nonveterans can obtain lithotripsy services through four other hospitals in Albuquerque—the UNM Health Services Center, a state-operated institution, or three private hospitals (Kaseman Presbyterian, St. Joseph’s, and Lovelace). Each of the latter four hospitals contracts for the use of lithotripsy equipment from one of two sources. UNM has a contract to use VA’s lithotripter at the Albuquerque center; the three private hospitals use a lithotripter supplied under contract with Southwest Therapies, a for-profit company. VA and Southwest Therapies are the only equipment owners in Albuquerque. Previously, hospitals had to send patients needing lithotripsy to health care providers outside the Albuquerque area. The two contractual arrangements for lithotripsy equipment use in Albuquerque differ in several key aspects. The UNM/VA arrangement is based on treatment with a lithotripter permanently located at the Albuquerque center. Under this arrangement, VA provides the site, equipment, technician, nurses, anesthesiologist or anesthesiology certified registered nurse, recovery room, and facility support, while UNM provides the urologist and handles the patient billing services. The arrangement between each of the private hospitals and Southwest Therapies, by contrast, is based on treatment with a mobile lithotripter that is taken to each hospital on a regularly scheduled basis. Southwest Therapies provides the equipment and a technician, while the hospital provides the site, utilities, recovery room, nurses, and other facility support. Under this approach, the urologist and anesthesiologist are private physicians who bill the patient or the patient’s insurance separately for their services, as table 1 shows. Over one-quarter of all lithotripsy procedures for Albuquerque-area patients (353) in 1993 were performed using the Albuquerque center’s lithotripter (see table 2). The procedures were divided nearly equally between VA and UNM patients. Medical centers are generally required to recover the full variable and fixed costs of contract services provided to patients of affiliated medical schools, according to VA’s rate-setting policy. Specifically, the Albuquerque center should include all costs for staffing, equipment usage (including depreciation), supplies, and administration. Variable costs refer to expenses that are incurred only when a lithotripsy procedure is performed, such as staffing, supplies, and administration. For example, if the center used supplies costing $200 for an individual procedure, this amount should be included in the charge. Thus, if 10 procedures were performed, the total cost would be $2,000; likewise, there would be no cost if the center did not perform any procedures. By contrast, fixed costs refer to those expenses that the center incurs regardless of the number of procedures performed. These include equipment depreciation and maintenance, as well as building management. For example, depreciation represents the annual expense of using an asset, such as the lithotripter. Generally, annual depreciation costs are determined by dividing the equipment’s purchase price (less any salvage value) by the number of years of useful life. By allocating this cost evenly over the number of procedures performed, the center can recover its initial investment. The Albuquerque center included the appropriate fixed and variable cost components in its rate-setting process. Nonetheless, the center’s rates were not sufficient to recover all costs. For example, the center charged $1,469 for a basic lithotripsy procedure provided to each UNM patient receiving contract services in 1993. The center had unrecovered costs of $1,894 for each procedure, consisting of $1,670 in fixed costs and $224 in variable costs, as the following sections show. The Albuquerque center incurred total annual fixed costs of $360,387 for lithotripsy services in 1993. The center estimated that a charge of $655 would be sufficient to recover fixed costs in its overall charge for each lithotripsy procedure in 1993. Depreciation costs accounted for the majority of the fixed costs, as table 3 shows. Our analysis showed that a charge of $655 per lithotripsy procedure was not sufficient to recover the center’s fixed costs. This can be seen by comparing the revenues such a charge would produce against the total fixed costs of $360,387 that Albuquerque incurred. Collecting $655 for each of the 155 lithotripsy procedures conducted in 1993 would recover about $101,525, leaving a shortfall of about $258,862 or $1,670 per procedure. This shortfall occurred because the Albuquerque center’s charges were based on an unrealistically high estimate of the total number of lithotripsy procedures it would perform in 1993. The center assumed that its fixed costs would be spread over 882 procedures during the year; the number of procedures actually performed was 155, less than 20 percent of this estimated workload. When we asked how the estimate of 882 had been developed, officials at the center said they based it on a low estimate of the equipment’s annual capacity. VA policy recommends, but does not require, that workload be developed on the basis of a center’s actual usage during the previous year (historical workload) and expected usage under new sharing agreement(s) (potential demand). If this approach had been used by the Albuquerque center, workload would have been estimated at 256 procedures—140 veterans and military beneficiaries served in 1992 and 116 patients targeted in the UNM contract for 1993. Our discussions with center officials indicated that they were unaware of this suggested workload estimating methodology when they developed their 1993 workload estimates. VA’s policy also recognizes that the accuracy of projections will greatly affect the charges assessed for a service that is provided under a sharing agreement with an affiliated medical school. Accordingly, VA recommends that the projected total workload be reviewed quarterly and the charges be adjusted if the revised workload estimate shows the per-procedure cost would change by more than 5 percent. Officials at the center made no effort to revise the charges for the fixed-cost components during 1993 and said that they were unaware of this provision. During 1993, the number of procedures averaged 39 per quarter, with a low of 34 in the second quarter. That the number of procedures performed would be well below the estimated workload was clear early in 1993. Adjustments should have been made to the charges then but were not. To illustrate the effect of this overstated workload on the center’s recovery of contract lithotripsy costs, we examined the center’s charge of $1,469 for a basic lithotripsy procedure. The center’s basic charge may be divided into two cost categories—$755 for the lithotripter and technician and $714 for facilities support, including anesthesiology services. These categories are consistent with those used by other Albuquerque lithotripsy providers and they facilitate our comparative analysis with these providers. Each category contains variable costs (staffing, supplies, or administration) as well as fixed costs (equipment depreciation and maintenance or building management). To estimate the amount of unrecovered costs, we compared the center’s 1993 charges for these cost categories using the center’s workload estimate of 882 and its actual workload of 155 procedures. To fully recover the Albuquerque center’s fixed costs spread over the 155 procedures provided, the center would have needed to charge about $3,360 rather than the $1,469 it actually charged. These charges are summarized in table 4. In February 1994, the center revised its lithotripsy charge for UNM patients. This revision included an adjustment in the expected number of procedures as well as changes to key assumptions and cost data. Because these adjustments had an offsetting effect, there was essentially no change in the rate—$1,451 for 1994, compared with $1,469 for 1993. Two key assumptions in the center’s calculations indicate that the center may again recover only a small portion of the fixed costs of lithotripsy services provided to UNM patients. The Albuquerque center computed its 1994 prices on the assumption that it would conduct 500 lithotripsy procedures at the center in 1994. While this represents a 43-percent reduction from the center’s estimate of 882 a year earlier, it still appears unrealistic given the experience of the past several years—140 procedures actually conducted in 1992 and 155 procedures actually conducted in 1993. Center officials were not able to offer support for their projection that the number of procedures would more than double. The center’s estimated workload would have been 223 procedures if it had been developed on the basis of historical workload and potential demand under UNM’s sharing agreement. During 1993, the center conducted 107 procedures on veterans and military beneficiaries, and the UNM sharing agreement calls for it to provide 116 procedures in 1994. The center’s charge of $1,451 should fully recover costs if the estimated workload (500 procedures) is performed. However, a higher charge would be needed to cover costs if fewer procedures are performed. As of June 30, 1994—halfway through 1994—the center had performed 97 procedures and we were told that the rate of utilization was not expected to increase significantly. Although adjustments to the charge appear warranted, Albuquerque center officials told us that they have no plans to do so. Albuquerque center officials computed the 1994 charges on the assumption that the lithotripter’s initial acquisition costs would be depreciated over a period of 9 years—4 years longer than the period used to determine the 1993 charges. Center officials told us that this adjustment was made to reflect the lower than anticipated utilization rate during the first 2 years of operations. Extending the recovery period reduces the amount of acquisition costs to be recovered each year and, hence, the amount charged for each procedure performed. Although the lithotripter’s manufacturer has guaranteed the Albuquerque center that service and parts will be available for 10 years, technological advances in medicine are sometimes so rapid as to call into question an assumption that a piece of equipment like a lithotripter will not become technologically obsolete before it reaches the end of its useful life. Using such a long recovery period increases the risk that its costs will not be recovered before the treatment of kidney stones moves on to new equipment or other types of medical procedures. In this regard, Southwest Therapies told us that they are depreciating their lithotripters over a 5-year period. VA policy calls for annual depreciation costs to be calculated using the actual purchase price, less any assigned salvage value, divided by the number of years of expected useful life. In its 1993 depreciation determination, the Albuquerque center assumed a 5-year useful life, with no resulting salvage value. On this basis, the annual depreciation for the lithotripter was $249,645, which represents one-fifth of the lithotripter’s purchase price ($1,248,225). Because of the low utilization, the center realized only $120,360 of the almost $500,000 (less than 25 percent) expected during the first 2 years of operation. As a result, the center has yet to realize $1,127,865 in depreciation costs. VA policy does not provide guidance for developing a change in the estimated useful life of equipment. However, generally accepted accounting principles provide that when a change in estimated useful life is determined to be necessary, the remaining value of the asset is to be divided by the remaining estimated life. In setting the 1994 charges, the center’s officials extended their estimate of the lithotripter’s useful life from 5 years to 9 years. This gave the center 7 years (1994-2000) to depreciate the remaining acquisition costs rather than the 3 years remaining from their original estimate of a 5-year useful life. This change should have resulted in an annual depreciation cost of $161,124, or a per-procedure charge of $322 spread over the center’s annual workload estimate of 500 procedures, if done in accordance with generally accepted accounting principles. However, the center’s officials decided to ignore the first 2 years of accumulated depreciation realized ($120,360) and divided the total acquisition costs of $1,248,225 by the estimated 7 years of remaining useful life. This resulted in an annual depreciation cost of $178,318, or a per-procedure charge of $357 spread over 500 procedures annually. In effect, this approach would fully depreciate the lithotripter’s costs in a little over 6 years. To illustrate the effects of these assumptions on the center’s basic lithotripsy charge, we evaluated what would happen if the center had used a more reasonable workload estimate of 223 procedures (computed as suggested by VA’s policy) rather than 500 and a depreciation period of 5 years (as used in 1993 pricing structure) rather than 9 years. In all, changing the assumptions in this way would result in a 1994 charge of about $3,271 rather than $1,451. For the lithotripter and technician, the charge would rise from $658 to about $2,168, of which $1,686 represents depreciation costs. For facilities support, the charge would rise from $793 to about $1,103. Appendix VI provides further details on how we developed these estimates. To assess how the center’s assumptions about the lithotripter’s useful life affect the center’s charges, we estimated annual depreciation costs for periods of 3, 5, and 7 years, using a workload estimate of 223 procedures. For these time periods, the center’s charges to recover the remaining acquisition costs ($1,127,865 as of January 1994) range between $723 and $1,686 as table 5 shows. By charging UNM for less than half of its 1993 costs to provide basic lithotripsy procedures, the Albuquerque VA center is not recovering its equipment depreciation costs. More specifically, the center did not charge UNM about $91,000 of the costs of the 48 lithotripsy services provided to UNM patients in 1993. The unrecovered costs averaged nearly $1,900 per procedure. In theory, UNM could keep the entire savings or it could pass some or all of it on to patients or their insurers. Our analysis of UNM’s pricing actions suggests that both situations occurred in 1993. Also, a comparison of rates charged by UNM and other providers suggests that VA could fully recover its costs and remain competitive in the Albuquerque market. As previously discussed, to fully recover its fixed and variable costs, VA should have charged about $3,360 for each of its basic lithotripsy procedures in 1993, rather than the $1,469 per procedure charge. The effect of VA’s price to UNM is difficult to determine precisely because there is not always a direct relationship between a service’s cost and its price in a complex, competitive market. A provider may have, in effect, several prices for the same procedure. For example, a hospital may have a different charge for certain types of insured patients and those paying individually. In addition, an insurer may have a policy of not paying beyond a specified amount, even if the hospital’s charge is higher. Also, one insurer may negotiate a rate that is different from the rate the hospital submits to other insurers or to individual patients. For most of 1993, UNM appears to have greatly benefited by its contract with VA. While UNM paid the Albuquerque VA center only $1,469 for each procedure, UNM’s lithotripsy charge to individuals and insurance companies was the highest in the area. UNM kept some or all of the savings in the form of increased revenues. Table 6 shows the breakdown of charges under the most prevalent UNM rate during 1993 and under one of the private hospital/Southwest Therapies packages. While UNM’s total charges under the two packages were the highest, the charges were relatively comparable ($9,029 vs. $7,977). However, the breakdown of charges for service components shows major differences, two in particular. First, the center’s charge of $755 for the lithotripter and technician was about one-quarter of Southwest Therapies’ charge of $2,920. Second, the combined Albuquerque VA’s and UNM’s charges of $5,750 for facilities support were over twice the $2,617 charge of the private hospital. Toward the end of 1993, changes in UNM’s pricing for lithotripsy services may have had the effect of passing the savings to UNM patients, insurers, and health maintenance organizations in the form of lower rates. In October 1993, UNM reduced its existing charge for lithotripsy from $9,029 to $6,950, a 23-percent reduction. UNM’s Chief Financial Officer said that UNM did so after deciding that its charges for lithotripsy were too high. The reduction came entirely from UNM’s portion of facilities support. At about the same time, UNM also negotiated an even lower lithotripsy rate of $3,550 with a local health maintenance organization. This 49-percent reduction in the $6,950 rate, came from two places: a reduction of $1,180 in the urologist’s fee, and a reduction of $2,220 in UNM’s facilities support charges. Table 7 shows a breakdown of these two new rates. In commenting on a draft of this report, the Vice President for Health Services, UNM, explained the rationale for the reduction. A large percentage of the discount, she said, is because patients enrolled in this health maintenance organization have their prelithotripsy work-up and postlithotripsy follow-up performed by private urologists, and the UNM urologists and UNM clinical facilities are engaged for only that portion of care directly associated with delivery of lithotripsy treatment. She noted that the remainder of the discount is associated with increased volume, case management, and similar factors that ordinarily provide the basis for offering discounts from usual and customary charges to managed care organizations. During 1994, UNM discussed the possibility of providing lithotripsy services with another health maintenance organization. This health maintenance organization purchases lithotripsy from one of the private Albuquerque hospitals. The negotiations have included a number of factors, including cost. At this time, however, UNM and the health maintenance organization have postponed further negotiations until our concerns about VA’s charges are resolved. The effect of changes in the center’s pricing practices on its competitiveness in the market for lithotripsy services in Albuquerque is also difficult to determine precisely. This occurs because the center’s price is only one of many variables, including access and re-treatment rates, that may affect decisions about which providers of lithotripsy services to use. On the basis of price, it appears that the Albuquerque center could comply with VA policy by charging enough to fully recover its costs and still offer a price that is competitive with the services provided by Southwest Therapies and other providers. For example, the center’s 1994 price for use of the lithotripter and technician is $658; Southwest Therapies’ price is $2,920. If the center charged a price that fully recovered costs within 5 years, the charge for this portion of its services would be about $2,168—still below Southwest Therapies. Likewise, it appears, on the basis of price, that UNM could pay the Albuquerque center for the full costs and still charge insurers and others a price that is competitive in the Albuquerque market. For example, since October 1993, the regular price for the UNM service has been $6,950; bills from private hospitals indicate that the total price for the service they offer with Southwest Therapies remains between $8,000 and $9,000. If the center charged a price for its lithotripter and technician ($2,168) and facilities support and anesthesiology ($1,103) that fully recovered costs within 5 years, the charge to UNM would need to increase by about $1,820 over the $1,451 now charged. If UNM passed on all of these costs to patients and insurers, its regular charge would increase to about $8,770. In theory, patients have the flexibility to choose among the various lithotripsy providers. Clearly, patients who pay their own medical bills or who have medical insurance, such as Blue Cross/Blue Shield, have greater latitude in selecting providers. If they belong to a health maintenance organization, patients seeking lithotripsy treatment may have less choice in where they can go to obtain services. Such organizations may have contracts with specific hospitals for such services. For example, HealthPlus, a local organization, contracts for services from Kaseman Presbyterian Hospital. However, some health maintenance organizations, such as QualMed, may contract for lithotripsy services with more than one hospital. When selecting a lithotripsy provider, patients’ choices may be affected by the recommendation of the urologist or other specialist who diagnosed their condition. Medical and administrative staff of the Albuquerque lithotripsy providers and user organizations indicated that several factors, in addition to cost, could also play a part in patients’ decisions, as discussed below. Scheduling of services could potentially vary substantially between providers. The private hospitals rely on a lithotripter that Southwest Therapies transports from hospital to hospital on a regular schedule. This lithotripter is generally at a hospital only 1 or 2 days a month and, as such, may not always be available when needed. By contrast, the Albuquerque center generally schedules UNM patients for one day each week, but the center also treats these patients on other days, if medically necessary. The types of anesthesia vary between providers, generally due to the type of lithotripters used. The private hospitals use general anesthesia, which produces complete unconsciousness, muscular relaxation, and absence of pain sensation during the procedure. These hospitals use the Southwest Therapies’ lithotripter and the manufacturer recommends the use of general anesthesia with that equipment. UNM uses local anesthesia as recommended by the manufacturer of the lithotripter used by the Albuquerque center. Local anesthesia produces muscular relaxation and absence of pain sensation in a limited part of the body; patients maintain consciousness during the procedure. Many health care practitioners regard local anesthesia as somewhat less risky than general anesthesia because it decreases the chance of complications or potentially bad outcomes. Southwest Therapies and VA have re-treatment rates that vary. Re-treatment rates refer to the frequency which patients must return for a second treatment because the first was not effective. Re-treatment may be needed, for example, if the stone did not fracture sufficiently to pass through the patient’s system. According to a VA urologist, the national re-treatment rate is about 20 percent. By comparison, the Albuquerque center reported a re-treatment rate of 15 percent and Southwest Therapies reported a rate of about 5 percent. Both providers require full payment for any re-treatment. The Albuquerque medical center’s charges for lithotripsy services do not recover the full costs of services provided. The main reason for the problem—a flawed price-setting methodology—can be corrected. First, the Albuquerque medical center should develop the lithotripsy charges using a workload estimate that is based on historical workload for veterans and potential demand under sharing agreements. Second, the center should include an equipment depreciation cost that is based on a shorter useful life. Without such actions, it seems likely that the Albuquerque center’s pricing practices will continue to fail to recoup costs and may adversely affect the market for lithotripsy services in the Albuquerque area. The Secretary of Veterans Affairs should direct the Director of the Albuquerque medical center to raise the price of lithotripsy services provided to nonveterans to a level that will recover the full fixed and variable costs of the services provided, as VA policy requires; and implement a process for periodically reviewing the adequacy of workload projections as VA procedures recommend, and use the results to adjust prices, as appropriate. We requested written comments on a draft of this report from the Department of Veterans Affairs and the University of New Mexico School of Medicine. The University’s Vice President for Health Sciences, in a letter dated October 18, 1994 (see app. VII), provided some clarifying observations that are included in the report where appropriate. However, she declined to offer an opinion on the appropriateness of VA’s pricing policies and procedures. The Secretary of Veterans Affairs provided written comments in an October 31, 1994, letter (see app. VIII) wherein he agreed that the Albuquerque medical center has not been recovering the full costs of its lithotripsy services provided to UNM. He also agreed with our assessment of why this situation occurred—a flawed price-setting methodology that set usage rates significantly higher than the actual rate. The Secretary, however, disagrees with our recommendations. First, he does not believe that the center’s lithotripsy prices should be raised to a level that will recover the full costs of the services provided. Rather, he prefers to raise the basic lithotripsy price by only $162, a significantly lower amount than is needed to fully recover costs. Second, he prefers to allow the center to review prices on an annual rather than on a quarterly basis as VA policy recommends. In our draft report provided for the Secretary’s review, we had recommended that the Albuquerque center adhere to VA’s policy. While we agree that annual pricing reviews may be a reasonable alternative, we disagree with the Secretary’s view that the center should not be required to fully recover costs. Depending upon the number of years that VA chose to recover its acquisition costs for the Albuquerque lithotripter, the medical center, in our opinion, would have recovered the full costs of its basic lithotripsy service in 1994, if it had charged between $2,308 and $3,271 per procedure. The lower charge could recover initial equipment acquisition costs over a 9-year period, whereas the higher charge could achieve full recovery in 5 years. Toward this end, we recommended that the Albuquerque center raise its price to achieve full cost recovery and indicated in the report our preference that such recovery be achieved in the shortest time period possible; that is, 5 years rather than 9 years. “a methodology that provides appropriate flexibility to the heads of facilities concerned to establish an appropriate reimbursement rate after taking into account local conditions and needs and the actual costs to the providing facility of the resource involved.” He also indicated that it is consistent with cost recovery practices that other VA medical centers have developed to price contract services involving low-volume, high-technology equipment. The Secretary concluded that the Albuquerque medical center qualifies to use a low-volume, high-technology equipment pricing practice because its lithotripter has an annual workload of 200 procedures. He explained that this practice involves a different methodology for determining the amount of equipment depreciation costs to be recovered per procedure than the one previously used in 1993 and 1994. In 1993 and 1994, the center used a methodology that allocated the equipment acquisition costs ($1,248,225) over the number of procedures to be actually performed during the equipment’s useful life (9 years). For example, the center expected to recover $178,318 in each of the 9 years and, using a projected workload of 500 procedures in 1994, included a charge of $357 in its basic lithotripsy price ($1,451) for that year. The 1995 methodology bases the depreciation charge on the number of procedures the equipment is capable of performing during its useful life. In this case, the center estimates that the equipment can perform 4,500 procedures in its life and, as such, decided to recover depreciation costs of $250 per procedure, or 1/4,500 of the equipment acquisition cost ($1,248,225 minus salvage value of $124,823). We find the Secretary’s approval of this methodology to be troublesome for several reasons. In general, it exposes the medical center (and taxpayers) to an unreasonably high risk of a large unrecovered equipment acquisition cost; ignores local market conditions, which seem to indicate that a faster recovery of equipment cost (and lower risk of unrecovered costs) is possible; and ignores the impact that such pricing practices may have on the competitive environment in the Albuquerque lithotripsy market. The Albuquerque medical center’s 1995 pricing methodology would result in a slower recovery of equipment acquisition costs than the center’s previous pricing practice—a situation that greatly increases the likelihood of potentially large unrecovered costs. The amount recovered will drop from $357 per procedure in 1993 to $250 in 1994. As a result, the center will recover about $50,000 a year compared with $71,000 at current usage rates of about 200 procedures a year. If usage continues to average 200 procedures a year, the center will recover less than half of the equipment acquisition costs, unless the equipment’s useful life greatly exceeds 9 years (the useful life that the center used in setting its 1994 price). Over a 9-year period, the center could expect to perform about 1,800 procedures, which would recover $450,000 of the almost $1.2 million acquisition costs. In contrast, the center would need to operate the equipment for 25 years to fully recover costs at current usage rates of 200 procedures per year. This seems unrealistic in that (1) the manufacturer has guaranteed parts for and maintenance of the lithotripter for only 10 years and (2) advances in medical technology would likely render the equipment obsolete well before the end of 25 years. It appears that VA will need an almost three-fold increase in utilization (about 500 procedures) if it is to fully recover costs within 9 years under its pricing policy. Given that there were only 353 procedures performed by all lithotripsy providers in Albuquerque during 1993, it seems that the center would have trouble reaching this utilization level even if all demand for lithotripsy services shifted to UNM. The local market in Albuquerque for lithotripsy services consists of two equipment providers—Southwest Therapies and the Albuquerque medical center. As pointed out in our report, Southwest Therapies charges medical facilities $2,920 per procedure for use of its lithotripter and technician compared with the Albuquerque center’s charge of $755 for use of its lithotripter and technician. In 1993, three hospitals in Albuquerque purchased 259 procedures from Southwest Therapies. Thus, it seems that the Albuquerque center could raise its price—to cover a more reasonable depreciation charge—by over $1,300 and still offer UNM a competitive alternative to the market price. The Albuquerque center’s below-cost pricing practice may also affect the competitive environment in the Albuquerque lithotripsy market because such a practice greatly increases the disparity between the costs for the use of lithotripter and technician paid by UNM and other competing hospitals. Because the Albuquerque center will continue to charge UNM less than half of the depreciation costs, the center, in effect, is underwriting the costs of lithotripsy services provided to UNM’s patients—a pricing practice that appears to foster an unlevel playing field in the Albuquerque lithotripsy market. The Secretary, in an attachment to his letter, indicated that the center considered UNM’s charges to third parties when it determined its prices. In this regard, it suggests that UNM’s charges do not equate to receipts, given that UNM serves indigent patients. While there may be some rationale for reducing the costs of care for UNM’s indigent patients, we find it difficult to comprehend why VA would want to subsidize the costs of care provided to UNM’s insured patients. Our analysis of UNM’s charges indicates that it is passing on the savings to its customers in the form of lower prices and retaining some or all of the savings for its own use in certain situations. As we pointed out earlier, a local health maintenance organization contracted with UNM to obtain a greatly reduced rate of $3,550 for the entire service, including the attending physician. This $3,550 price represents a 55-percent reduction from the price charged by a private hospital providing lithotripsy in the Albuquerque market. Also, as discussed earlier, another local health maintenance organization has inquired about purchasing UNM’s services. Such large price reductions would seem to provide a powerful incentive for other organizations to contract for use of UNM’s services. The Secretary noted that he will ask VA’s Assistant Secretary for Finance and Information and Resources Management, as well as VA’s Under Secretary for Health, to examine VA’s policies and assess their continued appropriateness to enable VA to recover its actual cost. We support this action and strongly urge the Assistant Secretary and Under Secretary to revise the center’s pricing practice so that it reduces the government’s risk of potentially large unrecovered equipment costs, while appropriately taking into account local market conditions so as to maintain a fair and competitive environment for lithotripsy providers in Albuquerque. VA policy appropriately states that medical centers should be fully reimbursed for the costs of services provided to affiliated medical schools (such as UNM). But in this case, the Secretary concludes that the Albuquerque center’s 1995 pricing practice is appropriate for low-volume, high-technology equipment, even though the pricing practice does not fully recover equipment costs. In fact, the center sold a service to UNM for $1,451 in 1994 and will sell it for $1,613 in 1995, when the service actually costs between $2,308 and $3,271. This looks like a bad business deal for VA (and taxpayers) and a good business deal for UNM. In summary, we believe that VA’s pricing policy should adhere to a guiding principle that equipment acquisition costs should be recovered as quickly as market conditions allow. Toward this end, we continue to recommend that the medical center raise its price to a level that will recover the full costs of lithotripsy services within the shortest possible time period. We continue to favor the center’s original methodology; that is, spreading the depreciation costs evenly over a prescribed recovery period and basing the charge on the expected number of procedures to be actually performed during each year, as long as the charges are competitive in the market. In our draft report, we recommended that the Albuquerque center implement a process to review the adequacy of workload projections on a quarterly basis, as VA policy recommends. In his response, the Secretary said that annual reviews would be more appropriate. Our recommendation was aimed at bringing the Albuquerque center into compliance with VA’s policy because we found quarterly reviews to be a reasonable approach. We do not disagree with the Secretary’s views that annual rather than quarterly reviews could meet VA’s pricing requirements. Given the Secretary’s desire to require annual reviews for the Albuquerque center, we believe that it would be appropriate for the Secretary to update VA’s policy statement on workload reviews so that it advises other centers that annual reviews are acceptable. As such, we have modified our recommendation to require the Albuquerque center to implement a process for periodically reviewing the adequacy of workload projections. Unless you publicly announce its contents earlier, we plan no further distribution of this report for 30 days. At that time, we will send copies to the Secretary of Veterans Affairs and interested congressional committees. We will also make copies available to others upon request. This report was prepared under the direction of Paul Reynolds, Assistant Director, Federal Health Care Delivery Issues. Please call Mr. Reynolds at (202) 512-7101 or Linda Bade, Senior Evaluator, at (503) 235-8507 if you or your staff have any questions. Susan Poling, Assistant General Counsel, also contributed to this report and can be reached at (202) 512-5881. Other evaluators who made contributions to this report include Dwayne Curry, William Stanco, and Stanley Stenersen. At the Albuquerque center, our work focused on reviewing the center’s agreement for the sharing of lithotripsy services and assessing whether the prices charged were fully recovering costs as stipulated in VA policy guidance. To obtain background on the issue, we discussed with Albuquerque center officials the factors that were involved in the decision to acquire lithotripsy equipment and to enter into a VA/UNM sharing agreement. To help ensure that we fully understood VA policy on the pricing of shared services, we also talked with VA headquarters officials from the offices in charge of surgical services and sharing with other institutions. To help assess the agreement’s pricing structure, we held discussions with officials at the Albuquerque center, including the Director, Associate Director, Chief of Quality Management (who has responsibility for oversight of lithotripsy services), and members of the center’s fiscal office. These officials explained the processes that were used to develop the center’s price for lithotripsy services in 1993 and 1994, including a detailed description of the individual cost components. They also described the methodology used to allocate costs for each component and provided documents supporting the cost data used. We compared the center’s pricing processes to VA’s policies and guidance and tested the reasonableness of the documentation provided. We also reviewed VA’s utilization and billing records for the nonveterans served under this sharing agreement in calendar year 1993 and confirmed these against similar documentation obtained from UNM. Our work at UNM focused on activities relating to its contract with VA for lithotripsy services. We discussed the sharing agreement and UNM’s related pricing information with officials in the finance and managed care offices at UNM. We obtained and analyzed utilization, billing, and other records relating to the treatment of UNM patients, as well as UNM’s pricing of the services it provided. We also discussed negotiations UNM was conducting with regard to providing lithotripsy services for other medical facilities or health maintenance organizations in the Albuquerque area. We also obtained pricing information for the services provided by other hospitals providing lithotripsy in the Albuquerque area—Kaseman Presbyterian, St. Joseph’s, and Lovelace. At VA and UNM, we had access to all records, because the providers are government agencies; at these other providers, which are all private institutions, our access to information was limited to those utilization and pricing documents that they were willing to provide. Specifically, we obtained a sample of actual bills for lithotripsy services that the providers told us were representative of their charges, and we discussed the processes the providers used to develop the charges billed. At Southwest Therapies, the only other provider of lithotripsy equipment in the Albuquerque area, we obtained and reviewed 1993 billings and utilization data. We compared the service provided, the financial data, and the utilization information we obtained with the information supplied by the Albuquerque center, conducting follow-up discussions as needed. At the three private hospitals in the Albuquerque area (Kaseman Presbyterian, St. Joseph’s, and Lovelace), we interviewed hospital officials and obtained sample billing documents and other related documentation. To the extent possible, we compared the information provided with the information obtained from the Albuquerque center and UNM. To help gain an understanding of how the Albuquerque center’s pricing actions might be affecting the market for lithotripsy services in the Albuquerque area, we spoke with officials at the three hospitals and with an official of a local health maintenance organization (QualMed) about their desire to either change their current service provider or expand their own capabilities in the provision of these services. We also discussed the provision of anesthesia services connected with lithotripsy (as it is provided at Kaseman Presbyterian Hospital) with the Anesthesiology Medical Consultant’s Group in Albuquerque, New Mexico. We obtained data related to how anesthesiologists develop their per-procedure rates and a range within which they might bill for such services. Our review was performed from January 1994 to August 1994 in accordance with generally accepted government auditing standards. Title 38, section 8153 of the United States Code provides VA with contracting authority to share specialized medical resources with non-VA health facilities. These contracts are generally called sharing agreements (38 U.S.C. section 8153 (Supp. IV 1992), as amended by P.L. 103-210, section 3(c), Dec. 20, 1993). Under the statute, sharing agreements may not result in “diminution of services to veterans” (38 U.S.C. section 8151 (Supp. IV 1992), as amended by P.L. 103-210, section 3(a), Dec. 20, 1993). Specialized medical resources are defined to include equipment, space, or personnel, which are either unique in the medical community or are subject to maximum utilization only through mutual use because of cost, limited availability, or unusual nature (38 U.S.C. section 8152(2)(Supp. 1992) as amended by P.L. 103-210, section 3(b), Dec. 20, 1993). VA can use section 8153, for example, to share equipment it owns with outside providers or to gain access to equipment owned by others. Sharing agreements may be used to secure specialized medical resources that otherwise might not be feasibly available or to effectively utilize certain other medical resources when the Secretary determines it is in the best interest of the prevailing standards of the Department medical care program. However, under section 8153, the Secretary may only enter into sharing agreements if the contract will obviate the need for a similar resource to be provided in a VA facility or the VA resources that are the subject of the agreement and that have been justified on the basis of veterans’ care are not used to their maximum effective capacity (which is the case with the lithotripter at the Albuquerque center). The law is not very specific with regard to how VA is to price the medical resources that it provides to medical schools, health care facilities, and research centers. The law states that reimbursement must be based on a methodology that provides appropriate flexibility to the heads of VA facilities after taking into account local conditions and needs and the actual costs to the providing facility of the resource involved. The guidance (VA Manual, G-13, M-1, Part I, p. 3, Mar. 11, 1986) in effect when the VA Albuquerque entered into its sharing agreement with the University of New Mexico Medical Center for lithotripter services generally required that charges cover the full cost of services rendered; supplies used, including normal depreciation; and amortization of equipment, according to life expectancy. In commenting on a draft of this report, the Secretary of Veterans Affairs approved the use of an alternative pricing practice for low-volume, high-technology equipment contained in VA Manual G-12, M-1, Part 1, appendix B. This pricing practice may not fully recover costs. (see app. VIII.) The current VA manual states that when a proposed sharing agreement involves the contractor’s use of federally owned property, such as medical space or medical equipment (which is the case with the lithotripter at Albuquerque), VA should obtain a fair market value in accordance with comparable commercial practices. The negotiated cost need not be limited to the recovery of costs and may produce net revenue to the government (M-1, Part 1, chapter 34, July 14, 1993). The guidance also references OMB Circular A-25 (Sept. 23, 1959), which includes in its definition of full cost an appropriate share of depreciation of equipment; this circular provides a basis upon which user charges are to be set. Another provision of Title 38 permits VA to enter into agreements with institutions for the joint acquisition of medical equipment (38 U.S.C. section 8157 (Supp. IV 1992)). Under this provision, the Secretary may not pay more than one-half of the purchase price, the equipment must be jointly titled to the United States and the institution, and the Secretary and the institution must have arranged by contract under 38 U.S.C. section 8153 for the exchange or use of the equipment before the equipment is acquired. Although this section does not apply to the Albuquerque acquisition, other VA medical centers have jointly purchased lithotripters in partnership with affiliated medical schools. Medical centers are to recover the full cost of contract services provided to patients of affiliated medical schools, according to VA’s rate-setting policy. Specifically, the Albuquerque center must charge, at least, all fixed costs for equipment and building usage. The Albuquerque center incurred an annual fixed cost of $360,387 to provide lithotripsy services to veterans and nonveterans in 1993, as table III.1 shows. This appendix explains how the estimates for each of these cost components were developed. Depreciation represents the expense of using an asset such as the lithotripter. VA policy calls for annual depreciation costs to be calculated using the actual purchase price, less any assigned salvage value, divided by the number of years of expected useful life. In its initial depreciation determination, the Albuquerque center assumed a 5-year useful life, with no resulting salvage value. On this basis, the annual depreciation for the lithotripter was $249,645 which represents one-fifth of the lithotripter’s purchase price ($1,248,225). This cost component covers the contract with the manufacturer for service and repair of the lithotripter and associated component parts. The cost for this category ($72,865) was the actual cost of the maintenance and repair contract for 1993. This component covers such costs as utilities and general maintenance for the area where the lithotripter is located. VA policy calls for establishing the general cost within this category by determining what percentage of the facility’s total square footage is devoted to the medical procedure and applying this percentage to the facility’s total engineering and building management costs. Our 1993 estimate uses the amount ($37,877) developed by the center. Our analysis was based mainly on the center’s basic level of lithotripsy services. However, the center has four levels of services, each one involving some differences in terms of the amount of time, equipment, material, supplies, and staff resources involved in conducting the procedures. The four are as follows: Basic procedure: encompasses the fracturing of kidney stones by the lithotripter without the need for additional procedures or instrumentation. Cystocopsy: involves the use of special instruments and equipment to perform related urology procedures as well as lithotripsy. Uteral catheterization: involves the placement of a uteral catheter to assist in the visualization of some types of kidney stones under X ray. Lithotripsy is performed after the placement of this catheter. Stent: the most time consuming of the four levels, this involves placing a tube in the patient’s ureter, usually after lithotripsy, in order to allow the kidney to drain properly and to relieve pain. In addition to these four levels of services, the Albuquerque center also provided the option of conducting the procedure at any of the four levels using VA’s staff urologist or a certified urologist from the UNM Health Services Center. This means that each level of service has two rates—one including the cost of the VA urologist, the other not including it. Table IV.1 shows the resulting eight rates for the four levels of service as they were specified in the original sharing agreement for 1993. The rates range from $1,469 for a basic procedure without a VA-supplied urologist to $2,216 for a procedure using a stent and with a VA urologist performing the procedure. Under the contractual agreement, these services include equipment, space, materials, ancillary services (such as X ray), and the following staff costs: physician assistant, registered nurse, anesthesiologist, technician, and secretarial services. The rates include depreciation and maintenance, which are discussed in more detail in appendix III. To fully recover its costs for a basic lithotripsy procedure in 1993, the Albuquerque center would have needed to charge about $3,360 rather than the $1,469 it actually charged. The charge of $3,360 per procedure would have been consistent with VA policy, which requires that the price for services sold under sharing agreements should recover the full cost of services rendered and supplies used, including the depreciation cost of equipment. This price is to include the following cost components: staffing, supplies, equipment (depreciation and maintenance), administration, and engineering and building management. This appendix compares the center’s actual costs for the major cost components of its basic lithotripsy service to the amounts the center charged for each component. The Albuquerque center’s $1,469 charge may be separated into two parts: a $755 charge for operation of the lithotripter, including the services of a a $714 charge for facilities support, including anesthesiology services. The $1,469 charge would have recovered the center’s costs if the center had performed 882 procedures or more in 1993. However, the center only performed 155 procedures and, as a result, did not recover $258,862 of the $360,387 in fixed costs spent to provide lithotripsy services. As the following sections show, most of the shortfall relates to the center’s charge for operating the lithotripter and only a small portion was attributable to the center’s charge for facilities support. We estimate that the Albuquerque center should have charged $2,224 for its lithotripter and technician, rather than the $755 charged. Most of this difference relates to the allocation of depreciation costs over 882 procedures rather than 155 procedures. Table V.1 separates the difference by the specific cost components included in the charge. VA’s calculations for staffing were not affected by its overestimation of the number of procedures that would be performed in 1993. This is because staffing costs are assessed on a procedure-by-procedure basis, not on estimated workload. VA policy calls for staffing costs to include professional administration and quality control, clerical and technical support personnel, and fringe benefit and bonus amounts associated with these categories. Salary, fringe, and bonus costs were computed based on average salaries for the classes of staff involved in the procedure, not on salaries for the individual staff actually participating in a particular procedure. Although this approach is likely to produce some distortions in individual cases, it would be difficult for the center to account for each variation that could exist. As a result, we found the center’s determination of costs to be consistent with VA’s policy. For 1993, the center’s fiscal staff used $1.8 million as the purchase amount for the lithotripter, adopted a period of 5 years as the lithotripter’s useful life, assumed it would have no salvage value at the end of the 5-year period, and divided the resulting depreciation amount of $360,000 by 882 estimated procedures to arrive at a per-procedure equipment depreciation charge of $408. This amount was incorrect for two reasons. First, the computation was based on the amount that had been obligated for the lithotripter rather than its actual price. The obligated amount was $1.8 million, but the purchase price was $1,248,225—a difference of $551,775. This created an overstatement of $110,355 in the annual depreciation expense allocated to the 882 lithotripsy procedures. The second reason was the use of the unrealistic workload, and it had the opposite effect—it understated the per-procedure cost. Because the center performed only 155 total procedures instead of the estimated 882, each procedure understated the depreciation amount by more than $1,900. Adjusting this amount to account for the understatement caused by using the incorrect price, the difference between the center’s actual depreciation charge and our recalculated amount was $1,203. A related consideration is whether a salvage value could have been assigned to the equipment, thereby decreasing the depreciation amount. A representative of the company manufacturing the lithotripter told us that the maximum salvage value after a 10-year period would be 20 percent of the purchase price or about $250,000. The representative said his company had guaranteed service and repair for 10 years from the date of purchase—5 years beyond the useful life assigned for depreciation purposes. After that time, the company did not guarantee that parts would be available. The representative said medical technology advances would also affect the equipment’s resale value during the 10-year period. Because of these uncertainties, we accepted the Albuquerque center’s judgment that no salvage value should be included in the depreciation cost estimate. The same two factors that caused errors in the equipment depreciation charge also caused errors in the charge for equipment maintenance and repair. When the charge for this component was developed, the actual contract price had not been determined. Thus, the charge was based on an amount equal to 10 percent of the $1.8 million that had been obligated to buy the lithotripter. This amount overstated the actual amount of the maintenance contract by $107,135. However, as with the charge for depreciation, the overstatement is dwarfed by the understatement that resulted from dividing the total by 882 expected procedures. If the charge is recomputed using the actual price of the contract and the actual number of procedures performed, the per-procedure amount would be $470, which is $266 more than the center actually charged. To fully recover costs, we estimate that the Albuquerque center would have needed to charge $1,139 per procedure for facilities support and anesthesiology, rather than the $714 charged. This difference relates to the insufficient allocation of costs for administration and building management over 882 procedures instead of 155 procedures. Table V.2 separates the difference by specific cost components included in the charge. Because staffing and supply costs are calculated on a per-procedure basis, they are unaffected by the center’s overestimate of the number of procedures that would be performed in 1993. As previously discussed for the lithotripter and technician, we found the center’s determination of staffing costs to be consistent with VA’s policy. VA guidance calls for the cost of supplies to be based on the actual acquisition cost. As with staffing costs, we made no adjustments to the center’s determination of supply costs. This component covers the Albuquerque center’s indirect administrative staff and resource costs related to the providing of lithotripsy procedures. It also reflects two other factors related to the center—building depreciation and interest on net capital investment—as well as administrative costs for VA’s central office in Washington, D.C. The administrative portion is the prorated share of headquarters administrative costs assigned to the Albuquerque center, which is 1 of 157 VA medical centers throughout the nation. The center’s indirect administrative staff and resource costs are based on determining what percentage of direct care (as measured by full-time-equivalent positions) that lithotripsy procedures represent relative to all types of direct care provided by the center. This percentage is then applied to the center’s total administrative costs to arrive at the portion to be allocated to lithotripsy procedures. VA policy guidance does not stipulate how the calculation is to be made. We reviewed the center’s methods and found no reason to adjust their results. Under VA policy, the charge to be assessed for central office administration, Albuquerque center building depreciation, and investment interest is a designated percentage of the total costs for all other components. We reviewed the center’s methods and found no reason to adjust their results. We found the cost for this component to be understated, because the Albuquerque center had underestimated the total cost for the other components. Our computations of the other components produced a total of $2,966, which was $1,670 more than the amount the Albuquerque center had used. Applying the designated percentage to the higher total raised the amount for this component to $456, an increase of $224. We found that the per-procedure charge for this component was understated. Although VA had allocated the appropriate percentage of engineering and building maintenance costs to the lithotripsy function, these costs had again been divided by the estimate of 882 procedures, resulting in a per-procedure charge of $43. Dividing the costs by the 155 procedures actually performed yields a cost of $244—a net increase of $201. The Albuquerque center’s 1994 charge to UNM for basic lithotripsy services is $1,451. Two key assumptions in the center’s calculations make it unlikely that this rate will be sufficient for VA to recover the costs of providing lithotripsy services to UNM patients. The first assumption is the estimate of the number of procedures that will be performed. The center estimated the number as 500. As of June 30, 1994, however—halfway through the year—the center had performed 97 procedures. The second assumption is the length of time for recovering the lithotripter’s cost. The center used an approach that had the effect of extending the total period for recovering the cost to 9 years—4 years longer than the period used for the 1993 estimate. This appendix compares the center’s estimated charges for the major cost components of its basic lithotripsy service to the amounts that would be chargeable, using different assumptions regarding workload and investment recovery period. Our assumed workload was 223 procedures rather than the 500 assumed by the Albuquerque center. The investment recovery period we used was the same period the center had used in its 1993 price determination. The Albuquerque center’s 1994 charge may be separated into two parts: a $658 charge for operating the lithotripter, and a $793 charge for facilities support. These charges will recover the center’s fixed and variable costs if 500 procedures or more are performed and the equipment is operated for 9 years or more. The center, however, will experience a significant shortfall if it performs less than half of the expected procedures, a situation that appears likely given the workload generated during the first half of 1994. As the following sections show, most of the shortfall will be related to the center’s charge for operating the lithotripter and only a small portion will be attributable to its facilities support charge. Under the assumptions we used, the Albuquerque center’s charge for its lithotripter and technician would be $2,168 rather than the $658 charged. Most of the difference relates to the depreciation charge. Table VI.1 separates the differences by the specific cost components included in the charge. VA’s calculations for staffing were not affected by its estimate of the number of procedures that would be performed in 1994. This is because staffing costs are assessed on a procedure-by-procedure basis, not on estimated workload. This component resulted in the largest difference between the center’s calculation and ours—$357 as set by the center, and $1,686 as we calculated it, a difference of $1,329. Two main factors contributed. One was the methodology the center used for changing the lithotripter’s useful life. The other was the estimated number of lithotripsy procedures over which the 1994 depreciation amount could be spread. In determining the annual amount of depreciation for the pricing computation, the center made two adjustments to its 1993 procedures.First, it used the acquisition price of the equipment rather than the amount that had been obligated to purchase the equipment. As we pointed out in appendix V, this was the more appropriate figure to use as a starting point. Second, it changed the lithotripter’s useful life from 5 years to 9 years. VA policy does not provide guidance for developing a change in the estimated useful life of equipment, but general accounting procedure does. The method to be used is as follows: when a change in estimated useful life is determined to be necessary, the remaining value of the asset, less any salvage value assigned, is to be divided by the remaining estimated life. The center did not follow this approach. Instead, it based its calculation on the full value of the asset (its original acquisition cost) and divided by the remaining 7 years of the 9-year useful life. In so doing, the center determined that an annual depreciation cost of $178,318 over 7 years would recover the initial acquisition costs of $1,248,225. Given the center’s estimated annual workload of 500 procedures, officials determined that a charge of $357 would be sufficient to realize the annual depreciation cost. The effect of this approach was to overstate the portion of the lithotripter’s cost to be depreciated each year, as well as the resulting charge per procedure. Because the center’s lithotripter had been operational for 2 years, and 295 procedures had been performed since that date, the center should have recognized an accumulated depreciation of $120,360, based on the $408 depreciation amount per procedure in the original rate (see table V.1). By adjusting the initial acquisition costs to reflect this accumulated depreciation, the remaining value of the lithotripter would be $1,127,865, which represents the amount to be depreciated over the remaining useful life. This approach would have yielded a depreciation charge of $322 per procedure over the center’s estimated workload of 500 procedures. By ignoring the accumulated depreciation, the center would recover more than the cost of the asset over its useful life. For example, if 500 procedures are performed for each of the next 7 years, the center would have a total recognized depreciation of $120,360 more than the $1,248,225 purchase price. Our recalculation of the amount to be depreciated is based on a 5-year useful life rather than a 9-year life. We used this shorter period in order to remain more consistent with the center’s previous methodology for determining costs and because we regard 5 years as a more appropriate period for recovering costs on equipment that can quickly become technologically obsolete even though it is still operable. Since 2 years of the period have gone by, 3 years remain over which to depreciate the equipment. We adjusted the purchase price by the $120,360 in accumulated depreciation and divided the remaining balance by the remaining 3 years to obtain an annual amount of depreciation of $375,955. This compares with the center’s computation of $178,318 in depreciation to be recovered during 1994. The other adjustment we made was to divide our annual depreciation amount by an estimate of 223 procedures to be performed during the year. The center had divided its annual depreciation amount by its estimate of 500 procedures. The combination of all of these adjustments produced our per-procedure recalculation amount of $1,686. This cost component covers the contract with the manufacturer for service and repair of the lithotripter and associated component parts. The center used the actual annual contract cost, as did we. The difference between the center’s price and our recalculation is again the number of procedures over which the cost is spread—the center used 500, and we used 223. This results in a difference of $181 per procedure. Under the assumptions we used, the Albuquerque center’s charge for facilities support and anesthesiology would be $1,103 rather than the $793 charged. This difference relates solely to the allocation of costs for administration and engineering and building management, as table VI.2 shows. Because staffing and supply costs are calculated on a per-procedure basis, they are unaffected by the different assumptions regarding workload and investment recovery period. As appendix V explained, this component is composed of several types of costs besides the administrative costs of VA’s headquarters in Washington, D.C., and is based on a percentage computed at the local level and applied to all other costs. We found the cost for this component to be understated, because the problems previously discussed for other cost components had produced a total for the other costs that was lower than it should have been. Applying the designated percentage to the higher total raised the amount for this component to $445, an increase of $216. This cost component allocates a prescribed percentage of engineering and building maintenance costs to the lithotripsy services. The difference between the center’s charge and our recalculation is the number of procedures over which the cost is spread—the center used 500, and we used 223. This results in a difference of $94 per procedure. The first copy of each GAO report and testimony is free. Additional copies are $2 each. 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A recorded menu will provide information on how to obtain these lists. | Pursuant to a congressional request, GAO reviewed the Department of Veterans Affairs' (VA) Albuquerque Medical Center's contracting practices, focusing on: (1) whether the center fully recovered the government's cost of providing nonveteran lithotripsy services; and (2) the effects of the center's pricing policy on competition for lithotripsy services in the Albuquerque area. GAO found that: (1) in 1993, the Albuquerque VA Medical Center did not fully recover the costs of providing lithotripsy services to nonveterans; (2) the center used an unrealistically high annual workload estimate in calculating its fixed costs; (3) the center's lithotripsy prices for 1994 were still unrealistically high, even though VA policy requires price adjustments if estimates are significantly off; (4) the center lengthened the equipment's depreciation period to compensate for its low procedure rate, but this was not practical, since the equipment will be obsolete before the end of its useful life; (5) the contractor lowered its charges for lithotripsy services significantly below market rates, which may have allowed it to gain a larger market share; (6) the impact of the contractor's lower prices is difficult to estimate because consumers' health care decisions are not driven by cost considerations alone; and (7) the center could raise its prices to cover its full costs for the services and still remain competitive. |
JSF restructuring continued throughout 2011 and into 2012 with additional costs and extended schedules incurred for key activities and decisions. The Department’s actions have helped reduce near term risks by lowering annual procurement quantities and allowing more time for flight testing. The Department is expected to soon approve a new acquisition program baseline that will likely make further changes in cost and schedule. This decision, critical for program management and oversight, has been delayed several times and it has now been 2 years since the Department announced that the JSF program had breached the and that a new baseline would critical cost growth statutory thresholdsbe established. Table 1 tracks historical changes in cost, schedule, and quantities since the start of development (2001), a major redesign (2004), a new baseline following the program’s Nunn-McCurdy breach of the significant cost growth statutory threshold (2007), initial restructuring actions after the second Nunn-McCurdy breach (2010), and an interim DOD cost estimate (2011). The interim total program cost estimate increased about $15 billion since the June 2010 estimate included in the Nunn-McCurdy certification, about $5 billion for development and $10 billion for procurement. Compared to the current approved baseline set in 2007, total costs have increased about $119 billion, unit procurement costs have risen more than 40 percent, and the start of full-rate production has been delayed 5 years. The department anticipates releasing its new cost and schedule estimates within the next few weeks. Department officials have indicated that the new figures will not be significantly different from the June 2011 interim estimate. Initial operational capability dates for the Air Force, Navy and Marine Corps—the critical dates when the warfighter expects the capability promised by the acquisition program to be available—have been delayed over time and are now unsettled. Until greater clarity is provided on the program’s path forward, the military services are likely to wait to commit to new initial operational capability dates. Concerned about concurrency risks, in February 2012, DOD reduced planned procurement quantities through fiscal year 2017 by 179 aircraft. This marked the third time in 3 years that near-term quantities were cut; combined with other changes since 2008, total JSF procurement quantity has been reduced by 410 aircraft through fiscal year 2017. Since the department still plans to eventually acquire the full complement of U.S. aircraft—2,443 procurement jets—the procurement costs, fielding schedules, and support requirements for the deferred aircraft will be incurred in future years beyond 2017. Figure 1 shows how planned quantities in the near-term have steadily declined over time. With the latest reduction, the program now plans to procure a total of 365 aircraft through 2017, about one-fourth of the 1,591 aircraft expected in the 2002 plan. Slowing down procurement plans reduces concurrency risks to a degree, but overall program affordability—both in terms of the investment costs to acquire the JSF and the continuing costs to operate and maintain it over the life-cycle—remains a major risk. The long-stated intent that the JSF program would deliver an affordable, highly common fifth generation aircraft that could be acquired in large numbers could be in question. As the JSF program moves forward, unprecedented levels of funding will be required during a period of more constrained defense funding expectations overall. As shown in figure 2, the JSF annual funding requirements average more than $13 billion through 2035, and approach $16 billion annually for an extended period. The Air Force alone needs to budget from $8 to $11 billion per year from fiscal year 2016 through 2035 for procurement. At the same time, the Air Force is committed to other big-dollar projects such as the KC-46 tanker and a new bomber program. Much of the instability in the JSF program has been and continues to be the result of highly concurrent development, testing, and production activities. During 2011, overall performance was mixed as the program achieved 6 of 11 primary objectives for the year. Developmental flight testing has recently gained momentum, but has a long road ahead with testing of the most complex software and advanced capabilities still in the future. JSF software development is one of the largest and most complex projects in DOD history, providing essential capability, but software has grown in size and complexity, and is taking longer to complete than expected. Developing, testing, and integrating software, mission systems, and logistics systems are critical for demonstrating the operational effectiveness and suitability of a fully integrated, capable aircraft and pose significant technical risks moving forward. The JSF program achieved 6 of 11 primary objectives it established for 2011. Five of the objectives were specific test and training actions tied to contractual expectations and award fees, according to program officials. The other 6 objectives were associated with cost, schedule, contract negotiations, and sustainment. The program successfully met 2 important test objectives: the Marine Corps’ short takeoff and vertical landing (STOVL) variant accomplished sea trials and the Navy’s carrier variant (CV) completed static structural testing. Two other test objectives were not met: the carrier variant did not demonstrate shipboard suitability because of problems with the tail hook, which requires redesign, and software was not released to flight test on time. The program also successfully completed objectives related to sustainment design reviews, schedule data, manufacturing processes, and cost control, but did not meet a training deadline or complete contract negotiations. Development flight testing sustained momentum begun in 2010 and met or exceeded most objectives in its modified test plan for 2011. The program accomplished 972 test flights in 2011, more than double the flights in 2010. Flight test points accomplished exceeded the plan, overall as shown in figure 3. The flight test points accomplished on the Air Force’s conventional takeoff and landing (CTOL) variant were less than planned, due to operating limitations and aircraft reliability. Even with the progress made in 2011, most development flight testing, including the most challenging, still lies ahead. Through 2011, the flight test program had completed 21 percent of the nearly 60,000 planned flight test points estimated for the entire program. Program officials reported that flight tests to date have largely demonstrated air worthiness, flying qualities, speed, altitude, and maneuvering performance requirements. According to JSF test officials, the more complex testing such as low altitude flight operations, weapons and mission systems integration, and high angle of attack has yet to be done for any variant and may result in new discoveries. Initial development flight tests of a fully integrated, capable JSF aircraft to demonstrate full mission systems capabilities, weapons delivery, and autonomic logistics is now expected in 2015 at the earliest. This will be critical for verifying that the JSF aircraft will work as intended and for demonstrating that the design is not likely to need costly changes. Like other major weapon system acquisitions, the JSF will be susceptible to discovering costly problems later in development when the more complex software and advanced capabilities are integrated and flight tested. With most development flight testing still to go, the program can expect more changes to aircraft design and continued alterations of manufacturing processes. The STOVL variant performed better than expected in flight tests during 2011. It increased flight test rates and STOVL-specific mode testing, surpassing planned test point progress for the year. Following reliability problems and performance issues, the Secretary of Defense in January 2011 had placed the STOVL on “probation” for two years, citing technical issues unique to the variant that would add to the aircraft’s cost and weight. The probation limited the U.S. STOVL procurement to three aircraft in fiscal year 2011 and six aircraft in fiscal year 2012 and decoupled STOVL testing from CV and CTOL testing so as not to delay those variants. While no specific exit criteria was defined, the two year probation was expected to provide enough time to address STOVL- specific technical issues, engineer solutions, and assess their impact. In January 2012, the Secretary of Defense lifted the STOVL probation after one year, citing improved performance and completion of the initial sea trials as a basis for the decision. The Department concluded that STOVL development, test, and product maturity is now comparable to the other two variants. While several technical issues have been addressed and some potential solutions engineered, assessing whether the deficiencies are resolved is ongoing and, in some cases, will not be known for years. According to the program office, two of the five specific problems cited are considered to be fixed while the other three have temporary fixes in place. The Director, Operational Test and Evaluation reported that significant work remains to verify and incorporate modifications to correct known STOVL deficiencies and prepare the system for operational use. Until the proposed technical solutions have been fully tested and demonstrated, it cannot be determined if the technical problems have been resolved. Software providing essential JSF capability has grown in size and complexity, and is taking longer to complete than expected. Late releases of software have delayed testing and training, and added costs. Software defects, low productivity, and concurrent development of successive blocks have created inefficiencies, taking longer to fix defects and delaying the demonstration of critical capabilities. The program has modified the software development and integration schedule several times, in each instance lengthening the time needed to complete work. In attempting to maintain schedule, the program has deferred some capabilities to later blocks. Deferring tasks to later phases of development adds more pressure and costs to future efforts and likely increases the probability of defects being realized later in the program, when the more complex capabilities in these later blocks are already expected to be a substantial technical challenge. The lines of code necessary for the JSF’s capabilities have now grown to over 24 million—9.5 million on board the aircraft. By comparison, JSF has about 3 times more on-board software lines of code than the F-22A Raptor and 6 times more than the F/A-18 E/F Super Hornet. This has added work and increased the overall complexity of the effort. The software on-board the aircraft and needed for operations has grown 37 percent since the critical design review in 2005. While software growth appears to be moderating, contractor officials report that almost half of the on-board software has yet to complete integration and test—typically the most challenging phase of software development. JSF software growth is not much different than other recent defense acquisitions which have experienced from 30 to 100 percent growth in software code over time. However, the sheer number of lines of code for the JSF makes the growth a notable cost and schedule challenge. JSF’s mission systemsoperational and support capabilities expected by the warfighter, but the hardware and software for these systems are immature and unproven at this time. Only 4 percent of mission systems requirements have been verified and significant learning and development remains before the program can demonstrate mature software and hardware. The program and logistics systems are critical to realizing the has experienced significant technical challenges developing and integrating mission and logistics systems software and hardware, including problems with the radar, integrated processor, communication and navigation equipment, and electronic warfare capabilities. Problems with the helmet mounted display may pose the greatest risk. The helmet is integral to fusing and displaying sensor and weapons employment data, providing situational awareness, and reducing pilot workload. Helmet shortfalls–including night vision capability, display jitter (varying image), and latency (or delay) in transmitting data–could limit capability or change operational concepts. DOD is pursuing a dual path by funding a less-capable alternate helmet as a back-up; this development effort will cost more than $80 million. The selected helmet will not be integrated with the baseline aircraft until 2014 or later, increasing the risks of a major system redesign, retrofits of already built aircraft, or changes in concepts of operation. The Autonomic Logistics Information System (ALIS) is a ground system essential to managing and streamlining logistics and maintenance functions and for controlling life-cycle operating and support costs. ALIS is also not mature and may require some design changes to address known deficiencies. ALIS is in limited operations at test and training sites and officials are evaluating proposed solutions. While additional development time and resources may resolve some deficiencies, several requirements are not going to be met given current schedules, according to the JSF test team report. Initial dedicated operational testing of a fully integrated JSF is tentatively scheduled to begin in 2017. Operational testing is important for evaluating the warfighting effectiveness and suitability of the JSF, and successfully completing initial operational testing is required to support the full rate production decision, now expected in 2019. Operational testers assessed progress of JSF development testing and its readiness for operational testing, and concluded that the program was not on track to meet operational effectiveness or suitability requirements. The test team’s October 2011 report identified deficiencies with the helmet mounted display, night vision capability, aircraft handling characteristics, and shortfalls in maneuvering performance. The report also cited an inadequate logistics system for deployments, excessive time to repair and restore low observable features, low reliability, and poor maintainability performance. It also stated that the JSF will require substantial improvements in order to achieve sortie generation rates and life cycle cost requirements. The program has not yet demonstrated a stable design and manufacturing processes capable of efficient production. Engineering changes are persisting at relatively high rates and additional changes will be needed as testing continues. Manufacturing processes and performance indicators show some progress, but performance on the first four low-rate initial production contracts has not been good. All four have experienced cost overruns and late aircraft deliveries. In addition, the government is also incurring substantial additional costs to retrofit produced aircraft to correct deficiencies discovered in testing. Until manufacturing processes are in control and engineering design changes resulting from information gained during developmental testing are reduced, there is risk of more cost growth. Actions the Department has taken to restructure the program have helped, but remaining concurrency between flight testing and production continues to put cost and schedule at risk. Even with the substantial reductions in near-term procurement quantities, DOD is still investing billions of dollars on hundreds of aircraft while flight testing has years to go. As was the experience with building the development test aircraft, manufacturing the procurement aircraft is costing more and taking longer than planned. Cost overruns and delivery slips are two indicators that manufacturing processes, worker efficiency, quality control, and supplier performance are not yet sufficiently capable to handle the volume of work scheduled. Cost overruns on each of the first four annual procurement contracts are projected to total about $1 billion (see table 2). According to program documentation, through the cost sharing provisions in these contracts, the government’s share of the total overrun is about $672 million. On average, the government is paying an additional $11 million for the 63 aircraft on under contract (58 are U.S. aircraft and 5 are for international partners). There is risk of additional cost overruns because all work is not completed. Defense officials reduced the buy quantity in the fifth annual procurement contract to help fund these cost overruns and additional retrofit costs to fix deficiencies discovered in testing. While Lockheed Martin, the prime contractor, is demonstrating somewhat better throughput capacity and showing improved performance indicators, the lingering effects of critical parts shortages, out of station work, and quality issues continue to be key cost and schedule drivers on the first four production lots. Design modifications to address deficiencies discovered in testing, incorporation of bulkhead and wing process improvements, and production of the first carrier variant further impacted manufacturing during 2011. Lockheed had expected to deliver 30 procurement aircraft by the end of 2011 but delivered only nine procurement aircraft. Each was delivered more than 1 year late. The manufacturing effort still has thousands of aircraft planned for production over the next 25 years and the rate of production is expected to increase substantially starting in 2015. This will make it vital that the contractor achieve an efficient manufacturing process. Pratt & Whitney, the engine manufacturer, had delivered 42 production engines and 12 lift fans at the time of our review. system, the propulsion system is still under development working to complete testing and fix deficiencies while concurrently delivering engines under the initial procurement contracts. The program office’s estimated cost for the system development and demonstration of the engine has increased by 75 percent, from $4.8 billion to $8.4 billion, since the start of development. Engine deliveries continue to miss expected contract due dates but still met aircraft need dates because of longer slips in aircraft Like the aircraft production. Supplier performance problems and design changes are driving cost increases and late engines. Lift fan system components and processes are driving the major share of cost and schedule problems. Going forward, Lockheed Martin’s ability to manage its expanding global supplier network is fundamental to meeting production rates and throughput expectations. DOD’s Independent Manufacturing Review Team earlier identified global supply chain management as the most critical challenge for meeting production expectations. The cooperative aspect of the supply chain provides both benefits and challenges. The international program structure is based on a complex set of relationships involving both government and industry from the United States and eight other countries. Overseas suppliers are playing a major and increasing role in JSF manufacturing and logistics. For example, center fuselage and wings will be manufactured by Turkish and Italian suppliers, respectively, as second sources. In addition to ongoing supplier challenges–parts shortages, failed parts, and late deliveries– incorporating international suppliers presents additional challenges. In addition, the program must deal with exchange rate fluctuations, disagreements over work shares, technology transfer concerns, different accounting methods, and transportation requirements that have already caused some delays. Also, suppliers have sometimes struggled to develop critical and complex parts while others have had problems with limited production capacity. Lockheed Martin has implemented a stricter supplier assessment program to help manage supplier performance. We and several defense offices cautioned the Department years ago about the risks posed by the extremely high degree of concurrency, or overlap, among the JSF development, testing, and production activities.To date, the Government has incurred an estimated $373 million in retrofit costs on already-built aircraft to correct deficiencies discovered in development testing. This is in addition to the $672 million for the government’s share of contract cost overruns. The program office projects additional retrofit costs through lot 10, but at decreasing amounts. Questions about who will pay for additional retrofit costs under the planned fixed price contracts–the contractor or the government–and how much, have delayed final contract negotiations on the fifth lot. Producing aircraft before testing sufficiently demonstrates the design is mature increases the likelihood of future design changes, which drives cost growth, schedule delays, and manufacturing inefficiencies. Design changes needed in one JSF variant could also impact the other two variants, reducing efficiencies necessary to lower production and operational costs with common parts and manufacturing processes for the three variants. While the JSF program’s engineering change traffic– the monthly volume of changes made to engineering drawings–is declining, it is still higher than expected for a program entering its sixth year of production. The total number of engineering drawings continues to grow due to design changes, discoveries during ground and flight testing, and other revisions to drawings. Figure 4 tracks design changes over time and shows that changes are expected to persist at an elevated pace through 2019. Defense officials have long acknowledged the substantial concurrency built into the JSF acquisition strategy, but until recently stated that risks were manageable. However, a recent high-level departmental review of JSF concurrency determined that the program is continuing to discover issues at a rate more typical of early design experience, questioning the assumed design maturity that supported the highly concurrent acquisition strategy. DOD’s November 2011 report concluded that the “team assesses the current confidence in the design maturity of the F-35 to be lower than one would expect given the quantity of LRIP aircraft procurements planned and the potential cost of reworking these aircraft as new test discoveries are made. This lack of confidence, in conjunction with the concurrency driven consequences of the required fixes, supports serious reconsideration of procurement and production planning.” The review identified substantial risk of needed modifications to already produced aircraft as the flight testing enters into more strenuous test activities. Already, as a result of problems found in less strenuous basic airworthiness testing, critical design modifications are being fed back through the production line. For example, the program will be cutting in aircraft modifications to address bulkhead cracks discovered during airframe ground testing and STOVL auxiliary inlet door durability issues. More critical test discoveries are likely as the program moves into the more demanding phases of testing. Restructuring actions by the Department since early 2010 have provided the JSF program with more achievable development and production goals, and has reduced, but not eliminated, risks of additional retrofit costs due to concurrency in current and future lots. The Department has progressively lowered the production ramp-up rate and cut near term procurement quantities; fewer aircraft procured while testing is still ongoing lowers the risk of having to modify already produced aircraft. However, even with the most recent reductions in quantities, the program will still procure a large number of aircraft before system development is complete and flight testing confirms that the aircraft design and performance meets warfighter requirements. Table 3 shows the current plan that will procure 365 aircraft for $69 billion by the end of planned developmental flight tests. Over the last 2 years, the JSF program has undergone extensive restructuring that places it on a more achievable course, albeit a lengthier and more expensive one. At the same time, the near-constant churn (change) in cost, schedule, and performance expectations has hampered oversight and insight into the program, in particular the ability to firmly assess progress and prospects for future success. Going forward, it will be imperative to bring stability to the program and provide a firm understanding of near- and far-term financial requirements so that all parties—the Congress, Defense Department, and international partners— can reasonably set priorities and make informed decisions amid a tough fiscal environment. The JSF remains the critical centerpiece of DOD’s long-term tactical aircraft portfolio. System development of the aircraft and engine ongoing for over a decade, continue to experience significant challenges. The program’s strategic framework, laden with concurrency, has proved to be problematic and ultimately, a very costly approach. DOD over the past year has identified substantial cost overruns attributed to relatively poor execution in production and specific concurrency-related inefficiencies. There is risk of future cost growth from test discoveries driving changes to design and manufacturing processes. Effectively managing software and the global supply chain is critical to improving program outcomes, increasing manufacturing throughput, and enabling future expansion of JSF procurement. Chairman Bartlett, Ranking Member Reyes, and members of the House Armed Services Committee, this completes my prepared statement. I would be pleased to respond to any questions you may have. We look forward to continuing to work with the Congress as we finalize our upcoming report with potential new recommendations that will address these issues in more detail. For further information on this statement, please contact Michael Sullivan at (202) 512-4841 or [email protected]. Contact points for our Office of Congressional Relations and Public Affairs may be found on the last page of this statement. Individuals making key contributions to this statement are Bruce Fairbairn, Charlie Shivers, LeAnna Parkey, W. Kendal Roberts, Sean Merrill, and Matt Lea. Joint Strike Fighter: Implications of Program Restructuring and Other Recent Developments on Key Aspects of DOD’s Prior Alternate Engine Analyses. GAO-11-903R. Washington, D.C.: September 14, 2011. Joint Strike Fighter: Restructuring Places Program on Firmer Footing, but Progress Is Still Lagging. GAO-11-677T. Washington, D.C.: May 19, 2011. Joint Strike Fighter: Restructuring Places Program on Firmer Footing, but Progress Still Lags. GAO-11-325. Washington, D.C.: April 7, 2011. Joint Strike Fighter: Restructuring Should Improve Outcomes, but Progress Is Still Lagging Overall. GAO-11-450T. Washington, D.C.: March 15, 2011. Defense Management: DOD Needs to Monitor and Assess Corrective Actions Resulting from Its Corrosion Study of the F-35 Joint Strike Fighter. GAO-11-171R. Washington D.C.: December 16, 2010. Joint Strike Fighter: Assessment of DOD’s Funding Projection for the F136 Alternate Engine. GAO-10-1020R. Washington, D.C.: September 15, 2010. Tactical Aircraft: DOD’s Ability to Meet Future Requirements is Uncertain, with Key Analyses Needed to Inform Upcoming Investment Decisions. GAO-10-789. Washington, D.C.: July 29, 2010. Joint Strike Fighter: Significant Challenges and Decisions Ahead. GAO-10-478T. Washington, D.C.: March 24, 2010. Joint Strike Fighter: Additional Costs and Delays Risk Not Meeting Warfighter Requirements on Time. GAO-10-382. Washington, D.C.: March 19, 2010. Joint Strike Fighter: Significant Challenges Remain as DOD Restructures Program. GAO-10-520T. Washington, D.C.: March 11, 2010. Joint Strike Fighter: Strong Risk Management Essential as Program Enters Most Challenging Phase. GAO-09-711T. Washington, D.C.: May 20, 2009. Joint Strike Fighter: Accelerating Procurement before Completing Development Increases the Government’s Financial Risk. GAO-09-303. Washington D.C.: March 12, 2009. Joint Strike Fighter: Impact of Recent Decisions on Program Risks. GAO-08-569T. Washington, D.C.: March 11, 2008. Joint Strike Fighter: Recent Decisions by DOD Add to Program Risks. GAO-08-388. Washington, D.C.: March 11, 2008. Tactical Aircraft: DOD Needs a Joint and Integrated Investment Strategy. GAO-07-415. Washington, D.C.: April 2, 2007. Defense Acquisitions: Analysis of Costs for the Joint Strike Fighter Engine Program. GAO-07-656T. Washington, D.C.: March 22, 2007. Joint Strike Fighter: Progress Made and Challenges Remain. GAO-07-360. Washington, D.C.: March 15, 2007. Tactical Aircraft: DOD’s Cancellation of the Joint Strike Fighter Alternate Engine Program Was Not Based on a Comprehensive Analysis. GAO-06-717R. Washington, D.C.: May 22, 2006. Tactical Aircraft: Recapitalization Goals Are Not Supported by Knowledge-Based F-22A and JSF Business Cases. GAO-06-487T. Washington, D.C.: March 16, 2006. Joint Strike Fighter: DOD Plans to Enter Production before Testing Demonstrates Acceptable Performance. GAO-06-356. Washington, D.C.: March 15, 2006. Joint Strike Fighter: Management of the Technology Transfer Process. GAO-06-364. Washington, D.C.: March 14, 2006. Tactical Aircraft: F/A-22 and JSF Acquisition Plans and Implications for Tactical Aircraft Modernization. GAO-05-519T. Washington, D.C: April 6, 2005. Tactical Aircraft: Opportunity to Reduce Risks in the Joint Strike Fighter Program with Different Acquisition Strategy. GAO-05-271. Washington, D.C.: March 15, 2005. This is a work of the U.S. government and is not subject to copyright protection in the United States. The published product may be reproduced and distributed in its entirety without further permission from GAO. However, because this work may contain copyrighted images or other material, permission from the copyright holder may be necessary if you wish to reproduce this material separately. | The F-35 Lightning II, also known as the JSF, is DODs most costly and ambitious aircraft acquisition, seeking to simultaneously develop and field three aircraft variants for the Air Force, Navy, Marine Corps, and eight international partners. The JSF is critical to DODs long-term recapitalization plans as it is intended to replace hundreds of legacy aircraft. Total U.S. investment in the JSF is nearing $400 billion to develop and procure 2,457 aircraft over several decades and will require a long-term, sustained funding commitment. In 2010, DOD began to extensively restructure the program to address relatively poor cost, schedule, and performance outcomes. This testimony draws on GAOs extensive body of work on the JSF, including preliminary results from the current annual review mandated in the National Defense Authorization Act for Fiscal Year 2010. This testimony discusses (1) program costs, schedule changes, and affordability issues, (2) performance testing results, software, and technical risks, and (3) procurement contract cost performance, concurrency impacts, manufacturing results, and design changes. GAOs work included analyses of a wide range of program documents and interviews with defense and contractor officials. Joint Strike Fighter (JSF) restructuring continues into a third year, adding to cost and schedule. Since June 2010, the total cost estimate increased about $15 billion, $5 billion for development and $10 billion for procurement. There will likely be additional changes when the Department of Defense (DOD) approves a new program baseline, expected soon. Compared to the current approved baseline from 2007, total costs have increased about $119 billion, full-rate production has been delayed 5 years, and initial operational capability dates are now unsettled because of program uncertainties. While the total number of aircraft the U. S. plans to buy has not changed, DOD has for 3 straight years reduced near-term procurement quantities, deferring aircraft and costs to future years. Since 2002, the program has reduced aircraft procurement quantities through 2017 by three-fourths, from 1,591 to 365. As the program continues to experience cost growth and delays, projected annual funding needs are unprecedented, averaging more than $13 billion a year through 2035. Most of the instability in the program has been and continues to be the result of highly concurrent development, testing, and production. Overall performance in 2011 was mixed as the program achieved 6 of 11 primary objectives. Developmental flight testing gained momentum and is about one-fifth complete with the most challenging tasks still ahead. The program can expect more changes to aircraft design and manufacturing processes. Performance of the short takeoff and vertical landing variant improved this year and its probation period to fix deficiencies was ended early, even though several fixes are temporary and untested. Management and development of the more than 24 million lines of software code continue to be of concern and late software releases have delayed testing and training. Development of the critical mission systems that give the JSF its core combat capabilities remains behind schedule and risky. To date, only 4 percent of the mission system requirements for full capability has been verified. Testing of a fully integrated JSF aircraft is now expected in 2015 at the earliest. Deficiencies with the helmet mounted display, integral to mission systems functionality and concepts of operation, are most problematic. DOD is funding a less-capable alternate helmet as a back-up. The autonomic logistics information system, a key ground system for improving aircraft availability and lowering support costs, is not yet fully developed. Cost overruns on the first four annual procurement contracts total more than $1 billion and aircraft deliveries are on average more than one year late. Officials said the governments share of the cost growth is $672 million; this adds about $11 million on average to the price of each of the 63 aircraft under those contracts. In addition to the overruns, the government also incurred an estimated $373 million in retrofit costs on produced aircraft to correct deficiencies discovered in testing. The manufacturing process is still absorbing a higher than expected number of engineering changes resulting from flight testing, which makes it difficult to achieve efficient production rates. Until engineering changes are reduced, there are risks of additional cost overruns and retrofit costs. The program now estimates that the number of changes will persist at elevated levels through 2019. Even with the substantial reductions in near-term procurement quantities, DOD is still investing billions of dollars on hundreds of aircraft while flight testing has years to go. GAO has made prior recommendations to help reduce risk and improve outcomes, which DOD has implemented to varying degrees. GAOs forthcoming report will address these in detail along with potential new recommendations. |
The Rail Passenger Service Act of 1970 created Amtrak to provide U.S. intercity passenger rail service because existing railroads found such service unprofitable. Today, Amtrak continues to be the main provider of intercity passenger rail service in the United States, operating a 22,000-mile network that provides service to 46 states and Washington, D.C., primarily over tracks owned by freight railroads. Federal law requires that freight railroads typically give Amtrak trains priority access and, in general, charge Amtrak the incremental cost—rather than the full cost—associated with the use of their tracks. Amtrak also owns about 650 miles of track, primarily on the Northeast Corridor (NEC), which runs between Boston, Massachusetts, and Washington, D.C. Access to this corridor is also critical for the operations of nine commuter railroads run by state and local governments serving 1.2 million passengers each work day. According to Amtrak, four freight railroads also use the corridor each day. Amtrak employs about 19,000 people. The Amtrak Reform and Accountability Act of 1997 gave Amtrak significant flexibility with respect to its route system, but directed it to continue to operate “a national passenger rail transportation system which ties together existing and emergent regional rail passenger service and other intermodal passenger service.” To meet this mandate, Amtrak currently operates 41 intercity passenger rail routes that fall into two distinct types, long-distance routes and short-distance corridors (see fig. 1). There are 14 long-distance routes, which generally travel over 750 miles and include an overnight component. Twenty-seven routes are short distance, or “corridor” services, and are further classified into two distinct categories. The first is the NEC. According to Amtrak, about two-thirds of its ridership is either wholly or partially on this corridor. The second category of corridor service is primarily comprised of routes partly funded by states, but also includes several other routes that Amtrak continues to operate as part of the original or “legacy” system. These corridor services have several similarities, such as a relatively high frequency of service and route distances generally under 500 miles. The 1997 act also established a Reform Board (to assume the responsibilities of Amtrak’s Board of Directors) and a Reform Council (to review and recommend changes in Amtrak's route structure). The act provided for the Reform Board to serve for 5 years and then be replaced by a new Amtrak Board of Directors; meanwhile, the Reform Council’s mandate was to look at “Amtrak’s operation as a national passenger rail system which provides access to all regions of the country and ties together existing and emerging rail passenger corridors.” In November 2001, the Reform Council reported that Amtrak would not achieve operational self- sufficiency by December 2, 2002, as envisioned by the act and, in 2002, the Reform Council recommended restructuring and rationalizing the national intercity passenger rail system—a move that envisioned, among other things, breaking up Amtrak and introducing competition to provide rail service. As of October 2006, Congress was still considering Amtrak issues, such as its funding level, the size of its network, the introduction of competition for routes, and Amtrak restructuring. Since Amtrak’s inception, it has struggled to become financially solvent. Amtrak has run a deficit each year and required federal assistance to cover operating losses and capital investment. Amtrak has received approximately $1.2 billion in annual appropriations since fiscal year 2003 for operational support, capital improvements, and debt obligations. Amtrak, like other intercity transportation systems, is capital-intensive. From fiscal years 1971 through 2006, Amtrak has received just over $30 billion in federal support, of which about $11 billion has been for infrastructure improvements and equipment overhauls. Additional capital funding has also been obtained from state and local governments, generally for specific capital investments required to support corridor routes operating within their jurisdiction. The Amtrak Reform and Accountability Act of 1997 removed Amtrak from the list of government corporations under 31 U.S.C. § 9101. While listed, Amtrak was required to submit annual management reports to Congress under the Government Corporation Control Act of 1945. Relieved from this requirement, Amtrak remains a government-established private corporation which is neither an agency nor instrumentality of the U.S. government, nor an issuer of securities to the public. Therefore, since 1997, Amtrak has not been subject to the basic accountability requirements of either federal entities or public companies. Such requirements cover financial reporting, internal control, and governance. Through its loan agreement and grant agreements for operating and capital expenses, Amtrak is subject to a variety of reporting requirements—including providing a monthly performance report to its board, the Department of Transportation (DOT), and Congress; providing FRA with a daily cash balance report; and providing FRA with a monthly progress report on actions addressing our previous recommendations. Due to Amtrak’s long- term challenges, several reform proposals and legislation have recently been introduced to address Amtrak’s financial problems. The suggested reforms vary in the level of federal subsidies proposed and the extent to which the current U.S. intercity passenger rail system would be restructured. Among these proposals is the administration’s 2005 proposal, which would phase out federal operating subsides for long-distance trains and split Amtrak into three entities: an oversight company to manage the restructuring process, a private infrastructure management company, and a train operating company. This proposal would ultimately give states greater decision-making authority with respect to rail service and capital improvements. Conversely, the Senate Committee on Commerce, Science, and Transportation proposed a reauthorization bill in 2005 that would authorize just under $2 billion per year over a 6-year period to fund Amtrak’s capital and operating expenses to maintain current operations, upgrade equipment, and return the NEC to a state of good repair. Although operating subsidies over the life of this bill would be reduced 40 percent through cost cutting and other actions, capital funding to Amtrak and states would increase. See table 1 for key aspects of recent intercity passenger rail reform proposals and legislation. The U.S. system is not the only intercity passenger rail system that has experienced financial deficits and economic inefficiencies. Many countries have undertaken efforts to reform their systems in order to alleviate financial and structural problems. While the intercity passenger rail experiences of other countries are often cited in the debate over the U.S. system, there are some key differences between the U.S. system and other foreign systems, including: Infrastructure ownership. In the United States, nearly all of the infrastructure that intercity passenger rail operates on is owned by private freight rail companies and is located on private land. Although Amtrak, by law, has a statutory right of access to infrastructure at incremental cost, it enters into operating agreements with freight and other railroads to use their lines. In contrast, in most of the countries in Europe, infrastructure is publicly owned. Freight and passenger railroad industry. In addition to owning the infrastructure, freight rail dominates the rail industry in the United States. This is a stark contrast to most other countries, where passenger rail is the primary component of the rail industry and freight plays a more secondary role. Geography and demographics. Geographic and demographic factors also make the United States significantly different from other countries, in particular those in Europe and Japan. The United States is relatively larger geographically than most of these other countries. Europe and Japan are more compact than the United States, making more intercity travel by rail between major cities as fast as by air. Additionally, experts and prior research highlight the greater population density of European cities—making rail a more attractive option for transportation. The existing U.S. intercity passenger rail system remains in poor financial condition, characterized by continued high operating losses and substantial levels of deferred capital and maintenance projects. Moreover, the current structure does not appear to effectively target federal funds where they may achieve the greatest level of public benefits. That is, many services are not focused on the markets where rail may have a comparative advantage over other modes and is most likely to be a viable and cost- effective option to meet public transportation demands. Amtrak operates two types of intercity routes—long distance and corridors—that provide service to a wide range of passengers across the country; however, each of these route types exhibit markedly different financial and operating characteristics. Long-distance routes account for about 80 percent of Amtrak’s financial losses although they serve about 15 percent of Amtrak’s total ridership, and are characterized by poor on-time performance. These routes are often associated with a number of public benefits, including offering service to a number of rural residents and providing national connectivity; however, these benefits may be limited by infrequent or inconvenient service and are provided at high cost to the federal government. In contrast, corridor routes account for most of Amtrak’s ridership and appear to offer greater potential to provide passenger transportation benefits and public benefits. For example, these services tend to be more time- and cost-competitive with other modes of transportation—potentially mitigating highway and air congestion—and they offer greater flexibility over long-distance rail services to adapt schedules and services to the demands of the traveling public. While several challenges related to funding and capacity constraints exist, corridors appear to be where the comparative strength for intercity passenger rail services lies and where the greatest potential exists for rail to provide increased public benefits for federal expenditures. Corridors could also facilitate integrating intercity passenger rail into the national transportation system. Although the Amtrak Reform and Accountability Act of 1997 proposed that Amtrak reach operational self-sufficiency by December 2002, Amtrak did not achieve this goal and its financial condition since this legislation was enacted remains precarious. In addition, to stabilize and sustain the existing system, Amtrak is likely to need increased levels of funding. Amtrak continues to incur substantial operating deficits and is faced with billions of dollars in deferred capital maintenance and debt obligations. No combination of service cuts or productivity improvements can fully eliminate the need for public operating and capital subsidies, particularly if Congress continues to mandate that Amtrak operate a national system. However, at a time when the federal government faces a long-term structural fiscal imbalance, these poor financial characteristics lead to questions about how the system should be structured and funded in the future. The U.S. intercity passenger rail system ends each fiscal year with substantial operating losses. Although Amtrak has made some progress in containing operating expenses in recent years, it continues to run an annual operating deficit (total operating revenues minus operating expenses) of over $1 billion dollars and relies heavily on federal subsidies to cover this deficit. In fiscal year 2005, Amtrak reported a net operating loss of $1.2 billion, including an annual cash loss of $450 million (see fig. 2). Although exhibiting a slight decrease from the record deficit in fiscal year 2004, operating losses have shown few signs of substantial long-term improvement. In fact, Amtrak projected in its 2005–2009 Strategic Plan that, under the existing structure, annual operating losses will increase to over $1.5 billion by 2009. While Amtrak has experienced a steady increase in ridership over the last decade, there has not been a corresponding increase in total annual revenues. Between fiscal years 2002 and 2005, passenger revenues remained relatively stable—declining from $1.34 billion to $1.29 billion (3.3 percent)—despite growth in annual ridership of nearly 2 million passengers during this period, an increase of 8.2 percent (see fig. 3). These results suggest that it is unlikely that Amtrak can grow its way out of financial difficulty through additional increases in ridership. Further, these trends of continued high operating losses and stagnating passenger revenues, despite a number of cost-cutting efforts, have led the DOT Inspector General and others to conclude that Amtrak also cannot “save its way to financial health” and—in the absence of increased federal funding—may require long-term structural operating reforms. In addition to the burden of its annual operating deficit, the intercity passenger rail system is faced with substantial financial obligations related to capital repairs and infrastructure maintenance, as well as accumulated debt. Both of these obligations have received substantial federal subsidies each year and are likely to continue affecting the financial outlook of Amtrak into the foreseeable future. Capital needs and deferred maintenance. Lacking the funds to complete all of its identified capital repair and maintenance projects, Amtrak has deferred an estimated $6 billion in capital and infrastructure maintenance spending. In addition to increasing the risk of a major failure on the system, the deteriorated condition of Amtrak’s rolling stock and infrastructure may contribute to higher operating costs and reduced reliability of service. Further, over 60 percent of this deferred maintenance is attributable to Amtrak’s mainstay NEC service. Disruptions of service on this corridor, due to needed repairs or safety concerns, would have significant financial impacts. While Amtrak has identified the restoration of rail infrastructure to a state of good repair as one of its primary goals, the cost and extent of the needed improvements remain a significant burden to the financial viability of the existing intercity passenger rail system. Although the level of federal capital funding has increased in recent years, there remains a fundamental mismatch between the level of investment Amtrak and the DOT Office of Inspector General (DOT OIG) have estimated is needed to maintain the existing network and the amount of funding provided. For example, in fiscal years 2005 and 2006, Amtrak identified capital funding needs of nearly $800 million dollars annually; however, actual funds appropriated for capital projects in those years totaled $369 million and $495 million, respectively. Debt obligations. Significant federal funds are also spent each year to service Amtrak’s substantial debt burden. At the end of fiscal year 2005, Amtrak carried a total of $3.6 billion in debt and capital lease obligations. Principal and interest payments on these accumulated debts is estimated at $295 million for fiscal year 2007 and will likely remain at about this level for the foreseeable future. These payments accounted for over 20 percent of Amtrak’s total federal appropriation for fiscal year 2006 and, in light of Amtrak’s other financial obligations, are likely to continue to require funding from other sources. Given high annual deficits, deferred capital spending, and debt obligations, the current levels of federal subsidies are likely insufficient to maintain the existing level of passenger rail service being provided by Amtrak. Since Amtrak’s authorizing legislation expired in 2002, federal funding for intercity passenger rail has been far below what Amtrak and others have estimated is needed to sustain and stabilize the current system. For example, Amtrak submitted budget requests of approximately $1.8 billion for fiscal years 2004 through 2006. However, the average amount of federal funding received over this period totaled about $1.24 billion per year— enough to keep the system operating but not enough to meet the level Amtrak estimated is needed to prevent the continued deferral of significant maintenance projects (see fig. 4). The President’s budget in fiscal year 2006 proposed no funding for Amtrak in the absence of significant operating and structural reforms; however, Amtrak eventually received federal funding in the amount of $1.29 billion. For fiscal year 2007, Amtrak’s budget request totaled $1.6 billion. This figure included $498 million to support cash operating losses, $730 million for capital spending, $295 million for debt service, and $75 million for working capital. The DOT OIG issued estimates similar to those proposed by Amtrak, reporting that $1.4 billion would be required in fiscal year 2007 just to maintain the currently configured system in a steady state, without addressing the backlog of infrastructure projects or investing in new corridor development. This report also identified that up to $125 million in additional working capital may be needed to protect Amtrak from insolvency risks posed by any significant unforeseeable events, such as the Acela brake problem experienced in 2005. The nation’s intercity passenger rail system serves a variety of purposes, but many routes appear to provide limited public benefits for the level of federal expenditures required to operate them. While none of the 41 routes comprising the current U.S. intercity passenger rail network earn sufficient revenue to fully cover the operating and capital costs of providing the service, the two types of routes that Amtrak operates—long distance and corridors—have markedly different operating and financial characteristics. Some of these differences include annual ridership and passenger demographics, financial performance, and the scope of potential transportation benefits and public benefits that the service is likely to provide. While Amtrak’s 14 long-distance routes serve a number of different geographical and traveler markets, they often do so inefficiently and at a high cost to the federal government. That is, long-distance routes account for nearly 80 percent of Amtrak’s financial losses although they serve 15 percent of Amtrak’s annual ridership. In addition, long-distance rail services also tend to be infrequent and exhibit poor dependability—as measured by on-time performance—due to increased trip distances and potential issues associated with operating on freight-owned infrastructure. As a result, actual transportation and public benefits potentially deriving from these routes, such as rural transportation and national connectivity, may be limited. Long-distance routes comprise a relatively small percentage of total Amtrak ridership, yet they consume a disproportionate amount of federal subsidies. Ridership on Amtrak’s long-distance routes has remained relatively stable, averaging approximately 3.8 million passengers per year between fiscal years 2002 and 2005. This figure represents approximately 15 percent of Amtrak’s total reported ridership of 25.4 million passengers in fiscal year 2005. Since many of these passengers travel longer distances than passengers on corridor routes, long-distance routes accounted for 47 percent (2.5 billion) of Amtrak’s total of 5.4 billion passenger miles in fiscal year 2005. However, many of the trips taken on these routes are for relatively shorter distances as opposed to end-to-end trips, with riders often traveling between city pairs on existing Amtrak corridors or planned corridor routes. For example, the DOT OIG issued a statement in 2003 which estimated that the share of trips taken on long-distance routes that were corridor in nature was 34 percent. In fiscal year 2005, nearly 30 percent of all trips on long-distance routes were for fewer than 300 miles and 46 percent were for fewer than 500 miles (see fig. 5). In this regard, many passenger trips on long-distance routes may be similar to those on Amtrak’s corridor services, where rail service is more likely to be time- and cost-competitive with other modes of intercity transportation. For example, on the Empire Builder—one of Amtrak’s best-performing long- distance routes—over 24 percent of all passenger trips on the 2,200-mile route take place on the 417-mile stretch between Chicago, Illinois, and Minneapolis/St.Paul, Minnesota; this stretch represents 1 of 10 potential high-speed rail corridors designated by FRA. Ridership demographic data also indicate that Amtrak’s long-distance routes serve a large percentage of vacation and leisure travelers. According to Amtrak passenger profile surveys, most passengers (over 80 percent) report utilizing long-distance routes for recreational and “leisure” trips, including visits with family and friends and for personal business, compared with other types of travel, such as business or commuting. In addition, Amtrak passenger data indicate that, overall, many long-distance customers tend to be retirees—33 percent versus 16 percent for the total travel market. Long-distance routes operate with substantial financial losses and consume a disproportionate amount of federal operating subsidies. Financial losses allocated to long-distance routes amounted to $539 million in fiscal year 2005, accounting for approximately 80 percent of Amtrak’s total reported loss of $659 million. This figure also accounts for nearly 95 percent of the total federal appropriated operating grant of $570 million provided to Amtrak for that year. Based on data provided by Amtrak, operating losses on long-distance routes averaged $154 per passenger with considerable variation illustrated between the individual routes. Financial performance over the past several years also indicates that Amtrak is unlikely to substantially reduce these losses through increased revenue or cost reductions. Between fiscal years 2002 and 2005, Amtrak reported a nearly 30 percent decline in annual long distance revenue. However, during this time period, operating costs decreased only about 9 percent. As a result, the budget gap between revenues and costs shows no sign of improvement (see fig. 6). Contributing to the high operating losses on many of Amtrak’s long- distance trains are the costs of extra services and amenities, such as sleeper services and dining cars. While these auxiliary services generate additional revenue over coach-class seats, the additional revenues do not cover incremental costs. In fact, passengers traveling in first-class sleeper cabins on Amtrak long-distance trains are actually more heavily subsidized than coach passengers. The DOT OIG estimated that sleeper services increase the operational loss over coach class seats by an average of $109 per passenger. When capital costs for providing such services are also included, these additional losses average $206, with losses on some routes as high as $358 per passenger (see app. II). Amtrak is currently evaluating several alternatives to their existing sleeper services in an aim to eliminate incremental financial losses. Some of these alternatives include making equipment and service enhancements on the Empire Builder to reposition it as a luxury service and potentially outsourcing premium sleeper services on select routes for passengers seeking a luxury “land cruise” experience. Amtrak’s long-distance routes are generally associated with a number of transportation benefits and public benefits; however, these benefits are obtained at high cost to the federal government and may be limited by infrequent or undependable service. In addition to offering a relatively safe mode of transportation, long-distance routes are commonly associated with their role in providing (1) an intercity transportation option for a number of rural passengers, and (2) national connectivity to link regional corridors and other long-distance routes. While there are public benefits associated with filling these roles, it appears that other transport modes may be better positioned to provide these benefits at reduced cost to the federal government. Moreover, the infrequent service and poor on-time performance of many of Amtrak’s long-distance trains may further limit the benefits provided by intercity passenger rail along these routes. Intercity passenger rail provides access to many of the nation’s rural residents but air and bus services continue to be the principal modes of public or common carrier transportation for these residents. In 2005, the Bureau of Transportation Statistics estimated that scheduled intercity public transportation (e.g., by air, bus, rail, or ferry) provides coverage to 93 percent of the 82.4 million residents classified as rural. Intercity bus and air services have the deepest penetration within rural America—at 89 and 71 percent of the population, respectively—and rail services were reported to cover approximately 42 percent of the rural population. While many of these residents have access to more than one transportation option, the Bureau of Transportation Statistics estimated that intercity passenger rail (i.e., Amtrak) is the sole public transportation option for approximately 350,000 people nationwide. Georgia and South Carolina were reported as the two states with the largest number of rural residents (with a combined total of 94,000) that were solely dependent on scheduled intercity passenger rail. In contrast, scheduled intercity air and bus services provide the sole transportation option for 2.4 million and 14.4 million rural residents nationwide, respectively. In addition, it appears that if rural transportation were a targeted public policy objective, other modes of transport could be better positioned to provide this benefit to a greater number of residents at lower cost. For example, in fiscal year 2004, federal grants available to the intercity bus industry to support rural service amounted to just $22 million, with rural coverage for that mode exceeding twice the level provided by rail. However, as the DOT reported in 2005, the goal of rural mobility should be to offer flexible and sustainable travel options to those with the greatest mobility needs—and not necessarily to preserve or promote use of any specific transportation mode. Achieving this goal may require the establishment of objective criteria by which to evaluate the needs of these communities. It may also require the awarding of competitive franchise agreements to whatever mode that could provide service with the least amount of subsidy. Intercity passenger rail also provides connectivity between different regions of the country and other rail routes; however, alternatives may exist to meet passenger demands at reduced cost. Federal law currently directs Amtrak to tie together existing and emerging regional rail passenger service. On a system wide basis, relatively few passenger trips (8 percent) include a train-to-train connection—that is, a passenger changing from one train to another. However, on long-distance routes the percentage of train- to-train connections is somewhat higher (an estimated 22.6 percent in fiscal year 2004). Consequently, national interconnectivity provided by long-distance routes appears to be a potential benefit to approximately 3.5 percent of Amtrak’s total annual passengers. While this population is a very small proportion of the overall intercity passenger market, some rail proponents believe national connectivity may also provide public benefits by providing transportation redundancy to the country. Such redundancy may be important, particularly if air services were grounded as they were in the immediate aftermath of the September 11, 2001, terrorist attacks. However, to the extent that transportation redundancy is a meaningful policy option, intercity passenger rail may not be positioned to provide cost-effective service to the greatest number of people. As previously cited, intercity buses currently provide much greater coverage across the United States without federal operating assistance. Therefore, determining whether these public benefits warrant federal subsidies involves consideration of the substantial costs required to achieve them, as well as evaluation of alternative options, such as intercity buses, that may be better positioned to provide these benefits. Amtrak’s long-distance services are often infrequent and hindered by poor on-time performance, which may further diminish the benefits provided by these services and offer reduced potential to meet the public’s transportation demands. For example, nearly all of the long-distance trains have limited frequencies—typically one daily departure in each direction— and, due to increased travel times, they are often scheduled to arrive outside of convenient traveling hours. For example, many of Amtrak’s long-distance trains operating within Georgia and South Carolina—the states with the most rural residents dependent solely on rail—are scheduled to arrive at the station between 3:20 a.m. and 6:50 a.m. The infrequent and inconvenient nature of many long-distance schedules is likely to severely limit rail as a viable transportation option for many passengers. While increased frequency of service may potentially address these limitations, this option could be costly due to the increased level of federal subsidies that more frequent service would entail if the population and other characteristics of long-distance corridors did not warrant increased frequency of service. On-time performance also continues to be a major limitation affecting the potential benefits provided by Amtrak’s long-distance services. In fiscal year 2005, Amtrak reported an average on-time performance of 41.4 percent for long-distance routes, ranging from a low of 7.1 percent on the Sunset Limited to a high of 83 percent on the City of New Orleans (see app. II). While several factors contribute to the wide variation in performance, Amtrak attributes operating delays on the six host railroads—on which Amtrak trains operate—as the largest single factor affecting Amtrak on-time performance, contributing as much as 75 to 80 percent of the delay minutes. Since fiscal year 2000, average on-time performance for all long-distance trains has been in decline (see fig. 7). On average, in fiscal year 2005, trains on long-distance routes arrived at their final destinations approximately 98 minutes late. Trains on the poorest performing route, the Sunset Limited, averaged nearly 5 hours late. Such poor on-time performance is likely to significantly affect the extent that passengers choose rail services to meet their transportation needs. Corridor rail services—which include NEC operations, as well as state supported and legacy corridor routes—appear to offer increased potential to provide transportation benefits and public benefits to a greater number of people at reduced cost to the federal government. Corridor routes comprise most of Amtrak’s annual ridership—providing service to a wide variety of business and leisure travelers—and they account for much of the growth in passenger rail in recent years, particularly on the state-supported routes (see app. II for a list of states and associated corridor services). Relative to the long-distance routes, corridor services also operate with lower costs and better on-time performance. They also appear to be better aligned to provide more cost-effective transportation benefits and public benefits. For example, they are generally more time- and cost-competitive with other transport modes and offer increased flexibility over long- distance rail services, adapting schedules and services to changing demographics and passenger travel demands. However, despite their relative financial and operating performance, many of the corridor routes face challenges such as capacity constraints and funding issues, which may limit opportunities for rail to increase market share and play a more significant role in the nation’s transportation system. Corridor routes account for most of the intercity passenger rail travel in the United States and they illustrate substantially reduced financial losses relative to the long-distance routes. Most intercity passenger rail travel in the United States is comprised of relatively short trips on a small number of corridor routes. In fiscal year 2005, the average trip length for all routes— both long distance and corridor—was 213 miles, with corridor routes servicing approximately 85 percent of the total Amtrak ridership. Among these corridor routes, over half of the ridership in fiscal year 2005—nearly 11 million passengers—occurred on the NEC alone. The Washington–New York City–Boston main line of the NEC remains the most heavily utilized rail route in the country, forming an essential link for intercity passenger and freight transportation, as well as nine different commuter rail operations in the Northeast. On an average weekday, over 1,800 commuter and Amtrak trains operate over the NEC. On the 26 non-NEC corridors, ridership in fiscal year 2005 was 10.6 million, with 52 percent of this total generated on the four most heavily traveled routes. These corridor services, namely the state supported routes, also represent the market that is exhibiting the strongest ridership growth. Since fiscal year 2002, there has been an 18-percent increase in ridership on state-supported routes as states continue to increase spending for operations and capital improvements of corridor rail services (see fig. 8). Given the high number of passengers and the relative importance of the NEC, passenger profiles for Amtrak-operated trains on this corridor illustrate some clear distinctions from those on long-distance routes. For example, a much higher percentage of ridership is comprised of commuters and business travelers in comparison to the long-distance routes, particularly on the higher-end NEC trains, the Acela Express and Metroliner. Amtrak survey data indicates that in fiscal year 2004, 82 percent of travel on these services was business-related. Passengers on Amtrak’s Regional Service—the other primary NEC trains—reported that 49 percent were traveling or commuting for business or school; 50 percent reported traveling for personal or family business, or traveling primarily for leisure purposes. For non-NEC corridors, the designated trip purpose varied widely between the routes because they operate in a number of different states and passenger markets. For example, the Empire service in New York caters to a number of business travelers and commuters, while the California corridor routes are characterized by a larger share of leisure and personal travel. As for financial performance, the Acela Express and Metroliner trains operating on the NEC are Amtrak’s only services in which passenger revenues cover the cost of operation (excluding depreciation and interest). In fiscal year 2005, Amtrak reported a positive total annual contribution of $65.3 million for this service. However, Amtrak’s other scheduled trains on the NEC ended the year with operating losses, resulting in a net contribution of approximately $45 million for intercity passenger rail service on this corridor. While these results indicate relative financial success, they do not take into account the substantial amount of capital spending invested to fund infrastructure improvements and maintain operations on the NEC. For example, in fiscal year 2005, Amtrak reported a capital allocation to the NEC of $190.4 million—over four times the reported operating contribution. In addition, Amtrak has an estimated system backlog of up to $6 billion in deferred maintenance and infrastructure improvements, with the NEC comprising more than 60 percent of this total. All of the non-NEC corridor routes also incur financial losses to Amtrak; however, considerable variation exists among them. In fiscal year 2005, Amtrak reported a total annual loss from all non-NEC corridor services of approximately $164 million, with losses on individual services ranging from a low of $200,000 (Illinois Zephyr) to a high of $23.3 million (Empire Service). In the aggregate, these losses represent an average operating subsidy of about $20 per passenger for non-NEC operations. One reason for the wide variance in Amtrak’s financial performance among these corridor routes is the level of state support provided. Overall, state payments to Amtrak for operating and capital costs have increased considerably in recent years—rising from $148 million to $272 million between fiscal years 2000 and 2005 (see fig. 9). However, states have generally not been required to pay the full subsidies for these routes. Moreover, many states that have corridor services have not paid anything at all, thus producing issues of equity among states. For example, Amtrak operates a number of weekly departures of the Hoosier State service—between Indianapolis and Chicago—although it has the lowest cost recovery of any short-distance route and neither state contributes any level of operating support. Both types of Amtrak’s corridor routes illustrate significant potential to provide transportation benefits and public benefits, but they each illustrate a number of unique attributes and opportunities for improvement. Transportation experts generally agree that intercity passenger rail services that serve large, relatively close population centers—and that are time- and cost-competitive with other transportation modes—represent the greatest potential markets for rail worldwide. Moreover, these markets are the ones most likely to offer the greatest opportunity to mitigate pollution and reduce the growth of highway congestion through increased rail use. However, the ability of intercity passenger rail to generate these benefits depends on the likelihood that travelers will choose rail service over other modes of transportation. As we have reported previously, congestion is most likely to be alleviated when rail routes run parallel to congested roadways and where travelers view rail as a more attractive “door-to-door” travel option (in terms of price, time, comfort, and safety) than driving. Similarly, rail becomes less competitive with other modes of transportation, particularly air services, as travel time and prices increase over longer distances (see app. II). For these reasons, corridor services appear to be most competitive with automobile and air travel in markets between 100 and 300 miles. In this regard, many existing and developing corridor rail services appear to be well positioned to provide a viable alternative to other modes of transport and potentially offer a number of public benefits: NEC. With over 30 million metropolitan residents, the NEC has a population density of over 65,000 residents per route mile. According to the American Association of State Highway and Transportation Officials, such a large population density helps to explain why the NEC accounts for such a large proportion of Amtrak’s total corridor ridership. Many of the rail services on the NEC are very competitive with air and auto travel in several markets. For example, Amtrak serves 50 percent of the combined air/rail market between Washington, D.C., and New York, and 40 percent between New York and Boston. Moreover, in fiscal year 2005, Amtrak reported air/rail market shares greater than 90 percent for other shorter distance city pairs such as Philadelphia–New York and Philadelphia–Washington, D.C. The Northeast region also illustrates characteristics of the type of urban congestion and capacity constraints that may benefit the most from travelers being diverted away from the highways and onto rail. State-Supported Corridors. State-supported routes are the fastest growing routes and illustrate significant potential to provide a viable transportation option; however, further development of new and existing rail corridors may require funding beyond what has been previously provided. A growing number of individual states and groups of states have made the public policy decision to utilize state funds to subsidize additional corridor rail service and invest in related capital projects. Some of the potential benefits cited for such expenditures include the potential for rail to accommodate regional growth and enhance economic competitiveness. Over 80 percent of the nation’s population now lives in a metropolitan area. Officials in many states are interested in identifying and developing regional rail corridors that link these economies and provide a viable transportation option to large numbers of residents. Officials in several states with whom we spoke also indicated that corridor rail services are an important component of state and local transportation plans. For example, in Washington State, corridor rail service between Seattle, Washington, and Portland, Oregon, comprised over 60 percent of the air/rail market share in fiscal year 2005 and was identified for its potential role in reducing the growth rate of highway congestion within the region. The nine member states of the Midwest Regional Rail Initiative also identified where potential public benefits may be provided through additional funding for increased train frequencies and extensions of existing corridor routes. In addition, this group has set out a “grand vision” to link all of the major industrial centers in the region with high-speed rail service (operating at speeds up to 110 miles per hour). If completed, this network would reach over 35 million residents—a number that exceeds the entire metropolitan population of the NEC. An additional benefit attributed to increased development of corridor services is that the state (or other public authority) has the ability to contract for the specific services that it chooses to subsidize, including scheduling, frequency, and the stations served. In this manner, services can be adjusted over time according to regional growth patterns and changing population demographics. While Amtrak’s corridor routes serve millions of passengers each year and appear to provide a number of public benefits, there may be additional opportunities to further develop rail corridors to improve existing services and reach new markets. For example, a number of issues associated with infrastructure improvements and capacity constraints may need to be addressed to ensure that rail services continue to provide an effective alternative to other transport modes. To be successful, corridor trains must operate with adequate on-time performance to provide competitive travel times and reasonably predictable schedules. In addition, overcoming funding issues will likely be required in order to realize the opportunities identified by states for the further development of regional rail corridors. Infrastructure improvements and capacity constraints are critical issues on the NEC. Although it is Amtrak’s most viable route, the NEC faces a high level of unmet infrastructure spending, maintenance spending, and growing capacity constraints, which may affect its ability to effectively compete with other transportation modes in the future. Amtrak’s most recent legislative grant request asks for $730 million in fiscal year 2007 to complete major projects such as replacing bridges, ties, power supply systems, and overhauling the existing fleet of rolling stock, with the NEC being targeted as a critical priority for such investments. In addition, the many users operating on the NEC present a constraint on capacity that may impact the ability of Amtrak trains to reach their destinations on time. Backups are becoming more common among freight, commuter, and Amtrak trains, causing delays that result in dissatisfaction among riders. Delays affecting on-time performance may be particularly important on the NEC, where a high number of business and commuter travelers rely on these services. In fiscal year 2005, Amtrak reported that train services on the NEC reached their destinations on time an average of 78 percent of the time. While this represents a slight improvement over fiscal year 2004 levels, this indicator has decreased from fiscal year 2000 levels (see fig. 10). Recognizing that the deteriorated condition of the infrastructure contributes to increased operating costs and reduced reliability of services, Amtrak has committed to developing a NEC master plan in conjunction with the states and commuter agencies that utilize it. This effort aims to identify long-term needs and service improvements, and work together to fund such projects. An example of such a project designed to address capacity constraints and improve service is illustrated by Amtrak’s current efforts working with the state of Virginia to develop an additional track dedicated to passenger trains between Washington, D.C., and Richmond, Virginia. The benefits identified by Amtrak for projects such as this one include increased capacity, potentially higher speeds, reduced trip times, and overall improvement in reliability and on-time performance. Non-NEC corridor routes also face a number of the same infrastructure and capacity challenges affecting train speeds and the predictability of travel times as the NEC services. In fiscal year 2005, on-time performance for these services was reported at 70.4 percent, reflecting a 6-percent decline since fiscal year 2000. A state official in New York cited the Empire Service as an example of one such corridor facing significant congestion and capacity constraints associated with heavy use by freight trains, commuter services, and Amtrak trains. A recent study estimated that $700 million would be needed just to complete infrastructure improvement projects on one segment of this corridor, the 141-mile line between Albany and New York City. Similar projects to reduce congestion and increase speeds have been identified on a number of other state supported and “legacy” corridors in Pennsylvania, California, and the Midwest. Overcoming funding challenges is another issue that needs to be addressed if Amtrak and state partners are going to work together to continue developing and expanding intercity passenger rail services. Although some states have identified where additional corridor services may provide significant transportation benefits and public benefits, these projects often require substantial levels of public funding. For example, the total cost required to develop the 3,000-mile high-speed rail network as envisioned by the Midwest Regional Rail Initiative is estimated at $4.8 billion. All the state officials with whom we spoke indicated that any additional state funding for rail will require some type of federal match program similar to other transportation modes. Moreover, Amtrak’s plans to recover additional overhead and other shared costs expended on state-supported corridor routes beginning in 2008 will place further demands on limited state funding for rail. Undertaking the significant infrastructure improvement projects needed to expand capacity and improve operational performance on existing corridors would also be expensive. For example, a report issued by a coalition of rail stakeholders in the Mid-Atlantic region estimated that funding to address major congestion bottlenecks in that region would cost approximately $6.2 billion over 20 years. In addition, a report issued by state transportation officials in 2002 estimated that capital investment projects outlined for 21 corridors across the country could cost as much as $60 billion over a 20-year period. Regardless of which projects are ultimately funded, it appears that, if rail is to play a more significant role in the nation’s transportation system, overcoming issues of funding and capacity will be an important component. The current intercity passenger rail system is not adequately focused on its comparative strengths; it exists much as it did when Amtrak began over 35 years ago. While Amtrak has made notable upgrades along the NEC and implemented a number of contractions and expansions of its route structure over the years, the system remains similar in its size and endpoints as the original “basic system” that the DOT designated in 1971 (see app. II for a map of Amtrak’s routes in 1971). As the DOT General Counsel recently testified, this system has not effectively adapted to shifting demographics and market demands over time, as other transportation modes have done. While the current model may provide limited service offerings across the country’s broad geography, it does so at a very high cost to the federal government. Amidst a number of fiscal constraints and increased pressure to reduce or better target federal rail subsidies in the future, this model may no longer be viable. However, intercity passenger rail continues to illustrate the potential to become an important element with greater integration into the nation’s overall transportation system if it is focused on the markets where rail exhibits comparative strength. As reported by the Congressional Budget Office (CBO) in September 2003, these opportunities are most likely to be found on routes of about 100 to 300 miles that connect cities with large populations. In these markets, rail is most likely to be both time- and cost- competitive with highway and air travel, and may be best positioned to meet both the demands of the traveling public and the demands of sponsoring public authorities. As our work illustrates, the current intercity passenger rail system targets substantial resources toward the operation of long-distance services, which the CBO and others have reported is an area of comparative weakness for rail services. In addition to accounting for about 80 percent of Amtrak’s operating losses, these services do not appear to be meeting Amtrak’s goal of providing “basic transportation” very effectively. Services are often unreliable—averaging 41 percent on-time performance—and serve communities infrequently or at inconvenient times (often one train daily in each direction). While these characteristics do not serve Amtrak’s long-distance passengers well, the several distinct “client” markets on these routes are also not efficiently targeted. For example, many passengers on long-distance trains travel relatively short distances—400 miles or less—suggesting that a substantial share of long-distance service may actually be corridor service. However, these services are not managed like corridors, which are characterized by higher speeds and more frequent train service. Passengers in rural communities along these routes also do not appear to be effectively targeted by rail services. These services are inherently limited to those communities fortunate enough to be located next to historical rail lines. Further, there is reason to believe that alternative modes of transportation may be better positioned to provide much greater rural coverage at potentially lower cost to the government. Finally, for those passengers traveling longer distances, Amtrak often operates costly amenities (e.g., sleeper and dining cars) which account for even higher levels of federal subsidies than coach-class seats. Amtrak survey data also suggests that, on average, the 16 percent of riders on long distance trains who utilize sleeper services are typically the most affluent passengers. For example, passengers in Sleeper/First Class reported an average household income over one-third higher than coach-class passengers. Consequently, substantial federal dollars are currently being spent to subsidize costly services to individuals with higher-than-average incomes. All of these characteristics raise questions about the appropriate federal role in long- distance service, such as whether federal expenditures should be used to subsidize leisure services to affluent travelers, and whether there may be more cost-effective alternatives to provide corridor services and efficient rural transportation. In contrast, the current intercity passenger rail system also includes corridor services, which have been identified as the comparative strength of passenger rail and where passenger rail services hold the most promise to be financially viable and provide a number of potential public benefits. There has been a relative growth of passenger rail ridership on corridor routes, especially state-supported corridors, and 85 percent of Amtrak’s riders live and work along corridors. Aside from the heavily populated NEC where Amtrak has achieved its best results, a number of other corridors— such as those in California, New York, the Midwest, and the Pacific Northwest—exhibit many of the key characteristics that indicate there may be potential public benefits that could justify public subsidies for passenger rail services, namely clusters of densely populated areas within 300 miles of each other. Moreover, many officials with whom we spoke agreed that the promise of intercity passenger rail is likely along corridors, not over long distances. States have further supported this view by providing substantial funds to support corridor operations and/or capital investments on these routes. Over the past 20 years, several countries have employed a variety of approaches in reforming their intercity passenger rail systems in order to meet national intercity passenger rail objectives. These approaches—alone or in combination with each other—have been used to support national objectives such as increasing the cost effectiveness of public subsidies, increasing transparency in the use of public funds, and providing transportation benefits and public benefits. Despite the variation or combination of approaches used, during the restructuring process these countries addressed several key elements of reform, such as establishing clear goals for intercity passenger rail, clearly defining stakeholder roles that are necessary in implementing any approach, and establishing stable sustainable funding. Prior to implementing these new approaches, many countries’ passenger rail systems consisted of “monolithic” state-owned and state run organizations in which customer service and financial performance were not the main concerns of the railroad. Rather, other concerns, such as socioeconomic issues (e.g., providing employment) were more important. Similar to the current situation in the United States, passenger rail in many countries was losing market share to other modes of transportation and this loss of market share, along with mounting dependence on public subsidies and decreasing transparency with respect to where public funds were being spent, prompted change in the passenger rail industry. Table 2 discusses the different passenger rail structures that existed in the five countries in which we conducted site visits for this report. These countries were chosen because they have transitioned from state-owned fully integrated organizations to more consumer driven market-dependent entities. While it is important to be aware of the key differences between these countries and the United States (e.g., infrastructure ownership, geography, and political culture) the general catalyst for reform—the need to deliver a better value for the expense of public funds—is the same as the current passenger rail environment in the United States. The foreign countries we visited have met a broad range of national objectives by implementing various approaches to improve the cost effectiveness of their intercity passenger rail systems. All the countries we visited reformed their systems in large part to improve the value of service they were receiving for the amount of public money being spent on the service. For example, the desire for increased transparency in the use of public funds, mounting public subsidies and rail-related debt, and a desire for economic efficiency were all key factors in the European Union’s 2001 directive requiring all member states to improve the efficiency of their rail systems. Three of the five countries we visited—France, Germany, and the U.K.—are members of the European Union and have all begun implementing changes to meet these goals. Similarly, Canada and Japan both reformed their systems to increase the value in service they were receiving for the funds being spent. While the countries we studied reformed their systems in order to meet financial objectives, the national governments of these countries still provided heavy financial support to the system after the reforms. Table 3 shows the current levels of financial support provided by these governments. Passenger rail reform in the countries we visited was also undertaken to achieve a number of other objectives. For example, reform was used as an opportunity to provide viable transportation benefits and public benefits that might not otherwise be achieved. The Canadian, Japanese, and French governments all financially support passenger rail service to areas of the country that have small or isolated populations and that may not be well served by other means of transport. For the most part, this service is unprofitable and would not otherwise be provided. Another objective was to address growing urban congestion through enhanced passenger rail service. In the European Union member countries we visited passenger rail reform was used to address environment and urban congestion issues. Finally, the countries we visited used reform to improve the operational performance of existing intercity passenger rail systems. For example, in Germany, a large part of its reform was to consolidate the two highly inefficient rail systems that existed after the country was reunified into one cost-efficient rail system. Similarly, in Canada a major reexamination of long-distance intercity passenger rail service took place in order to better market these routes and, therefore improving the routes’ financial performance. Additionally, Germany and France have established performance metrics such as on-time performance and train cleanliness, which result in bonuses or penalties for the rail operators based on their ability to meet the standards established in the metrics. These reform objectives have been addressed through various approaches. Each approach reorganized a different aspect of the existing intercity passenger rail system. See figure 11 for a summary of the approaches each country took. These approaches are not mutually exclusive of each other, and have included, but are not limited to: 1) changing the roles and responsibilities of the various stakeholders involved in the intercity passenger rail system, 2) changing the funding structures of the existing system, 3) changing the organizational structure of the existing passenger rail entity, and 4) the introduction of competition or privatization in rail operations. One approach taken by the five countries we visited was a shift in the roles and responsibilities of the stakeholders involved in intercity passenger rail—primarily the national and regional governments. This was generally undertaken to remove political and state interests from the operation of the rail system in order to increase efficiency. Shift from service operator to service regulator/oversight. In both the U.K. and Germany, the national government shifted from being the operator of intercity passenger rail service to taking on more of a regulatory role, overseeing the competitive bidding process used by private operators. By taking on an oversight role, these governments are facilitating competition and, in turn, supporting their objective of creating a more cost effective and transparent use of public funds. A more cost effective and transparent use of public funds helps facilitate improved operational performance of intercity passenger rail operators. Shift away from infrastructure manager, yet remaining owner. In the countries we visited, some of the national governments no longer provide day-to-day management of the infrastructure; however, they remain the owner of the infrastructure companies in order to ensure that the state’s best interests with respect to decision making can be maintained. For example, in France and Germany, government-owned private companies were established to manage and maintain the entire rail infrastructure, including granting access to operators and collecting access fees. In the U.K., a member-owned private company handles infrastructure matters. By moving away from the day-to-day management of the infrastructure, governments are able to put those tasks in the hands of individuals best suited to manage the infrastructure, while still being able to set the strategic direction. Shifting away from day-to-day management allows the government to be more of a customer of the infrastructure manager, thereby enhancing transparency in costs as well as accountability in the financial performance of the infrastructure companies. Devolving decision-making authority to local and regional governments. One of the most prevalent changes made in two of the three European Union countries we visited was the devolution of specific roles and responsibilities from the national government to local or regional governments. These roles included decision making (e.g., selecting the operator through a bidding process), as well as determining the quantity and frequency of intercity passenger rail service. By letting governments that were geographically closest to the service make decisions about it, the national governments have been able to be more cost effective by targeting public and transportation benefits to the specific preferences of the localities. In cases where the localities are able to select their operator through competitive bidding, service can be purchased for the lowest bid—as opposed to having no choice if there were only one operator to choose from. For example, in Germany, all of the national operation subsidies are given directly to the Länder (analogous to U.S. states); the Länder are then able to issue a request for proposal outlining specific service needs, and receive competing bids for the level of service they request. Shift from service operator to customer. The U.K. and Germany, as well as France and Canada, have transitioned their relationships with rail operators from that of operator to that of customer—the governments determine what type of service they want to make available to their citizens, and then purchase that service from the rail operators. Frequently, the governments establish performance metrics to hold the operators accountable. In the U.K. and Germany there are multiple operators that can bid to provide this service, but in France and Canada the service is provided by a single national operator. By taking on a customer role—even if the national provider is still fully owned by the government—these nations have been better able to define the type of service they want, and then pay for those services. This can lead to more cost-effective service, and better provision of public benefits and transportation benefits. For example, officials in the Ile de-France region (greater Paris area) told us that they have received better service from the national operator since they were able to deal with them directly, and in 2004 the operator received 1.8€ million in bonus payments from the region for meeting metrics such as the handling of passenger claims and station cleanliness. Another approach taken by some of the countries we visited involved changing the public funding structure used to support intercity passenger rail. Changes to government commitment to funding. In all the countries we visited, the national governments made commitments to fund intercity passenger rail. Four of these countries dedicated annual funding towards investing in the intercity passenger rail system in order to provide the resources needed to achieve a desired level of rail service. Japan established a one-time fund for its railroads that needed financial assistance, allowing the railroads to invest these funds in order to operate off the interest earned on these investments. Changing the commitment to funding allows these countries to get the best value for their money by requiring rail operators to provide specified levels of service for the amount of funds required to conduct these services. Also, as shown by Canada, cuts to the level of annual funding can push an operator to improve its operations, reduce costs, and grow revenues in order to operate within its funding limits. Changes to funding mechanisms for infrastructure. Another major funding change made in the three European Union countries we visited was the establishment of new funding mechanisms (i.e., grants and loans) for intercity passenger rail operations and infrastructure. By splitting the funding sources for these two distinct functions, the governments are better able to determine what the subsidy is being used for and increase the transparency in the use of public funds; in addition, constant and expensive infrastructure projects now have a specific source of funding, allowing infrastructure managers to better plan for future projects. Changes to funding dissemination. Another funding change made by both France and Germany occurred in conjunction with the devolution of decision making to local and regional governments. These two countries now provide national funds directly to local and regional governments in order to support the purchase of intercity passenger rail service. By doing this, these countries have enabled local and regional governments to be more flexible and purchase service that best fits the preferences of the users; funds can therefore be targeted at the transportation benefits and public benefits preferred by local areas. In addition to these changes in the structure of the public funds, another factor played an important role in changing the funding structure—a national commitment to provide stable sustainable funding. For example, in Germany, part of the motor fuel excise tax was dedicated to rail; meanwhile, Japan created Business Stabilization Funds in order to support operations and capital improvements of the three island railway companies with smaller passenger rail markets. In Canada, officials told us the national government has informally made an ongoing commitment to support intercity passenger rail operations by consistently providing the same level of funding each year. By committing to provide the funds each year, all the national governments above allowed rail operators to better manage their resources and planning capabilities. As part of this commitment, four of the five countries we visited transferred or reduced the debt that the railways were carrying. In Germany, reform took place in 1994 and the debt was transferred to the government; a new public agency was then created to take over and pay off the 35€ billion in debt (about $39 billion) incurred by the preexisting railways, as well as by the employees of the former railways. In Japan, during the 1987 reform, the national government relieved the railway of its ¥37.1 trillion debt (about $257 billion) by transferring most of it—along with part of the railway’s employee pensions—to the national government, and splitting the remainder of the debt among the operators. In France, the 1997 reform resulted in 20€ billion in debt (about $24 billion) being transferred to the new infrastructure manager. In exchange, the new manager received the country’s entire rail infrastructure at no cost; the remaining 10€ billion in debt (about $12 billion) was transferred to the national operator. While the British government wrote off the initial debt of the railway in 1994, the U.K. is currently carrying an infrastructure debt of about £18 billion (currently about $34 billion). According to U.K. officials we interviewed, this amount is expected to increase to £21 billion (currently about $39 billion) by 2009. Officials with U.K.’s infrastructure manager noted, though, that borrowing is limited to 85 percent of the value of its regulatory asset base. Canada did not have debt at the time of their restructurings. Relieving the debt of the rail operators created a viable capital structure for the new railways to operate in, and has been an important factor in their ability to move forward more cost effectively. Restructuring the organization of existing passenger rail systems is another approach often taken by governments when reforming their rail systems. Historically, most national rail systems have been comprised of monolithic government-owned and government-managed entities, where the two major functions—managing infrastructure (e.g., tracks and stations) and managing daily operations—were integrated. The three European countries we visited began their reform by separating the operational and infrastructure functions of their passenger rail systems. Separating these two functions from each other can result in more transparency and a better estimate of what the costs for each function are. This separation can take place in a variety of ways. For example, the U.K. went from a government monopoly with full control over both functions to a private company owned by “members” that own and manage all of the rail infrastructure; operations were turned over to private operators in 1993. In France, the government monopoly was separated into two separate government-owned companies. One company is responsible for managing all rail operations and the other is responsible for managing the infrastructure. In Germany the government rail monopoly was turned over to a private state-owned holding company, with separate independent subsidiary business units in charge of infrastructure and operations. Additionally, in Germany, although the same holding company that owns the infrastructure also includes the primary passenger rail operator, other private operators are permitted to provide intercity passenger rail service on their tracks. Conversely, in Japan, the infrastructure and operational function of the passenger rail system have remained integrated—instead, the country divided its rail system into six distinct geographic regions allowing each area of the country to address issues specific to its passenger markets. Restructuring the rail system is generally implemented to create more transparency in the costs incurred by the rail companies; once accurate costs are known, companies can better gauge how much to charge for their services, as well as identify opportunities for cost savings. The introduction of competition and/or privatization in rail operations is another approach to reform intercity passenger rail. This approach was used by some of the countries we visited. Over the past two decades, countries have been reforming their railway systems through various forms of privatization in order to improve the quality of service and efficiency offered to customers, and to reduce costs. Competition and privatization are two market mechanisms that are often used to improve service efficiency while meeting financial objectives. The use of competition and privatization can lead to a market that is more responsive to customers as well as investors. However, regardless of the degree of success, deep and continuing government involvement will likely continue to be necessary in order to balance the financial needs of the railways with the transportation coverage desired by the state. Competition and privatization have been particularly prevalent in Europe, where a European Union directive requires the existence of competition in the freight rail industry; an additional directive has been proposed requiring the allowance of competition in the international passenger rail industry as well, although some countries have already opened their markets to multiple operators. Germany makes extensive use of private operators, with over 300 operators providing rail service on many regional routes. In the U.K., all passenger rail services are franchised and open to competitive bidding by operators. The introduction of competition and privatization is largely dependent on the government changing its role to that of a customer, with the primary focus on purchasing the best service for the best price. In Germany, the dissemination of national funding to regional governments has facilitated the extensive presence of multiple operators. Japan, meanwhile, aims to have its passenger rail system completely privatized; currently three of Japan’s six passenger rail systems are managed by individual private companies. By turning its passenger rails over to the private sector, Japan has improved its quality of service and substantially reduced the number of its employees; the demand for railway service continues to increase. Several key reform elements were addressed by the five countries we visited as part of their planning and implementation of new approaches to intercity passenger rail. Based on our review, implementing these approaches appears to improve the cost effectiveness of intercity passenger rail service. For example, officials with the primary operator in Germany told us that their company has seen a 187-percent increase in staff productivity between 1993 and 2004; at the same time, the company was able to reduce its workforce by 40 percent. These officials stated that the German rail reform resulted in taxpayers paying 44€ billion less during this time period than what they would have been expected to pay if there had been no reform. The key reform elements addressed throughout implementation of these approaches include: Establishing clearly defined national policy goals. In making major changes to an intercity passenger rail system, it is essential that the national government establish a clear vision for what the goals of the system should include while making decisions to implement new approaches to meet these goals. During our review of the five countries we visited, we observed that each country established goals that their reforms were intended to achieve. As we reported in February 2005, a key component in reforming a national program includes determining if there is a clear federal role and mission. All of the approaches taken by the five countries we visited were tailored to meet the specific national policy goals established by those countries. For example, in the U.K., there was a national goal to reduce the role government played in managing the passenger rail system. To meet this national goal, the U.K. used approaches such as introducing competition in its system, and changing the role of the national government from service operator to that of a customer of private rail operating companies. Clearly defining government and stakeholder roles. The second key reform element we learned about during our site visits is that government and stakeholder roles should be clearly defined prior to (or during) implementation of any reform approach. Deciding what these roles should be was the first step in several of the approaches. For example, in order to shift the national government’s role, the responsibilities of the government first needed to be defined; it then had to be decided which of these responsibilities would continue to be government functions, and which would be those of other stakeholders. Establishing consistent, committed funding. Consistent, committed funding is the final reform element key to successful implementation of a new approach to intercity passenger rail. In the five countries we visited, the national governments made a commitment to provide intercity passenger rail service. The governments also committed to provide the system, on an annual basis, with the funds necessary to maintain this service. Whether the approach taken was to increase the annual subsidy, provide subsidies to regional levels of government, or establish a consistent subsidy for each year, all of these governments made financial commitments to provide intercity passenger rail service. See app. III for more detailed information about each of the countries we reviewed. The United States is not well positioned to reform or restructure intercity passenger rail service. Based on our review of foreign intercity passenger rail reforms, a more fundamental reexamination of the system by policymakers than has taken place to date will be needed if the United States wants to better position itself to improve the performance and benefits of the intercity passenger rail system in this country. The national governments of the countries we visited addressed three main elements through the process of reforming or restructuring their intercity passenger rail systems: (1) clearly defining national policy goals, (2) clearly defining the various roles and responsibilities of public and private sector entities involved, and (3) establishing consistent committed funding for intercity passenger rail. Currently, the goals and expected outcomes of U.S. passenger rail policy are ambiguous, stakeholder roles are unclear, and funding is limited because of other priorities and a lack of consensus on the level of funding to devote to goals. As the primary provider of U.S. intercity passenger rail, Amtrak has the authority to take a number of actions, but has a history of poor financial and operating performance. Amtrak has recently proposed a reform strategy and is undertaking efforts to reduce costs and increase corporate efficiency. However, constraints, such as expensive labor protection payments that may be triggered by possible route and service changes, limit the benefits Amtrak can achieve on its own. Even if Amtrak were to fully exercise its authority, Amtrak is not in a position to address the key elements of reform we observed in other countries. Federal leadership will be needed to fundamentally improve the performance of intercity passenger rail. We found that other countries we visited addressed key reform elements in the process of reforming or restructuring their intercity passenger rail systems. U.S. policymakers will need to reexamine national policy goals and objectives, stakeholder roles and responsibilities, and funding mechanisms for intercity passenger rail if the United States wants to better position itself to improve the performance and benefits of federal expenditures on intercity passenger rail. Based on our review of intercity passenger rail systems in five countries, we found that, in the process of reforming or restructuring their systems all five national governments clearly defined national policy goals and objectives for the system. For example, a specific goal of the reform process in France, Germany and the U.K. was to increase transparency in the use of public funds and restructuring included separating the management of their rail infrastructure and passenger operations. In Germany, the government’s objectives in consolidating two state railways into one private holding company, Deutsche Bahn AG (DB), was to improve efficiency, and to allow DB to function independently of the government and manage its railway like a private business. During the restructuring process in Japan, by defining specific goals and outcomes for the system, the national government was able to determine an overall structure for the system. Some of the goals Japan defined for the railway before restructuring it were reducing the accumulated debt, minimizing the national government’s role in maintaining the railway, increasing efficiency, and strengthening competitiveness. Additionally, a desired outcome of restructuring the state-owned provider into six private regional passenger rail operating companies was to better position rail service to compete for passengers. Goals provided by Congress focus narrowly on Amtrak management, rather than providing guidance and direction for the entire U.S intercity passenger rail system. The current legislation governing Amtrak directs it to operate a national passenger rail transportation system that ties together existing and emerging regional corridors and other intermodal service. However, it does not provide specific objectives for the system Amtrak is required to operate, such as defining transportation benefits and public benefits or increasing the transparency of public funds, nor does it specify how the system should be structured to achieve certain outcomes. This broad mandate, as previously discussed, has resulted in the current intercity passenger rail system—a system that does not target markets where rail may have a comparative advantage over other transportation modes nor makes the most cost-effective choices to meet public transportation needs. In April 2005, Amtrak released a set of proposed strategic reform initiatives, which included a vision for the future of intercity passenger rail service and Amtrak’s role. Recently, Amtrak developed a mission statement, which aims to improve financial and operational performance by tying specific goals to the mission statement. Although the vision and mission statement provide a direction for the company, senior Amtrak officials told us that this mission for the company should not be a substitute for Congress setting a national intercity passenger rail policy. Furthermore, they said that a national rail policy should be explicit and clearly indicate the transportation services that the federal government wants operators to offer; Congress should then provide funding for the desired level of service. Determining the system’s structure, as well as determining how to position passenger rail within the entire U.S. transportation system, will remain uncertain without specific goals and outcomes for intercity passenger rail. To change the current structure of intercity passenger rail, policy decisions need to be made. As the Congressional Research Service (CRS) reported in December 2004, maintaining the status quo of passenger rail policy allows policymakers to avoid making decisions, such as shutting down Amtrak and eliminating its long distance routes or alternatively, committing to a major financial program. Without a more explicit national policy, the future role of intercity passenger rail in the national transportation system is uncertain. Similarly, establishing clear stakeholder roles and responsibilities was important to helping improve the efficiency of intercity passenger rail systems in several of the countries we reviewed. For example, the U.K. reorganized its structure by creating separate organizations (e.g., organizations to provide train service, manage the rail infrastructure, and regulate infrastructure access fees and costs). Each of these organizations has defined responsibilities and is transparent with respect to the responsibility of achieving specific goals. According to a U.K. official, in privatizing some of these organizations, the U.K. sought greater efficiency, tighter cost control, a reduction in government interference in the railway industry, and more consistent and reliable funding. Our study also showed that clarifying stakeholder roles and responsibilities may require the creation of new entities. For instance, when Japan National Railways restructured its railways in 1987, the government created the Japan National Railways Settlement Corporation to settle the accumulated debt of Japan National Railways. In addition, an official from Japan’s Ministry of Land, Infrastructure, and Transport told us that the railway split into six passenger railroads in order to have more efficient regional service. In the United States, stakeholder roles and responsibilities for managing, operating, and funding intercity passenger rail services are unclear. For example: It is unclear what Amtrak’s main responsibility should be as the primary intercity passenger rail operator in the United States, given that the purposes of Amtrak are in conflict. Although Amtrak is incorporated as a for-profit corporation, any expectation of being a profitable company has not been realized—partly because it is responsible for maintaining an intercity passenger rail system with many unprofitable routes. The federal role in intercity passenger rail service has primarily been to subsidize Amtrak’s operations and, in the past, manage capital improvements to the infrastructure along the NEC. Only recently has the Secretary of Transportation been tasked with overseeing these funds, but such funding has been tied to Amtrak’s business plan and not a national policy or vision that articulates goals, objectives, and outcomes for intercity passenger rail services. Current law offers states a narrow role in decision making, but permits states to subsidize additional intercity passenger rail service. Some states see benefits to subsidizing intercity passenger rail and choose to spend their own funds for additional service not provided as part of Amtrak’s national route system—a system that has not had substantial changes since 1971. Those states have had a role in making decisions, such as what stations will be served and whether food service will be provided on the subsidized route, unlike states that do not provide funding. Forty-two states receive basic long distance service with no state support, while 13 of these states have decided to subsidize additional corridor services based, partly, on demand. For example, Amtrak’s legacy route system has provided service on some corridors without state support, (e.g., from Pittsburgh, Pennsylvania, to New York City), but on other corridors, states have subsidized additional service, such as Washington state paying for additional frequencies for the Cascades Service between Seattle, Washington, and Portland, Oregon. Additionally, in December 2004, CRS reported that there are those who view that state governments may be better positioned to make regional service decisions. The administration’s proposal also favors giving states a greater role in decision making with respect to rail service and capital improvements. The role that freight railroads should play in shaping the future of intercity passenger rail service is not defined. Management of and access to infrastructure is dominated by the freight railroads. Since passenger railroads and freight railroads must often share access to privately owned tracks, the freight railroads’ control over infrastructure has an influence on both national passenger rail policy and day-to-day passenger rail operations. Specifically, freight railroads may be concerned with intercity passenger rail policy decisions that affect access to their rights-of-way and capacity on existing tracks; these decisions could potentially affect the freight business. While their decisions may influence passenger rail service, freight railroads do not have a defined role in decision making or the funding of intercity passenger rail. Finally, as part of their overall restructuring process, all of the countries we reviewed committed to funding intercity passenger rail service. For example, in the U.K., the Secretary of State for Transport is tasked with determining what services the railway should deliver. This determination is made through a document called the High Level Output Specification: available funds for these services over a 5-year planning period are set down in a statement of funds available. An official in the U.K. Department for Transport told us that this funding cannot be reallocated for other purposes without great political and financial risk. In addition, a 2002 CRS report observed that reorganization of the railways in several countries required substantial political and financial commitment over an extended period. Besides establishing funding tied to goals, countries we visited also devoted funds to capital improvements separate from operating subsidies. In France, about 2€ billion per year (currently this is approximately $2.5 billion) is provided for new rail lines: additionally, the government also offers interest-free loans to support new infrastructure projects. In addition to providing funding specifically for capital improvements, three of the five countries disseminate the national subsidy to regional governments, allowing passenger rail subsidy options to be decided by regional governments instead of the national governments. For instance, about 7€ billion per year (about $8.9 billion) in operating subsidies is divided among the 15 German Länder to be used at their discretion, and in France a 2€ billion per year (currently this is about $2.5 billion) subsidy is divided among the 21 regions to support operations. The U.S. federal government has annually subsidized Amtrak since its inception. The funding for intercity passenger rail has been constrained due to competing priorities; possibly, funding has also been constrained due to the inability to reach consensus over the federal role in intercity passenger rail, which is demonstrated in the status of Amtrak’s reauthorization. Grants to Amtrak have not been expressly reauthorized since its previous 5-year authorization expired in 2002, despite the number of proposals presented to the Congress. Nonetheless, Amtrak developed a 5-year strategic plan (covering the period of fiscal years 2005 to 2009) that was designed to address its immediate needs. (The plan identified inadequate and uncertain levels of funding as a risk.) In recent years, Amtrak has received over $1 billion in annual operating grants and capital grants through the annual appropriations process. Some other transportation programs have established funding mechanisms that share costs between the federal government and other parties. For example, the Federal-aid Highway Program—a portion of which is subject to the annual appropriations process for budget authority—has a dedicated trust fund, the Highway Account, which is mainly funded by highway user fees, such as taxes on motor fuels, tires, and trucks. Transit projects have access to the Federal Transit Administration’s full-funding grant agreement—a mechanism that requires identifying and committing federal and nonfederal funds to support the multiyear capital needs of construction projects. According to the Federal Transit Administration, dependable levels of funding for the full-funding grant agreements have improved the ability of transit agencies to finance, plan, and execute projects. Without consensus over the federal role in funding intercity passenger rail and competing priorities for federal funds, Amtrak will continue to operate in an uncertain environment—impairing its ability to make strategic and operational decisions, and often deferring capital and infrastructure maintenance. In general, Amtrak’s Board of Directors and management have the flexibility to make numerous changes in its corporate direction and organizational structure to improve financial performance. However, Amtrak has a history of poor financial and operating performance. As we have previously reported, many of its efforts at internal restructuring over the last decade have largely failed and the company lacks many basic management and reporting practices. More recently, in April 2005, Amtrak proposed a more strategic approach for the company with a broad set of reform initiatives. Amtrak is taking actions within its existing authority to implement these initiatives, although most of the actions currently being taken are operating in nature. While the Amtrak Reform and Accountability Act of 1997 provided Amtrak with greater flexibility to make more significant improvements, constraints limit the benefits that can be achieved from this increased freedom. For example, although Amtrak no longer requires approval by the Secretary of Transportation to make changes to its route structure, route changes that result in elimination of service could trigger expensive labor protection requirements. Regardless of the internal changes Amtrak could make to manage its operations more efficiently, Amtrak, as an operator, is not in a position to address the key elements of reform. Federal leadership is needed to establish national policy goals and stakeholder roles related to these goals, and to identify funding levels needed to support these goals. Amtrak’s Board of Directors and management have the authority to make numerous changes and have made changes in its corporate direction and organizational structure. Amtrak is incorporated as a for-profit corporation, but has been the recipient of substantial federal financial assistance since its inception and has historically struggled to earn sufficient revenues and operate efficiently. Without annual federal subsidies for Amtrak’s operating costs, the corporation would not survive as presently configured and operated. Amtrak’s financial condition has never been strong and it has been on the edge of bankruptcy several times. In 2001, Amtrak lost about $1.2 billion and mortgaged a portion of Pennsylvania Station in New York City to generate enough cash to meet its expenses. In July 2002, Amtrak also received a federal loan of $100 million to meet expenses. Management of Amtrak has also generally been ineffective and the company lacks basic tools for comprehensive planning. For example, some of Amtrak’s internal changes over the last decade, such as establishing strategic business units and modifying Amtrak’s routes, have not met expectations. Instead, Amtrak’s financial condition deteriorated. Additionally, as we reported in February 2004, Amtrak’s ineffective management of a large-scale infrastructure project resulted in the incompletion of many critical elements of the project, increased project costs, and the project goal—a 3 hour trip time between Boston and New York City—was not achieved. Finally, in October 2005, we reported that the corporation lacked many basic management and financial reporting practices. Among other things, we found that much of the financial information Amtrak used for day-to-day management purposes lacked certain relevant information or was of questionable reliability. Amtrak’s Board of Directors and management have recently taken actions to address these concerns. These actions include appointing a new president and creating a planning and analysis department to develop and manage a company-wide strategic plan. However, impacts on the corporation’s performance remain to be seen. Additionally, in April 2005, Amtrak’s Board of Directors and management proposed a set of broad strategic reform initiatives designed to improve the operational efficiency of the company, transition Amtrak into one of a number of competitors to provide intercity passenger rail service, and change how federal subsidies are distributed for intercity passenger rail. Specifically, changes outlined include reinforcing management controls, organizing planning and reporting by lines of business, and cultivating competition and private commercial activity in passenger rail functions and services. Amtrak’s proposed initiatives are a step toward a more strategic approach for the corporation and include both reforms Amtrak could pursue internally, such as changes to its maintenance services and facilities, and those that require legislative action, such as the enactment of a federal- state capital matching program for corridor development in partnership with states. However, according to senior Amtrak officials, Amtrak is initially focused on internal reforms that Amtrak believes it has greater control over. Currently, Amtrak is implementing operational changes in 15 areas based on the broader proposed set of strategic reform initiatives. (See app. IV for a list of Amtrak’s operational initiatives and their status.) These efforts are primarily associated with improving business efficiency and reducing costs. For example, Amtrak’s management proposed to redesign some aspects of the sleeper car service offered on long-distance trains, such as reducing the number of sleeper cars and offering new sleeper service products targeted at different markets. This effort is projected to reduce Amtrak’s losses from offering sleeper service by about 46 percent. Although Amtrak’s recent efforts are expected to result in some savings, these changes alone will not be sufficient to address broader structural issues. According to a July 2006 DOT OIG report, Amtrak’s 15 operational changes have resulted in a $46 million reduction in annual operating losses through May 2006. But the projected incremental operating savings from full implementation of Amtrak’s operational changes over the next 5 or 6 years will not be sufficient to fund needed improvements to the intercity passenger rail system such as addressing capital and maintenance needs, returning the system to a state-of-good repair, and promoting corridor development. In April 2005, Amtrak estimated that the strategic reform initiatives could achieve total operating savings of nearly $550 million by fiscal year 2011. Amtrak said achieving these savings would require a number of legislative actions, such as the enactment of an 80 percent federal capital match for state intercity passenger rail funds, as well as realizing increased revenues from passengers, obtaining additional state operating contributions for corridor trains, and having the federal government cover Amtrak’s legacy debt obligations. Some or all of these could increase federal costs. The Amtrak Reform and Accountability Act of 1997 provided Amtrak with greater flexibility to alter its route network and undertake other cost saving changes to meet the goal of operating self-sufficiency by the end of December 2002, which Amtrak did not achieve. However, the benefits that Amtrak can achieve from these provisions are limited by practical constraints. For example, while the act eliminated the statutory ban on Amtrak contracting out or outsourcing work, except for food and beverage service that could already be contracted out, it made outsourcing a part of the collective bargaining process. Amtrak officials also told us that this provides less flexibility rather than more since it is more difficult to change collective bargaining agreements with unions than for Congress to change a statutory requirement. This could limit the extent to which Amtrak could contract out services, depending on the outcome of negotiations with unions. Amtrak officials told us that little progress has been made on labor negotiations since only three contracts (of the 24 collective bargaining agreements Amtrak maintains with its agreement employees) have been signed and these all technically expired on December 31, 2004. As a result, Amtrak is currently in negotiations with all of its unions and employee councils over collective bargaining agreements. The benefits of making route changes to better meet the demands of the public may also be limited as a result of labor protection requirements, which are also part of the collective bargaining process. The Amtrak Reform and Accountability Act of 1997 relieved Amtrak from getting approval from the Secretary of Transportation to make changes to its route structure and allowed Amtrak to discontinue routes without having to preserve the “basic system” formerly mandated by Congress, as long as the remaining route structure tied existing and emergent regional rail passenger service and other intermodal passenger service. One Amtrak official told us that while Amtrak is legally allowed to change the route network, decisions are often met with a variety of reactions including resistance by Congress. In addition, if route changes result in the elimination of jobs, Amtrak employees may be entitled to labor protection benefits. As we reported in September 2002, if Amtrak had been liquidated on December 31, 2001, potential Amtrak employee claims for immediate labor protection payments could have been as much as $3.2 billion. Further, if an employee loses his or her job as a result of a reduction in service on a route or closing of a maintenance shop, then he or she could receive labor protection benefits for up to 5 years. Finally, several potential constraints exist in gaining benefits from Amtrak adopting a “user pays” principle for the provision of its services. Under the user pay concept, costs to build and maintain rail infrastructure, including along the NEC, would be paid for by the full range of users of the system, including states, commuter rail agencies, freight railroads, and the public. If adopted, a better matching of fees paid to costs incurred by the diverse users of the NEC could provide incentives for both public and private users to make modal choices and transportation options based on true costs. One issue in implementing this approach is Amtrak’s ability to accurately define the true costs of intercity passenger rail services. We discussed examples of this issue in two recent reports. In October 2005, we reported concerns with how Amtrak captured and reported financial information, such as Amtrak’s overreliance on indirect cost allocation methods. In April 2006, we reported that it is difficult to determine Amtrak’s revenues and costs associated with providing services and access to infrastructure to commuter rail agencies, in part due to the limitations of Amtrak’s accounting practices. Since then, Amtrak has made some changes to its reporting and financial systems, but according to Amtrak officials and progress reports, more work is needed. A senior Amtrak official told us that identifying direct route costs may be difficult since Amtrak uses many different systems to capture costs. Another constraint may be the ability and willingness of users to pay additional fees. For example, we recently reported that the ability and willingness of private rail companies to invest in infrastructure capacity to meet projected future demand for freight rail transportation is uncertain. While some states see a benefit to intercity passenger rail and pay for additional service, two state officials we spoke with opined that a proposal which required states to further subsidize existing intercity passenger rail service would face political opposition at the state level unless a federal capital matching program comparable to other transportation modes is enacted. In addition, commuter rail agencies that use the NEC raised several concerns about FRA’s efforts to establish a fee on them as mandated in Amtrak’s fiscal year 2006 appropriations. Among other concerns, these agencies stated that their usage of the NEC is different from Amtrak’s, which should dictate different levels of payment for use of the same infrastructure. Amtrak, as an operator, is not in a position to adopt and ultimately implement key elements to begin reforming intercity passenger rail in the United States. Amtrak’s efforts will not likely change the structure of intercity passenger rail without legislative action. Most of all, Amtrak cannot address the three key elements of reform we observed in other countries: 1) clearly defining national policy goals, 2) clearly defining the various roles and responsibilities of public and private sector entities involved, and 3) establishing a level of funding to devote to these goals. Amtrak’s role is to provide intercity passenger rail service to the public. Congress sets the national policy and goals for intercity passenger rail, especially in the context of the entire national transportation system. Since 2002, federal policymakers have been struggling with what to do about U.S. intercity passenger rail in general. Policymakers have not adopted the legislative actions in Amtrak’s strategic reform proposal. Additionally, in June 2006, CRS reported that policymakers have not endorsed Amtrak’s strategy of maintaining its current route network while restoring its infrastructure to a state of good repair, nor did they provide Amtrak with the requested funds to meet these goals. CBO also said there has been a lack of consensus about the role intercity passenger rail service should play in the national transportation system and Amtrak’s role in providing such services. While Amtrak’s efforts are a step to improving the corporation’s financial and operating performance, these changes do not address the reform elements necessary to maximize transportation and public benefits of, and the effectiveness of federal expenditures for, intercity passenger rail service. Any fundamental change of intercity passenger rail will involve a number of difficult operational challenges and policy decisions and all of them will require federal leadership. There are a number of challenges associated with addressing the key elements of reform for intercity passenger rail. The variety of stakeholders, all with different interests and issues, makes it difficult to reach consensus on any change. Central among federal challenges is determining what the vision and role for intercity passenger rail in the United States should be, the federal role, if any, within this vision, and the reconciliation of the wide diversity of views on how the intercity passenger rail service fits into the national transportation system. Challenges in promoting a more equitable federal–state partnership include the varying ability and willingness of states to participate in funding intercity passenger rail and identifying appropriate policy changes to overcome the disadvantages intercity passenger rail faces relative to the leveraging of federal funds. Currently, states are challenged to leverage their expenditures on such service. However, federal-state cost sharing is common in highway and transit programs where investment is encouraged through matching grants. Other challenges include freight railroad concerns about infrastructure access and capacity, workforce issues, and the role of the private sector. Addressing funding issues will also present challenges. This includes identifying funding sources to achieve national policy goals and developing incentives for state participation. Each of these challenges presents opportunities to increase the benefits of federal and nonfederal expenditures on intercity passenger rail; not addressing them will likely continue the stalemate in moving toward a well-defined role for federal subsidies for intercity passenger rail in the United States. One of the most difficult aspects of addressing reform elements for intercity passenger rail will be reaching consensus among stakeholders on the topic of change. Stakeholders include federal and state governments, freight and commuter railroads, the passenger rail workforce, and potential private sector operators. There are a variety of stakeholder interests in intercity passenger rail and, at virtually every level, there are challenges that will need to be overcome before consensus can be reached to change any policies, goals, or stakeholder roles involved with intercity passenger rail. The federal government’s interest, as laid out in statute, is in seeing that intercity passenger rail service is provided on a national basis. However, the Amtrak Reform and Accountability Act of 1997 removed direct federal involvement in making route decisions, and DOT and FRA have, until recently, largely taken a “hands-off” approach to Amtrak and intercity passenger rail. As we reported in October 2005, FRA officials have told us that, even though FRA has a seat on Amtrak’s Board of Directors, the agency has historically refrained from advocating a particular approach to running Amtrak; neither has it specifically held Amtrak management accountable for meeting particular goals. In addition, an FRA official told us that the agency must be careful about its involvement with management decisions since, legally, Amtrak is a private for-profit corporation. Since fiscal year 2003, Congress has imposed measures to increase the Secretary of Transportation’s responsibility for providing oversight of, and accountability for, the federal funds used for intercity passenger rail service. Among other things, these measures require Amtrak to transmit a business plan to the Secretary of Transportation and Congress and provide monthly reports about this plan. In response to these measures, FRA has entered into grant agreements with Amtrak. Although measures are in place to increase FRA’s oversight of Amtrak’s operations through grant agreements, FRA attributed the lack of resources for its limited and focused approach to Amtrak oversight. These measures address oversight and accountability but do not necessarily address establishing a vision for intercity passenger rail service, and the role of such service, in the national transportation system. DOT commented that FRA’s role has never been to “establish a vision for intercity passenger rail” regardless of resources available. The challenges of establishing a national policy vision for intercity passenger rail and the federal role, if any, within this vision are illustrated by the wide diversity of intercity passenger rail service proposals introduced in recent years. For example, one recent congressional proposal would largely keep Amtrak intact and instead focus on various reforms related to improving financial management, corporate governance, and the development of metrics and standards for measuring performance and the quality of service. This proposal would, among other things, require Amtrak to develop a capital spending plan for restoring the NEC to a state of good repair, and would allow freight railroads to bid for operating long- distance trains. In contrast, a proposal by the administration would significantly restructure Amtrak. This proposal includes splitting Amtrak into three functionally independent entities: a corporate entity to oversee the restructuring and manage residual responsibilities; a passenger operating company; and an infrastructure management company. It would also, among other things, encourage the creation of an interstate compact made up of northeastern states and the District of Columbia, to operate the NEC. Amtrak itself has recognized the need for change. In April 2005, Amtrak’s management released a proposed set of strategic reform initiatives that, if fully implemented, could substantially change how it is operated. Under this proposal, states would play a larger role in deciding what services to offer, and there would be increased opportunities for competition in providing intercity passenger rail service. There are also a variety of interests and challenges in promoting a more equitable federal–state partnership that make reaching consensus difficult. One is the number of states that have the interest or willingness to participate in intercity passenger rail. On the one hand, there are a number of states that are willing to participate in subsidizing intercity passenger rail and have made commitments to do so. In fiscal year 2005, 13 states paid about $140 million to subsidize additional service from Amtrak. Amtrak also received about $130 million from 8 states and 3 state agencies for capital improvements on passenger rail corridors and at stations. In addition, a coalition of 27 states—called the States for Passenger Rail— have come together to promote the development, implementation, and expansion of intercity passenger rail services with the involvement and support from state governments. This organization’s policy statement indicates that states have taken, and will continue to take, a lead role in the planning and development of new, expanded and enhanced regional passenger rail corridor services. The states in the organization maintain that these systems cannot be fully programmed and implemented without a federal–state funding partnership similar to existing highway, transit, and aviation programs. On the other hand, there are a number of states that receive the benefits of intercity passenger rail service but do not subsidize such service, and may or may not be willing to do so. This situation reflects the legacy service that existed when Amtrak was created in the early 1970s. For example, as of April 2006, there were 12 Amtrak trains scheduled to operate daily Monday through Friday between New York City and Albany, New York. The state subsidizes only 1 of these trains—the Adirondack. Even on this train the state only subsidizes service north of Albany to Montreal, Canada. New York City to Albany is part of the legacy service that dates to when Amtrak began service in 1971. The extent to which states would be willing to pay for the intercity passenger rail service currently received for free is an open question. Another federal–state challenge is the leveraging of financial assistance to intercity passenger rail. Recent surface transportation acts have authorized some federal financial assistance for the development of high-speed rail and other passenger rail corridors. In addition, states can finance passenger rail projects through the Federal Highway Administration’s Congestion Mitigation and Air Quality Improvement program when the project will result in demonstrable air quality improvements. However, states are challenged to leverage their expenditures on intercity passenger rail. In general, states work directly with Amtrak to obtain service above the basic service provided. Some states also work directly with Amtrak to finance intercity passenger rail capital improvement projects that benefit their state. An FRA official told us that states could start their own intercity passenger rail service, but doing so would be difficult given the potential cost and lack of statutory access to infrastructure at the incremental cost that Amtrak currently enjoys. Some other transportation programs—such as the interstate highway program and the Federal Transit Administration’s New Starts program for transit systems—share responsibility for planning, design, and funding between the federal government and state and local governments. Federal agencies generally set the design and quality standards for projects and encourage investment through matching grants. State and local governments prepare transportation plans which identify the need for investment, develop a business case for the investment, and contribute a portion of the funding. Finally, reform initiatives designed to increase state roles in intercity passenger rail will likely face the challenge of finding mechanisms for states to work cooperatively together in the development of routes and corridors that cross state lines. One mechanism is an interstate compact. Interstate compacts for intercity passenger rail were proposed in the Amtrak Reform and Accountability Act of 1997. Interstate compacts are agreements between states that are constitutionally permitted when approved by Congress. Several interstate compacts are currently being used to study the feasibility of, or advocate for, intercity passenger rail service. These include the Midwest Interstate Rail Passenger Compact and the Interstate High Speed Intercity Passenger Rail Compact. Currently, however, there are few passenger rail systems being operated under an interstate compact. State officials have told us that interstate compacts are a very difficult mechanism to use when more than two states are involved. They said that not only do compacts take a substantial amount of time and burden to create, but, in the context of passenger rail, there are practical issues involved—such as deciding what service is provided, how the costs of such service are allocated to participants, and what happens when one or more states do not fulfill their financial obligations to the compact. There may be other mechanisms available for states to work cooperatively with each other. For example, the Appalachian Regional Commission (ARC) is a federal–state partnership that, in general, was created to promote economic development in Appalachia. Although the current definition of Appalachia includes 13 states, the governance structure is made up of only two co-chairs—one representing the federal government and one representing the collective interests of 13 member states. Each co- chair has one vote on ARC matters. ARC officials told us that because of the governance structure of ARC, virtually all decisions are reached by consensus. In fact, they said that one of the advantages of ARC is that more can be accomplished together than separately. They also cited as a disadvantage the difficulties in reaching decisions. Freight railroads play an integral role in intercity passenger rail. Over 95 percent of Amtrak’s route system operates over lines owned by freight railroads. As such, the freight railroads have a keen interest in the volume of passenger rail service provided and the potential impacts of such service on their business. One of the main challenges associated with passenger and freight railroads is infrastructure access and the cost of such access. Since Amtrak’s creation, federal law has generally required freight railroads to give Amtrak trains priority access and charge Amtrak an incremental cost—rather than the full cost—associated with the use of their tracks. These legal rights currently apply only to Amtrak. However, efforts to reform intercity passenger rail service raise questions about the status of Amtrak’s priority access and incremental charge rights—that is, can, or should, these rights be transferred to non-Amtrak operators or will some other arrangement need to be made? Other arrangements could significantly increase both the difficulty and cost of introducing non- Amtrak operators, possibly through competitive bidding for subsidies, to provide intercity passenger rail service. Commuter rail service offers an example of access negotiations on commercial, rather than incremental, cost terms. As we reported in January 2004, unlike Amtrak, commuter rail agencies do not possess statutory rights of access to freight railroad track. As a result, commuter rail agencies must negotiate with freight railroads to purchase, lease, or pay to access the railroads’ right-of-way. Negotiations for these agreements can last from a few months to several years. Our report noted that when negotiating a lease or access agreement, freight railroads typically want to be compensated for all operating, capital, and other costs associated with hosting commuter and other trains. These costs would include direct costs, such as dispatching trains and maintaining the rights-of-way, and indirect costs, such as the cost of foregone opportunities (e.g., the incremental value of “lost” train slots). Infrastructure access is also difficult from the perspective of a freight railroad company. Since freight service is the companies’ core business, the ability to move freight through the system must be protected. Freight railroad officials with whom we spoke for our earlier report insisted that they must protect their systems’ capacity to handle both today’s freight traffic as well as future traffic projections. Protecting capacity becomes difficult when passenger trains, either intercity or commuter, consume available capacity without some sort of infrastructure enhancement, expansion, or market-based compensation for line capacity used. In addition to infrastructure access, capacity and capacity-availability issues—that is, the ability of rail lines and infrastructure to handle current and future traffic volumes—are also of concern to freight railroad companies. After years of reducing infrastructure and rationalizing their property, plant, and equipment, freight railroads have recently experienced a substantial growth in traffic—a growth that some project will continue into the future. In January 2006, the CBO reported that total freight carried by all modes of transportation in the United States has been growing. CBO indicated that railroads, in particular, experienced a sharp increase in traffic in the 1990s, with traffic increasing more than 50 percent between 1990 and 2003 (from about 1 trillion ton-miles to about 1.6 trillion ton- miles). This growth is expected to continue. For example, the Department of Energy’s Energy Information Administration has projected that railroad ton-miles will increase 1.7 percent annually between 2004 and 2030, reaching about 2.4 trillion ton-miles in 2030. Other organizations have similarly predicted increases. This growth has acted to limit available capacity on the rail network, at least in some locations. In April 2006 testimony before the U.S. House Committee on Transportation and Infrastructure, Subcommittee on Railroads, the president and chief executive officer of the Association of American Railroads said that the traffic density (i.e., ton-miles per route-mile owned) for Class I railroads had more than doubled from 1990 to 2005 (see fig. 12). He went on to say that the traffic increases had resulted in capacity constraints and service issues at certain junctions and corridors within the rail network. These constraints and service issues will all affect the ability of both passenger and freight rail carriers to provide the quality and frequency of service the carriers may be asked to provide. Any reform that changes the type and frequency of intercity passenger rail service will need to address system infrastructure access and capacity issues. In doing so, any federal policy responses regarding freight infrastructure should consider several things in this regard: (1) subsidies can distort the performance of markets; (2) the federal fiscal environment is constrained; (3) policy responses should occur within the context of a National Freight Policy that reflects system-performance-based goals and a framework for intergovernmental and public-private cooperation; and (4) federal involvement should occur where demonstrable wide-ranging public benefits—and mechanisms to appropriately allocate the cost of financing these benefits—exist between the public and private sectors. In addition, federal involvement should focus on benefits that are more national than local in scope. Freight railroads have other concerns as well. These include concerns about liability issues—that is, adequate protection against the risks of accidents involving passenger trains using their lines. In general, freight railroads seek full indemnification against any risks that might exist because of passenger rail service. See appendix V for a more complete discussion of infrastructure access, capacity, and liability issues. Workforce Issues and Challenges Finally, efforts to reform intercity passenger rail require consideration of workforce issues. That is, having enough people with the requisite knowledge and skills to provide the amount and type of service called for in a reformed system. There are several issues that need to be considered in this regard, including the following: Availability of a qualified labor pool. The reform of intercity passenger rail resulting in new services or operators will require that there be sufficient staff to provide service, conduct maintenance, and perform other duties related to running passenger railroads. In the short term, obtaining sufficient staff could be a challenge. As we reported in April 2006 (in the context of commuter railroad services), if Amtrak were to abruptly cease to provide service, some commuter railroad agencies would be able to replace Amtrak employees dedicated to their particular commuter rail service with employees from another railroad. However, there were a number of agencies that said they would not be able to quickly replace current Amtrak employees because of workforce limitations, such as the availability of a qualified labor pool. Workforce flexibility and productivity. Reform of intercity passenger rail resulting in new services or operators will also require consideration of workforce flexibility and the extent that labor productivity can be increased. One key to providing cost effective intercity passenger rail service is to have high levels of labor productivity. Collective bargaining agreements and their related work rules specify the work that employees are expected to do and the amount of compensation they will receive for performing this work. Although such agreements can and do include changes designed to increase employee productivity by increasing or broadening the types of tasks that employees can perform, such agreements can also affect productivity by limiting the amount or type of work that employees can perform. Potential labor protection payments. If, as the result of a reform of intercity passenger rail, Amtrak employees lose their jobs, there could be liability for labor protection payments. In general, labor protection payments are made to employees who lose their jobs as a result of a discontinuation of service. The Amtrak Reform and Accountability Act of 1997 made a number of changes to labor protection, including eliminating the statutory right to such protection; this made labor protection subject to collective bargaining, and required Amtrak to negotiate new labor protection arrangements with its employees. Amtrak labor-relations officials observed that bringing labor protection under collective bargaining (and therefore subject to the constraints of the Railway Labor Act), as opposed to being statutorily mandated, has actually limited Amtrak’s flexibility to respond to marketplace changes. They observed that their flexibility was reduced because it is generally easier to change a statutory requirement than it is to change a collective bargaining agreement. With regard to the potential magnitude of labor protection payments, in September 2002 we reported that Amtrak would have had potential unsecured labor protection claims of about $3.2 billion had it been liquidated on December 31, 2001. Although any restructuring might not involve a bankruptcy, potential labor protection payments could still be substantial if employees lose their jobs. Workforce challenges also include determining how a potentially reformed intercity passenger rail system fits into the current scheme of railroad- specific labor–management relations, retirement, and injury-compensation systems. Amtrak is currently subject to, among other laws, the Railway Labor Act, the Railroad Retirement Act of 1974, and the Federal Employers’ Liability Act, which govern labor–management relations, retirement, and injury compensation, respectively, in the railroad industry. Amtrak’s collective bargaining agreements generally do not expire and are subject to requirements designed to reduce labor strikes; Amtrak participates in, and provides financial contributions to, the railroad retirement-system (approximately $400 million annually); and Amtrak and its employees are subject to a tort-based injury compensation system under the Federal Employers’ Liability Act. We have reported that these legal requirements raise railroad costs compared to nonrailroad industries. Amtrak’s April 2005 Strategic Reform Initiatives also suggested that meaningful reform of intercity passenger rail will require changing how some of these requirements apply to passenger rail. On the other hand, rail labor has argued for the importance of these laws in protecting employee rights, providing critical retirement benefits, and adequately compensating employees injured on the job. State officials with whom we spoke expressed general concerns about the potential impact of Amtrak’s labor agreements and obligations on the future of passenger rail. Some state officials viewed Amtrak’s labor agreements as a significant barrier to restructuring. One official stated that serious labor reform is needed for intercity passenger rail reform to succeed. State officials also questioned whether alternative operators would be bound by Amtrak’s labor agreements and thought that it was unlikely another operator could provide significant improvements in cost savings if they were. Another official stated that Amtrak’s labor agreements would put Amtrak at a considerable disadvantage over alternative operators in a competitive market if the alternative operators were not bound by the same agreements. Rail labor union officials with whom we spoke expressed several concerns about the effects any potential reform of intercity passenger rail might have on their members. First and foremost, union officials told us of their concern about the history of Amtrak’s successive reforms and said these reforms had a detrimental effect on union employees. In their view, past Amtrak reforms have brought fewer union jobs and the loss of health and safety programs with no real improvement in Amtrak’s financial performance or service to the public. Union officials also told us that any reform should attempt to make Amtrak, among other things, find new leadership dedicated to working with employees and growing the business, fix basic business practices, and improve customer service. Finally, union officials emphasized that rail labor is the monopoly workforce for passenger rail. Any reforms of intercity passenger rail would still require any operator—Amtrak, alternative operators, or a successor to Amtrak—to work through the unions to maintain a labor force. Rail union officials noted the success of the Massachusetts Bay Commuter Railroad, which provides commuter rail service in and around Boston, Massachusetts. In this instance, a private operator took over operations from Amtrak and was able to maintain existing work rules (collective bargaining agreement provisions that specify tasks employees can perform) while offering a 24- percent increase in wages. See appendix VI for more information about workforce issues. Private sector issues and challenges primarily focus on what role, if any, the private sector will play in any reformed intercity passenger rail system. Currently, there is little private sector involvement beyond the infrastructure provided by freight railroads to operate intercity passenger rail service. Amtrak is the sole operator of intercity passenger rail service, and, although organized as a private, for-profit corporation, is heavily dependent on federal subsidies to remain solvent. In general, there are no other private sector operators outside of leisure travel providers such as GrandLuxe Rail Journeys (previously American Orient Express). This contrasts with the pre-1971 situation when, before Amtrak began service, freight railroads provided all intercity passenger rail service. There are suggestions that the private sector could play a larger role, including being contract operators under a system in which competition and bidding is used to select service providers. For example, Amtrak’s April 2005 Strategic Reform Initiatives suggests that there are opportunities for increased competition, and part of Amtrak’s vision for itself under these initiatives is to evolve into one of a number of competitors for contracts to provide passenger rail service. However, there are a number of issues associated with increasing the private sector role in intercity passenger rail. These issues include the following: Availability of potential private sector operators. Since Amtrak is the sole provider of intercity passenger rail service, there has been little opportunity to test the market for potential new operators. However, there are indications that potential operators may exist and may be willing to participate in any opportunities that might arise, especially corridor service. For example, an official of one firm with worldwide rail and transportation operations said he believes there is a U.S. market for rail service in corridors—especially corridors with city-pairs 100 to 300 miles apart. An official from another firm with extensive passenger rail operations in the U.K. said his firm is very much interested in entering the U.S. passenger rail market, especially in operating the NEC. In his opinion, the NEC is a very viable corridor and could be wholly or partially privatized. Costs of private sector operators and the need for public subsidies. One of the key questions associated with competition and the use of private sector operators is how costs will change, and whether public subsidies can be reduced or eliminated. Again, since the U.S. market has not been tested, it is difficult to know what the specific cost or subsidy impacts from competition might be. On the one hand, European experience has shown that franchising and competitive bidding has not necessarily reduced the need for government subsidies. In fact, in 2 of the European countries we visited (Germany and the U.K.) there is substantial government financial involvement in competitively bid systems. On the other hand, in the U.K., some franchise operators have recently been financially successful enough to allow them to pay the government a premium for excess profits they have made. Aside from government financial assistance, foreign officials also pointed to other things—such as increases in ridership and quality of service—as the benefits of a more competitive system. For example, data from the Association of Train Operating Companies indicate that passenger rail ridership in the U.K. increased about 38 percent over roughly the last decade (from about 745 million trips to just over 1 billion trips annually). The largest growth was in the long-distance market. Similarly, government data show that the number of complaints per 100,000 passenger trips in the U.K. generally decreased from about 120 in April 1999 to 70 in April 2005. Potential requirements to encourage private sector participation. There may be certain requirements for encouraging private sector participation in providing intercity passenger rail service. These requirements may include maintaining Amtrak’s current statutory rights of infrastructure access. An official from one firm with worldwide transportation operations with whom we spoke emphasized that access to tracks, stations, rights-of-way, and maintenance facilities would be key for his firm and other operators to be successful participants in the intercity passenger rail market. This firm would look to states or Amtrak to provide these access arrangements prior to their taking over operations. Officials from all 5 states we talked to agreed there would be a number of barriers to competition and that access issues would be a critical issue. Flexibility in allowing firms to branch into nonrail operations may also be important. In Japan, passenger rail officials told us that their firms not only provide passenger rail service but are also involved in other activities such as real estate development, retail stores, and light manufacturing. There are also a number of challenges associated with funding for intercity passenger rail service. One is identifying funding sources to meet long-term funding needs. Being in a capital intensive business, intercity passenger rail has substantial ongoing and long-term funding needs. For example, Amtrak is currently receiving over $1 billion annually in federal subsidies and it has an estimated $6 billion in deferred capital backlog of infrastructure improvements, including about $4 billion on the NEC. In March 2006, the DOT OIG reported that, for fiscal year 2007, Amtrak would need about $1.4 billion just to maintain Amtrak and keep its system from falling into further disrepair. This would not include amounts to address the backlog of capital maintenance, invest in short-distance corridors, or renew equipment. This official went on to say that none of the corridors around the country, including the NEC, can provide the type of mobility needed without significant capital investment. This limitation applies to the development of new corridors as well, including high-speed rail corridors. As we testified in April 2003, the total cost to develop high-speed rail corridors is unknown because these types of corridors are in various stages of planning. However, the costs could be substantial. The American Association of State Highway and Transportation Officials—a trade association of state and local transportation officials—has reported that about $60 billion would be required to develop these corridors, including Amtrak’s NEC, over a 20-year period. Funding challenges also include finding funding sources to meet whatever national intercity passenger rail policy goals are established. Currently, virtually all federal funding for intercity passenger rail comes from general appropriations; therefore, intercity passenger rail must compete with a myriad of other needs to obtain funding. This practice allows Congress to set spending priorities. As discussed earlier, the existence of funding sources to meet national policy goals was a component in many foreign passenger rail reform efforts. Even in Canada, where there was no major restructuring, the government was willing to commit, albeit not on a formal basis, to identifying funding amounts so as to provide a stable level of annual operating funding for its intercity passenger rail provider, VIA Rail. This commitment has continued for about 8 years and through several changes in government. According to Transport Canada officials, this commitment allowed VIA Rail management some stability in planning. They also said that, while there was no explicit rationale for the amounts provided, the objective was clearly to “set VIA’s feet to the fire” by not increasing the subsidy. However, reducing the level of support would make it difficult to preserve services. Finding funding sources to meet national policy goals for intercity passenger rail will not be easy, especially as the nation faces increasing fiscal constraints at the federal level. As discussed earlier in this report, the federal government faces significant fiscal challenges in future years and will need to reexamine its role and financial support for virtually all federal programs, including intercity passenger rail. The challenge will be in finding a funding source(s) that can meet long-term needs while retaining the accountability of an annual appropriations process. Funding challenges include aligning the decision making for, and the benefits of, intercity passenger rail service with the responsibility for paying for such service. Currently, there is a basic misalignment in these elements. Historically, states have not been required to subsidize basic intercity passenger rail service. States may subsidize additional service that would benefit residents. As discussed earlier, in fiscal year 2005, 13 states paid about $140 million to subsidize additional service from Amtrak. However, there were over 30 states that did not subsidize intercity passenger rail service even though such service was provided in their state. In general, Amtrak is the focal point for decision making about what intercity passenger rail service is provided and where. Under this structure, some states benefit from having intercity passenger rail service but play little role in deciding what service is provided or in subsidizing the services received. Some states are aware of the benefits of this structure— for example, an official from one state we contacted told us that Amtrak is “a great deal” for the state because the state pays nothing for service, even though there are numerous Amtrak trains that operate daily within the state. This official said his state would like to see additional service, but the state has little voice in the matter because the state does not pay. On the other hand, an official with another state said his state believes it is paying an inequitable amount for service compared to other states. As we reported in April 2003, the willingness and ability of states to provide and maintain financial support for intercity passenger rail is unknown. This willingness and ability is a challenge that will need to be considered in aligning the decision making and benefits of intercity passenger rail with payment for such benefits. Finally, funding challenges will involve developing incentives to ensure participation and cost sharing by states and other stakeholders. Currently, there are few means for cost sharing of federal and nonfederal expenditures on intercity passenger rail. The current funding structure provides appropriations for both federal operating and capital improvement funds directly to Amtrak by way of grant agreements. These grant agreements specify what federal funds are to be used for but do not require Amtrak or others to contribute matching funds, either for operating or capital purposes. Some other federal surface transportation programs require matching contributions to create incentives and leverage federal funds. For example, the Federal-aid Highway program generally limits the federal financial share of the cost of highway projects (generally 80 percent of costs) and requires states or others to contribute matching funds for the remaining cost of such projects. Similarly, federal statute limits the maximum federal share for some mass transit projects and requires project sponsors to contribute matching funds. In fact, one of the criteria the Federal Transit Administration considers in selecting new transit projects to finance under its New Starts program is the amount of local financial commitment. The absence of similar cost sharing mechanisms makes it difficult for intercity passenger rail projects to compete for federal or state dollars. The equitable and sustainable response to funding challenges is more complex than providing some “comparable” funding for intercity passenger rail to that provided for other transport modes. First, while advocates for increased federal support for passenger rail often cite the billions of dollars provided to highways and airports, in fact these funds are derived from explicit taxes or user fees. Second, in spite of the historical user-based funding of these modes, we have recently reported that commitments made are no longer sustainable; there is an urgent need for identifying new, more sustainable, and adequate funding to support the defined federal role. Finally, the modal comparisons of the magnitude of federal funding are most appropriately grounded in the magnitude of current and potential public benefits. As such, the order of magnitude of public funds to support intercity passenger rail would appropriately be grounded in the role intercity passenger rail does (or could) play in national mobility, relative to the dominance of highway and air travel for medium- and long-distance travel and the public benefits that would result. Any consideration of dedicated funding for intercity passenger rail also needs to account for the potential downsides of such funding. In May 2006, we reported that, despite the advantages of dedicated funding, there are risks of revenue volatility and loss of budgetary flexibility. That is, there is a risk that revenues may fluctuate and not meet funding expectations; and, that setting government funds aside for a specific use may affect the funding available for other spending priorities. Not addressing the challenges discussed earlier may very well hinder opportunities to increase the benefits of both federal and nonfederal expenditures on intercity passenger rail. Amtrak has efforts under way to analyze and implement various changes to its operations to reduce costs, increase efficiency, and move states closer to paying for the services they receive. Although these efforts are a step in the right direction, they are expected to have only marginal impacts on the financial performance of intercity passenger rail service. These efforts will not, and should not be expected to, address some of the more fundamental reform elements (e.g., clearly defining both a national policy and stakeholder roles for intercity passenger rail service, and finding funding to support national policy goals) associated with increasing public benefits provided by intercity passenger rail service. Amtrak itself has said that its existence is not a substitute for a national policy. The incremental changes being taken by Amtrak do not necessarily go to the root of the challenges that policymakers need to address to bring about increased public benefits of any federal expenditure on intercity passenger rail service. Not addressing the challenges makes it likely that a well-defined role for federal subsidies for intercity passenger rail in the United States will also remain elusive. As CRS reported in June 2006, Congress has essentially reached a stalemate with respect to Amtrak and intercity passenger rail. This stalemate was illustrated by the fact that both the 107th and 108th Congresses were unable to reauthorize funding for Amtrak or reach consensus on what kind of passenger rail system it would be willing to fund. This stalemate has largely continued in the 109th Congress. As discussed earlier, part of this stalemate has resulted from the wide diversity of views and opinions on how the intercity passenger rail system should be structured, what role the federal government, states, and others should play in the system, and required funding levels. All of these speak to the fundamental challenges described above. Finally, addressing challenges has been integral to reform efforts elsewhere in the world. Although passenger rail reform efforts worldwide are still largely evolving and continue to face challenges, addressing such challenges has been part of moving forward. For example, in the early 2000s, the U.K. realized it faced problems with insufficient infrastructure investment and rising costs of train operators. In response, a new structure was developed that changed the infrastructure manager and the governance structure of this manager, and significantly increased government involvement in specifying the services to be provided by train operating franchises. The U.K. has also established a process that will develop expected national outputs for its passenger rail system in 2007, develop a cost estimate for these outputs, and ensure that adequate funds are available to support these outputs. Accompanying this output document will be a broader and longer-term strategy document looking ahead to about 2035. Similarly, to address the costs of intercity passenger rail service and growing federal budget pressures, Canada initially considerably reduced VIA Rail’s annual subsidy from 1992 to 1998 from $344 million (Canadian) to $171 million (Canadian), then imposed informal caps on VIA Rail’s operating subsidy. Along with the caps came informal funding commitments designed to facilitate management stability in planning. The funding also came with incentives by allowing VIA Rail to finance capital improvements or meet operating shortfalls by retaining any annual operating subsidy amounts not used. Further, Japan addressed funding challenges associated with financially weak passenger rail systems by establishing a business stabilization fund that is expected to provide sufficient income to continue operations without using an annual federal subsidy. Japanese rail officials told us that the business stabilization fund has allowed smaller railroads to operate more independently of government interference. As the federal government is the primary provider of funds, oversight, and direction for intercity passenger rail service, federal policy makers should take the lead in deciding what the federal government’s role in intercity passenger rail service should be and what changes, if any, need to be made to its goals, structure, and funding. Using our previous work, the work of other government agencies, and our review of other selected countries, we defined four basic options that represent the potential range of options for reforming intercity passenger rail service in the United States. They are maintaining the status quo, introducing incremental changes within the existing structure, discontinuing federal support, and restructuring the entire intercity passenger rail system. This section discusses each option separately, although some combination of these options could also be implemented. All four options for the future of intercity passenger rail present challenges that could impede both their selection and their effectiveness once chosen. Of the four options, however, restructuring presents the opportunity to substantially improve the intercity passenger rail system. This option would allow Congress and policymakers to establish intercity passenger rail’s goals, define the roles of stakeholders, and develop funding mechanisms that provide performance and accountability for intercity passenger rail expenditures. Any substantial reorganization of intercity passenger rail will be difficult and can be expected to occur over a long period of time. In the sections that follow, we (1) lay out the framework for examining the options, (2) describe each option in more detail, and (3) offer observations on the advantages, disadvantages, and challenges associated with each option. It is important for federal policy makers to determine whether or not the federal government should be involved in intercity passenger rail and, if so, how federal participation can be both cost-effective and sustainable, particularly in light of the federal government’s long-term structural fiscal imbalance. In our report on 21st century challenges facing the federal government, we defined a set of fundamental reexamination criteria that are useful for evaluating the federal role in any government program, policy, function or activity. The criteria are designed to address the legislative basis for the program, its purpose and continued relevance, its effectiveness in achieving goals and outcomes, its efficiency and targeting, its affordability, its sustainability, and its management. These fundamental criteria can be used to inform and evaluate the continued federal involvement in intercity passenger rail service (see table 4 below for an example of how these criteria may be applied). If policy makers determine that there is a clear federal role in subsidization of intercity passenger rail service, the implementation of that role should have several essential elements. From our past work on federal investments in transportation, and our analysis of foreign efforts on intercity passenger rail reform, we have defined a framework that can guide the implementation of any of the basic options for the future of intercity passenger rail. This framework includes three components: creation of solid goals, establishment of clear stakeholders’ roles, and the provision of sustainable funding. This framework has three components (see table 5). All four basic options we identified would also benefit from a process for evaluating performance periodically to determine if the anticipated benefits are being realized. Evaluations also provide a means to periodically reexamine established goals, stakeholder roles and funding approaches, and provide a basis to modify them, as necessary. Leading private and public organizations we have studied in the past, such as General Electric and the state of Washington, have stressed the importance of developing performance measures and then linking investment decisions and their expected outcomes to overall strategic goals and objectives.While federal funding is currently a major source of financial support for intercity passenger rail service in the United States, currently there are no requirements for a periodic, regular evaluation of the use of federal funds (outside of annual appropriations legislation and yearly FRA grant reviews). Each of the four options we identified has different implications for the three elements of our framework—goals, roles, and funding. (See fig. 13 for an overview.) For example, the federal role changes from managing the different aspects of a federal exit from intercity passenger rail service in the discontinuance option to one where it provides strategic direction and targeted funding to increase the benefits of intercity passenger rail service in the restructuring option. This option would continue the existing structure and about the same level of federal funding for intercity passenger rail service. Under this option, the federal government would continue to ensure that a national intercity passenger rail system exists. However, the existing inefficiencies, uneven service levels, and limited capital investment would also continue. The goal of this option would be to preserve and maintain the current intercity passenger rail structure and federal funding levels. This option would also maintain the current route structure and levels of capital investment. The federal mandate to have a national route structure connecting intercity corridors would continue to influence the route structure of the intercity passenger rail system. With no increased federal direction to change Amtrak, intercity passenger rail operations would continue without any major structural changes or increased federal expenditure. The federal role under this option would be to continue to support the current structure of intercity passenger rail. The federal requirement to run a national system would remain and Amtrak’s route structure and management of the NEC would continue. The current stakeholder roles of the federal government, state and local governments, freight railroads, and commuter rail agencies would also remain the same. This option would also retain the current relationships between Amtrak and the states and commuter rail agencies, which in some cases are uneven. For example, extensive service provided by Amtrak for some city pairs allows some states to benefit from basic or “free” intercity corridor services from Amtrak, while other states pay Amtrak to run corridor services that were not part of Amtrak’s original service structure. Likewise, some commuter rail agencies would continue to pay lower access fees than other commuter rail agencies for using Amtrak-owned infrastructure. These access fee differences, the result of a 1982 Interstate Commerce Commission ruling, are depicted in figure 14. Federal funding to support Amtrak’s operations and capital expenditures would continue at current levels (between $1.25 billion and $1.5 billion per year) under this option. Although a small portion of the overall federal transportation budget, this level of expenditure could maintain Amtrak’s current operations and level of capital investment in the short term. However, the longer this level of expenditure continues without any other changes in Amtrak’s route structure or expenditures, the less likely that Amtrak will be able to cover any losses from extended operational difficulties (such as the Acela brake issue in April 2005 or the loss of electrical power on the NEC in June 2006), or be able to start improving the condition of its core asset, the NEC. Federal policy makers could determine that the current level of federal involvement in, and funding of, intercity passenger rail is generally adequate and appropriate, as in the first option. Under this second option, however, federal policy makers could introduce incentives for incremental improved operational and financial performance and accountability within the current intercity passenger rail structure, such as financial, accounting, or operational improvements. These incremental improvements could come from federal policymakers or Amtrak’s management. The aim of this option would be to make some positive financial and operational improvements without substantially changing Amtrak’s financial situation or the current structure of intercity passenger rail in the national transportation system. Under this option, the goal of federal involvement could be defined as continuing to support the current intercity passenger rail structure while incrementally improving its performance. This goal would be achievable within the current system and funding structure and would focus on incremental operational and financial improvements. For example, provisions in Amtrak’s fiscal year 2006 appropriations legislation specify that Amtrak must show savings from operational reforms or federal funds could not be used to cover losses from sleeper or food and beverage services. Another improvement federal policy makers could consider is making Amtrak subject to basic requirements that are consistent with either federal-entity or public-company financial reporting and accountability requirements. Many of the basic accountability practices and requirements of federal entities or public companies would improve Amtrak’s accountability and transparency to Congress, the public, and key stakeholders; and could be implemented while streamlining current practices. An integral step in this process would be to first evaluate Amtrak’s current practices and requirements in comparison with those of federal entities and public companies and use the evaluation as the basis for a plan to move forward. Currently, Amtrak is not subject to many of the basic accountability requirements of either federal entities or public companies due to its status as a government-established private corporation. However, the current financial reporting and accountability requirements specific to Amtrak require it to submit annual audited financial statements and an operations report to Congress. Amtrak is also subject to additional reporting requirements as a result of its current funding structure, where annual grant agreements for operating and capital expenses are established and a prior loan agreement remains in effect. The monthly performance report— an extensive report containing financial results, route performance, workforce statistics, and performance indicators—is one of the various daily, monthly, and annual reports that Amtrak is required to provide under these agreements. In our October 2005 report on Amtrak’s management and performance, we noted that certain relevant information was not included in monthly performance reports and the information in the monthly performance reports was of questionable reliability. We also noted in our October 2005 report that Amtrak had made improvements in its financial information, and we recommended including relevant information and increasing the reliability of the information in the monthly performance report, as well as preparing an action plan to put certain financial management and reporting mechanisms in place. Although financial reporting requirements of federal entities vary somewhat, most federal entities are required to issue annual performance and accountability reports (PAR). These PARs contain audited financial statements; management’s discussion and analysis of the current year in comparison to the prior year; an analysis of the agency’s overall financial position, the results of its operations, and a discussion of key financial related measures; and management's assurance statement on the effectiveness of internal control, including a report on identified material weaknesses and corrective actions. OMB, which oversees the financial reporting of federal entities, reviews the PARs submitted by agencies. In addition, agency Inspectors General report semi-annually on their assessments of the agencies’ most serious management and performance challenges. Public companies, in addition to annual reports, are required to (1) provide, with their annual financial statements (management’s discussion and analysis), information relevant to an assessment of financial condition and the results of operations; (2) issue quarterly financial statements that are reviewed by external auditors; (3) have the chief executive officer and chief financial officer certify that the financial statements do not contain any untrue statements; and (4) have management assess and report on the effectiveness of internal controls over financial reporting. Independent audit committees provide oversight of public companies' financial reporting, internal control, and the audit process. The Securities and Exchange Commission oversees accountability at public companies through reviewing the financial reports and other filings of public companies. (See app. VII for a more detailed discussion of financial accountability standards and oversight that could be applied to Amtrak.) As this option would not represent a dramatic shift in the current intercity passenger rail structure, a clear definition of roles may not occur. The current roles for states, local governments, Amtrak, freight railroads, and commuter railroads, would stay the same. As in the first option, this option would perpetuate Amtrak’s current service structure that provides more basic intercity service between some city pairs than others. It would also perpetuate its current relationship with commuter rail agencies on the NEC. One approach would be to reach an agreement among key legislative and executive branch decision makers on a multiyear funding level for federal operating of subsidies for intercity passenger rail service. Such a multiyear agreement was successful in Canada when VIA Rail used the imposition of a cap on its operating subsidies from the Canadian government to reduce its operating costs. Although the spending cap was originally intended to save the Canadian government money during a time of high fiscal deficits, VIA Rail used its imposition to increase its emphasis on internal cost control by reducing its labor costs for managers by 50 percent and its equipment maintenance costs by 65 percent. The operating funds are planned for over 10 years, giving VIA Rail the stability to plan its operational expenditures over that time. While the funds are not adjusted for inflation, VIA Rail is allowed to retain any amount of its operating subsidy it does not use from year to year to save for capital improvement projects or other needs. While the funding approach could take several forms, federal support under this option would likely not rise substantially, as the goal of the option is to make incremental improvements without substantially changing the federal commitment. While some savings could result from incremental reforms, it is likely that, as with the first option, Amtrak would remain unable to cover any losses from extended operational difficulties or to start improving the condition of the NEC. Under this option, the federal government would end its financial support of the intercity passenger rail system. This would shift responsibility for all intercity passenger rail service and federally owned rail infrastructure in the Northeast to state and local governments and other stakeholders. While this option could ultimately reduce federal expenditures by eliminating operating and capital funds for Amtrak, according to CBO, discontinuing federal support for intercity passenger rail could also force a liquidation of Amtrak. Consequently, federal funds could be needed in the immediate and long terms to cover implementation costs of Amtrak liquidation, including labor protection payments and the disposition of Amtrak’s assets. Also, although this option could create opportunities for states to contract for intercity passenger rail service from other operators, many states may not be able or willing to fund existing intercity passenger rail service with state transportation funds without access to federal capital matching funds. Any federal exit strategy and transition plan would also need to be comprehensive and detailed. Under this option, federal policy makers would determine that there is no federal role in the support of intercity passenger rail service. A goal of successfully implementing this option could be an orderly withdrawal of federal support and involvement from long distance and corridor intercity passenger rail service. The federal government would create an exit strategy that would enact this goal, in part by creating a detailed and comprehensive transition plan that would address several important issues resulting from federal withdrawal of support. One of these issues is the disposal of the federal interest in Amtrak and in Amtrak owned portions of the NEC. The NEC is the busiest rail corridor in the United States, with over 1,800 intercity passenger, commuter, and freight trains using its tracks per day. Amtrak owns a substantial portion of the NEC, including portions over which several commuter rail agencies and freight railroads operate. Amtrak operates trains, controls the movement of train traffic over the NEC, and maintains most of the NEC. One example of how to handle the NEC under this option could be similar to how the Mexican government sold franchise agreements for different segments of its freight rail network. Following privatization efforts in Argentina and Brazil, the Mexican government, between 1996 and 2000, sold nine different 50-year franchises (each with a 50-year renewal option) to private bidders to operate freight rail service. According to the World Bank, considerable care was taken by the Mexican government when creating the franchises to preserve competition and avoid cross-holding and cross-subsidization between the bidders and eventual franchise operators. Since privatization, freight traffic has grown and substantial investments in the rail infrastructure have been made by the private operators. As we pointed out in our April 2006 report on Amtrak and commuter rail issues, access to Amtrak’s skilled labor and its infrastructure are two critical issues to commuter railroads—especially to those railroads that operate over the NEC. Some commuter rail agencies could not continue to fully operate service—or would cease service altogether—without access to Amtrak’s skilled labor and infrastructure. Any transition plan would also need to include, among other things, strategies for addressing the challenges identified earlier in this report (e.g., federal–state partnerships, and infrastructure access and capacity), the financial viability of Amtrak, and concerns of freight railroads and others about the viability of the railroad retirement system. The heart of any federal exit strategy and transition plan would be to define the appropriate role for freight and commuter railroads, Amtrak, and any new owner or manager of the NEC in relation to any continued intercity passenger rail service. Since following this option would involve a major shift in national transportation policy, the federal exit strategy and transition plan would need to clearly define the roles of stakeholders in the new intercity passenger rail structure in the United States. The federal role would be discontinued and responsibility for any continued intercity passenger rail service could be transferred to states (either to individual states or to groups), local governments, or the private sector. Amtrak, as a private corporation, could potentially continue as a provider of service; other private transportation companies could also compete for subsidies to provide service on current or new routes sponsored by the states. However, many states may choose not to invest their scarce transportation funds in a transportation mode for which there are no federal capital matching funds—especially considering passenger rail’s capital costs. For example, two state transportation officials said their states would be willing to consider taking over operational responsibility for corridor Amtrak service in their states, but only if the federal government would match state capital funds at an 80-percent to 20-percent rate, similar to highway and airport expenditures. The financial incentive for private transportation companies to continue or start any intercity passenger rail service would be reduced, or may not exist at all, without federal subsidies for either operations or capital projects. For example, officials from one private transportation company with whom we spoke stated that virtually every intercity passenger route would require public subsidies. However, according to the official, if competition for intercity passenger rail service were introduced, it could motivate private transportation companies to reduce their costs. While probably not enough to eliminate the public subsidy, competition could lead to lower overall costs. If states did want to continue intercity passenger rail service (especially across state borders) without direct federal involvement, different intergovernmental structures could be adopted. One structure could be interstate compacts, under which a group of states can work together to achieve a common regional goal or provide a regional service without direct federal involvement. An example is the Washington, D.C., Metropolitan Area Transit Authority (WMATA). WMATA is an agency created by an interstate compact (although the federal government is also a signatory to the compact) that provides bus and rail transit service in Virginia, Maryland, and Washington, D.C. WMATA operations are funded by fare and non-fare revenue and contributions from local governments, the two states and Washington, D.C. Capital projects are funded by these states and Washington, D.C., and are matched by the federal government. While the federal government could eventually save the amount of Amtrak’s annual capital and operating subsidy if it decided not to support intercity passenger rail service, this option could have substantial immediate and long-term costs to the federal government, especially if Amtrak were liquidated as a result of withdrawal of federal support. In our 2002 report on potential issues associated with an Amtrak liquidation, we identified $44 billion in total claims against Amtrak’s estate—including $3.2 billion for potential payments Amtrak would owe its terminated employees (if Amtrak had been liquidated on December 31, 2001). Payments to the railroad retirement system could be as high as $400 million annually if former Amtrak employees were not reemployed in the railroad industry. In addition, currently, Amtrak has about $3.5 billion in long-term debt and capital lease obligations that could be unfunded in an Amtrak liquidation. The federal government may also decide to fund Amtrak’s other liabilities as a last resort if the sale of Amtrak assets does not cover them. In addition, as we found in 2002, the market value of Amtrak’s most valuable asset, its portion of the NEC, has not been tested. The corridor clearly has substantial value and some consideration could be given to a long-term lease to a private operator. However, the railroad is subject to numerous easements and has, as of our October 2005 report, over $3.8 billion of deferred capital maintenance that any future owner or operator would need to address for continued safe, reliable operations. Substantial restructuring of intercity passenger rail service could take many different forms. However, the core challenge of this approach is that critical decisions would have to be made with all stakeholders about what goals the restructured intercity passenger rail system should try to meet, what roles the various stakeholders should play, and what federal funding sources and mechanisms would be available to operate and maintain the restructured system while maximizing cost sharing by all who benefit from intercity passenger rail. Some examples of ways that substantial restructuring could be implemented could include the following: continuing corridor intercity routes where the benefits of intercity passenger rail are higher while discontinuing long distance routes where the benefits are lower; restructuring Amtrak into separate companies; transferring Amtrak-owned infrastructure to a compact or commission of states to oversee its operations and improvements; creating competition for federal- and state-subsidized routes between private operators and Amtrak; providing a one-time endowment to Amtrak as an incentive for it to run as a more market-oriented business without continued federal involvement and support; or providing states flexible capital matching grants to create their own solutions to transportation needs, including intercity passenger rail service. Under this option, policy makers would determine that there are sufficient public benefits at a national level to justify subsidies for an intercity passenger rail service that is different from the current structure. The primary goal for the federal government, under this option, would focus on increasing the national transportation benefits and public benefits of intercity passenger rail service relative to the federal expenditure. For example, furthering this goal could include using federal subsidies for intercity passenger rail to: reduce highway congestion, increase intermodal connectivity, provide environmental benefits, or increase redundancy in regional or urban transportation. Specifically, one of the goals under this option could be to increase the use of intercity passenger rail service between major cities with trip times under 3 hours. Two examples of how this goal could be achieved include the U.K. model of intercity passenger rail service or the German model for regional rail service. In both models, passenger rail operating companies openly bid for the lowest amount of government subsidy to operate a specific route. These franchise agreements are multiyear contracts backed by either national or regional government subsidies. The operator would collect ticket revenues and the agreed-upon government subsidy to operate a specific level of service over the route. This approach makes the government an explicit buyer of intercity passenger rail services from a private operator and increases the transparency of costs for a given level of service. Contracts for service could include operational and capital expenditures and specify such things as service frequency, trip length, stops, a payment schedule, and performance metrics. Importantly, spending federal funds for intercity passenger rail service to increase public benefits will not necessarily lower the cost of providing intercity passenger rail service. As discussed earlier in this report, in many of the countries we visited the level of federal expenditures on passenger rail after reform remained high or increased. There are many different ways that the federal government and other stakeholders could define their respective roles within a new intercity passenger rail structure. The federal government could narrow or expand its role in the new structure. However, the key opportunity of a restructuring effort is in defining the roles of all stakeholders to create incentives and promote equity across all beneficiaries, both public and private, in the new structure. For example, the federal government could determine—in partnership with states, local governments, Amtrak, and various transportation providers (including freight and commuter railroads)—the route structure, service frequency, and infrastructure access arrangements for all intercity passenger rail routes. In order to ensure that intercity passenger rail service does not significantly interfere with freight rail service, any restructuring approach should also take into consideration the national freight transportation policy currently being developed by DOT. One of the more challenging areas to define roles is the NEC, where Amtrak is the owner of most of the infrastructure while many other railroads are the main users. As discussed above, participation is uneven and the vital infrastructure is not being maintained effectively. One structure that could facilitate a federal–state partnership to manage the NEC could resemble the Delta Regional Commission or the Appalachian Regional Commission. These commissions consist of a group of states and a federal representative to foster partnerships between state and federal government entities and distribute economic development funds throughout a specified economically distressed region. For example, the federal government and thirteen states make up the Appalachian Regional Commission to distribute economic development and highway construction funds throughout the 410-county Appalachian region. Federal economic development grant funds are distributed to member states according to criteria based on such factors as population, land area, and economic need. Recognizing its fiscal constraints, the federal government could provide matching funds (either for operating or capital expenditures, or both) for routes that meet certain goal-related criteria (such as reducing highway congestion or increasing intermodal connectivity) and that are partially funded and proposed by states or groups of states under a process similar to the New Starts program for federal transit funding. However, regardless of the eventual structure or tools used to implement the structure, federal leadership would be needed to reach a consensus on goals, structure, and funding with all stakeholders. Given the long term federal fiscal imbalance, finding federal funds necessary to fund a substantial restructuring of intercity passenger rail could be a significant challenge. In four out of the five countries we visited, the national government currently provides a substantial amount of funding for intercity passenger rail service. Finding sufficient funding could be crucial in order to restructure current service, attract increased capital investment from nonfederal sources and give other transportation providers the incentive to provide intercity passenger rail service by significantly increasing the incentives for non-federal partners. However, the scarcity of federal funds puts a premium on sharing costs of equipment, infrastructure, and service. State and local governments may be willing to invest to support continued, expanded or new intercity passenger rail service. Moreover, increased state participation would more effectively integrate decision making on intercity passenger rail priorities with investments in competing and complementary modes including highways, airports and mass transit. An example of how costs could be shared across stakeholders could be seen in the Federal Highway Administration’s Innovative Financing Program. This program includes several different forms of highway financing, which are designed to stimulate additional investment and private participation. Different financing approaches in the program include the use of state infrastructure banks and credit assistance under the Transportation Infrastructure Finance and Innovation Act. These financing approaches could be adapted to allow states to leverage federal funds for investment in intercity passenger rail projects. Funding for intercity passenger rail could come from a number of sources. For example, some funding to subsidize federal and state intercity passenger rail service could be provided through taxes paid by, or franchise payments received from, private operators on those routes that may be profitable and not require a subsidy (as is the case for some railroads in Japan). Capital funds used to increase capacity, reduce bottlenecks, and increase train speeds (especially on freight railroad owned track) could come from existing federal taxes, including taxes on railroads or fuel taxes. For example, regional governments in Germany are allocated funds from a federal automobile fuel tax to support regional (i.e., short-distance, intraregion) passenger rail service. This is not necessarily a new tax— rather, it is a change in how these funds are allocated by the German federal government. Another funding option would be for the federal government to create an endowment or “business stabilization fund,” such as was used in Japan, to stabilize its smaller privatized railroads. This endowment would help Amtrak transition from being dependent on federal support to being a more market-based company. Any funding for a stabilization fund would need to recognize the fiscal constraints on the federal government and competing priorities. During the privatization of its national railroad system, the Japanese national government identified the railroads that were least likely to be profitable and provided them with a one-time set-aside of government funds to provide continuous interest income for those railroads. While the companies were prohibited from using the invested capital to cover expenses, the earned interest could be used to stabilize the business and provide long-term funds not subject to annual government appropriations. All four options for the future of intercity passenger rail present challenges that could impede both their selection and their effectiveness once chosen. Of the four options, however, restructuring presents the opportunity to substantially improve the intercity passenger rail system. This option allows all stakeholders to establish intercity passenger rail’s goals, the roles of stakeholders and the funding mechanisms that provide performance and accountability for intercity passenger rail expenditures. Consensus on any change to the current intercity passenger rail structure has been difficult to achieve in the past. As a result, if a decision is made to proceed with restructuring, a commission may be a useful mechanism for reaching consensus on a method of restructuring among stakeholders and for recommending a restructuring approach. While keeping intercity passenger rail’s current structure and federal funding levels would preserve a federal role in intercity passenger rail, it would also preserve all of the current problems and limitations. States and commuter rail agencies would continue to have unequal relationships with Amtrak. The current route structure would continue to dilute the public benefits of federal intercity passenger rail expenditures. Investment in and the quality of commuter and intercity service on the NEC would likely continue to decline and in states where intercity passenger rail could provide the most public benefits states’ transportation funds would continue to be spent on other modes without considering public benefits from spending on intercity passenger rail. Any extended operational difficulties may leave Amtrak without significant cash reserves to cover lost revenues and may result in more financial difficulty. With the current general level of federal funding, Amtrak will continue to be faced with a deteriorating infrastructure and aging equipment that will increase its operating costs and limit its ability to provide its current levels of service. Without a significant capital infusion, the capital maintenance backlog on the Amtrak-owned portion of the NEC will continue to increase, negatively affecting Amtrak’s performance on its key route and diminishing the benefits of intercity passenger rail in the most densely populated area of the country. In addition, any new equipment (or a refurbishment of old equipment) would have to be financed either with Amtrak’s limited capital funds or with commercial debt, which would increase Amtrak’s operating expenses. With current levels of funding and the lack of a clear definition of roles for intercity passenger rail service, significant opportunities—for instance, cost sharing for service in corridors where the public benefits of such service may be high—could go unrealized. Amtrak will also face the continued annual uncertainty about its financial situation, which will damage its relationship with its creditors, suppliers, freight railroads and its riders. Freight railroads will receive the same compensation from Amtrak for the use of increasingly scarce capacity on their major rail lines in addition to not benefiting from increased public investment to increase capacity for passenger and freight traffic where they co-exist on their rail lines. Intercity passenger rail riders could also face disadvantages under this option. A deterioration in service and equipment could force Amtrak to raise ticket prices for a lower quality service (which may also be affected by increased freight rail traffic). In addition to the uncertainty surrounding federal and state investment in intercity passenger rail service, this deterioration of service may drive away current and future riders and increase highway and airway congestion in areas where intercity passenger rail has made progress in increasing ridership, such as on the NEC and in California. Finally, the federal government would receive no increased benefits, and may receive less benefit due to declining capital investment, for its expenditures and would have no accountability or performance measures in place to gauge the effectiveness of those expenditures. In addition, no performance or outcome based goals would be established for intercity passenger rail service, clear stakeholder roles would not be defined, and there would be no opportunity to restructure funding mechanisms to include share costs across all stakeholders. Though there may be some increase in public benefits, incremental change within the existing intercity passenger rail structure retains many of the same problems that would be retained under the first option. States and commuter rail agencies may still have unequal roles and face declining investment in Amtrak’s infrastructure. While some savings could result from incremental reforms, the need for federal subsidies would remain, continuing the uncertainty of Amtrak’s financial future. Freight railroads would continue to receive the same level of compensation for increasingly constrained rail capacity and may not see more investment where public demand for intercity passenger rail service on their railroads increases. Riders could also face reductions in amenities due to cost cutting measures in addition to the same or decreased service levels due to, among other things, increased freight traffic and deteriorating equipment that could reduce ridership on some routes. With current levels of funding and the lack of a clear definition of roles for intercity passenger rail service, significant opportunities—for instance, to share the costs of intercity passenger rail service in corridors where the public benefits of such service may be high—could go unrealized. While the federal government or Amtrak may impose new accountability and performance measures, the route structure may stay generally the same, still diluting the impact of federal expenditures. Also, no overall goals will be established for federal expenditures, roles will not be clarified and costs of intercity passenger rail service will not be equally shared across all beneficiaries. Discontinuing the federal role presents strong challenges to all intercity passenger rail stakeholders. The federal government will need to create a comprehensive transition plan and exit strategy, especially in disposing of the NEC. The federal government could also face pressure from states, commuter rail agencies, and Amtrak’s creditors and workforce to continue infrastructure investment in the NEC, and to cover Amtrak’s outstanding debts and labor protection payments, respectively. Amtrak would face bankruptcy and a possible shutdown of all services without federal financial support. States will likely need to take on the responsibility to continue intercity passenger rail service, which may result in some routes being discontinued if they are not financially viable and states or others are not willing or able to subsidize service. In addition, an Amtrak bankruptcy may take away its equipment and its right of access to freight rail infrastructure. Without a comprehensive federal transition plan, commuter rail agencies that rely on Amtrak for services or infrastructure would face service disruptions and financial difficulties. This would be especially acute in the NEC, where most commuter railroads rely on Amtrak infrastructure or services. Freight railroads may gain increased capacity on some of their network, but would have to separately negotiate with individual or groups of states that wished to continue intercity passenger rail service on their railroads and deal with any new intercity passenger rail operators as well. Finally, riders could be forced to other modes of intercity and commuter transportation as a result of the federal exit from intercity passenger rail, either temporarily or permanently, increasing congestion on those modes. Under the discontinuation option there could be gaps in the national transportation system to the extent there are areas where the public relies solely on intercity passenger rail for mobility or travel between regions if states or groups of states choose not to retain the service. The restructuring option provides the opportunity to address the key reform elements necessary for a sustainable, equitable, intercity passenger rail system that delivers increased public benefits for federal and nonfederal expenditure where the other options do not. The status quo and incremental change options do not allow for a reexamination by all stakeholders of the goals, roles and funding mechanisms of the system and would not significantly increase the potential benefits of the system relative to the expenditures required. Discontinuing federal support would transfer responsibility for the system to other stakeholders, possibly creating disruption and loss of benefits for a possible decrease in federal expenditures. Although specific approaches may vary as to the goals, roles, funding and challenges faced by different stakeholders, restructuring the intercity passenger rail system potentially allows each stakeholder to more fully participate and build consensus toward addressing these key reform elements and to move toward a more equitable sharing of costs between the federal government and other beneficiaries of intercity passenger rail service. Several challenges would need to be addressed before a restructured intercity passenger rail system could provide increased public benefits and accountability for federal expenditures. Federal policymakers will need to determine the goals of the restructured system, the roles of all the stakeholders, how federal expenditures will support the new system and mechanisms for its implementation. Increased funding for private operators may be needed to create a competitive marketplace for intercity passenger rail, as well as increased funding or financial backing for capital improvements in the NEC to ensure higher quality service. Federal policymakers could also face pressure to compensate those who might lose intercity passenger rail service or jobs due to the restructuring. States and commuter rail agencies may have to shoulder more of the financial, maintenance, and management burden in a restructured intercity passenger rail system, especially in the NEC, but may receive other benefits (such as improved service) in return. Amtrak would need to adjust to the new intercity passenger rail structure or face bankruptcy. Freight railroads may face increased public pressure for the use of their infrastructure for intercity passenger rail service and may need to accommodate non-Amtrak intercity passenger rail operators on their railroads. Riders may experience some disruption as routes are re-routed or discontinued. Due to the complex nature of intercity passenger rail issues and the wide diversity of views about the future of intercity passenger rail service, an independent and properly designed commission may be an effective mechanism for building a consensus that helps determine a restructuring approach. For example, a commission might be able to facilitate public dialogue around a variety of options. While it may be difficult for citizens to discuss the federal role in the abstract, preferences about that role can be inferred from their reactions to and comments on the various restructuring approaches. By facilitating public dialogue focused on feasible alternatives, the commission could help the President and the Congress as they define the role for the federal government in providing or subsidizing such service and specifying how the service could fit into our national transportation system. As discussed above, reaching consensus about federal policy toward intercity passenger rail has been difficult. While the stalemate in part reflects widely divergent views of the appropriate federal role, the debate has been stymied by the lack of objective, rigorous exploration of the operating challenges, costs, and distributional impacts of alternative strategies. Prior commissions and initiatives have recommended options for restructuring intercity passenger rail service; however, their recommendations have not been implemented. This inaction is due, in part, to the challenges facing Amtrak as stated earlier in this report and, in part, to a failure to reach public consensus on the recommended restructuring approaches, which more fundamentally, requires a consensus on the future role of intercity rail in the nation’s transportation system. Although motivated to define the federal role in intercity passenger rail, these prior commissions and current strategic initiatives have assumed a federal role in intercity passenger rail service without explicitly stating what that role is, what other stakeholders’ roles are, and how that federal role will be funded. If the role of intercity passenger rail is to be effectively integrated into the national transportation system and federal support is to be targeted to assure its performance, results and accountability, we believe that there is a clear need to change the current structure of and the federal role in intercity passenger rail in the United States. This change would be consistent with GAO’s position that all federal activities should be reexamined with an eye to whether they fit in the changing world of the 21st century. The current and future fiscal imbalance underscores the importance of assuring that all federal programs and policies, including those for intercity passenger rail service, are subject to reexamination, review and possible change. The extended stalemate in developing a clear vision for how intercity passenger rail can be a part of the national transportation system has reflected the significant challenge in achieving consensus. As recently reported by the CBO, in the absence of any consensus on intercity passenger rail issues, Amtrak is likely to continue “limping along” as it has since its inception. We agree that without any changes to its current structure, roles, and funding, the current intercity passenger rail structure will continue to underserve, underinvest, and underachieve. Consensus will be needed, in addition to legislative action—both in the short and long term—to improve the focus, performance, and sustainability of federal support for intercity passenger rail. Development of a national passenger rail policy to guide investments of federal funds should have: a clearly defined federal role, outcome-based policy goals, an approach to financing that stimulates investment by others commensurate with their benefits, and appropriate accountability mechanisms. The current U.S. intercity passenger rail structure meets none of these criteria—it does not have clear transportation related goals, the roles of stakeholders have grown haphazardly over time, federal funding is not based on cost sharing and not focused on maximizing public benefits, and its results are not outcome-based. With regard to its accountability and financial reporting, Amtrak is not subject to the same basic requirements for financial reporting, internal control and governance that are typically required of federal entities or public companies. To improve Amtrak’s financial and internal control reporting and overall accountability, we recommend that the president of Amtrak: Immediately take steps to evaluate Amtrak's accountability—particularly its financial reporting, internal control, and governance practices—and formulate a plan to bring the financial reporting, internal control, and governance practices in-line with the basic requirements that federal entities or public companies practice, while also identifying opportunities to improve and streamline current reporting practices. The evaluation should include a comparison of Amtrak’s current accountability requirements and practices to those of federal entities as well as public companies. This evaluation should serve as the basis for the formulation of Amtrak’s plan to bring Amtrak’s financial reporting, internal control, and governance practices in-line with the basic requirements that federal entities and public companies practice, based on a determination of which practices are most appropriate given Amtrak’s overall mission, funding sources, and current situation. The plan should include developing management discussion and analysis as part of its annual financial reporting and developing management's assessment of internal control over financial reporting, while identifying opportunities to streamline other reporting practices. The plan should be submitted to Amtrak’s Congressional oversight committees. In order to address longer term needs to maximize the transportation benefits and public benefits of intercity passenger rail service and any federal funds expended on this service, we recommend that Congress consider restructuring the approach for the provision of intercity passenger rail service in the United States. Only Congress can provide the national vision and has the authority to put in place a wide-ranging restructuring effort. This restructuring should include establishing clear goals for the system, defining the roles for states and the federal government, if any, commuter rail agencies, freight railroads and other stakeholders, focusing expenditures where they will achieve the most public benefits, and developing funding mechanisms that include cost sharing between the government and beneficiaries. In undertaking this restructuring, it will be important to solicit input from all stakeholders, particularly DOT and FRA given their responsibility for transportation and rail matters. Evaluation of restructuring approaches should also consider the relationship between passenger and freight railroads and give due consideration to the national freight transportation policy being developed by DOT. Due to the complex nature of intercity passenger rail issues and the wide diversity of views about the future of intercity passenger rail service, an independent and properly designed commission may be an effective mechanism for developing a consensus over the future of intercity passenger rail service and helping determine a restructuring approach. By addressing the key reform elements, Congress can create a structure that not only efficiently and effectively serves travelers but also promotes performance and accountability and the chance for increased transportation and public benefits from federal expenditures for intercity passenger rail. We provided copies of the draft report to Amtrak and DOT for comment prior to finalizing the report. Amtrak provided its comments in a letter from its president and chief executive officer (see app. VIII). In general, Amtrak did not take an overall position on the report or the Matter for Congressional Consideration. However, Amtrak agreed that intercity passenger rail in the United States has come to a critical juncture and that a national dialogue about the future direction of rail service is needed. Amtrak also said that the three key elements to comprehensive reform of intercity passenger rail are establishing clearly defined national policy goals, clearly defining government and stakeholder roles, and establishing committed funding. Finally, Amtrak commented that a more efficient, improved, and expanded intercity passenger rail service can play an important role in relieving congestion, both in the air and on the highways, and that rail has unique advantages compared to other transport modes. We agree and our report discusses the importance of the three key elements of reform and the role they have played in reform efforts in foreign countries. We also agree that intercity passenger rail can play an important role in the nation’s transportation system. For this reason, as well as the fact that intercity passenger rail service does not currently provide the most transportation benefits and public benefits that it can and the growing federal fiscal challenges, it is more important than ever for serious efforts to begin on identifying how intercity passenger rail service can be restructured to focus on its comparative advantages. We believe that success of this restructuring effort can best be achieved in the context of national policies and goals for intercity passenger rail—goals that are performance and outcome based. In addition, all relevant stakeholders need to participate and realistic assessments need to be made of potentially available funds for sustaining the restructured system. It will be very difficult to maximize the transportation benefits and public benefits of intercity passenger rail service without these foundations. In response to our recommendation that Amtrak evaluate its accountability—particularly its financial reporting, internal control, and governance practices—Amtrak offered comments about specific steps that could be taken in that regard. For instance, Amtrak agreed that creating a Management Discussion & Analysis with its annual audited financials is reasonable and could help the uninformed readers understand the results and trends. Amtrak took exception with other examples of oversight such as the CEO and CFO certifying Amtrak’s financial statements similar to those done under Section 302 of Sarbanes-Oxley Act. However, our recommendation notes some general steps that Amtrak needs to take in order to evaluate Amtrak’s current accountability practices in order to formulate a plan to bring Amtrak’s practices in-line with the basic practices of federal entities or public companies, while identifying opportunities to streamline Amtrak’s current reporting practices. In its response, Amtrak did not specifically address our recommendation to conduct such an evaluation for purposes of formulating a plan. Therefore, we have included additional information to our recommendation further elaborating on the objectives of the evaluation and the formulation of a plan to bring Amtrak’s practices in-line with the basic practices of federal entities and public companies. In its comments, Amtrak also pointed out that among the Federal Railroad Administration, the Department of Transportation Inspector General’s office and the independent Amtrak Inspector General’s office they have three existing oversight agencies that oversee Amtrak on a monthly, quarterly and annual basis and increasing oversight by adding the Securities and Exchange Commission seems an unnecessary use of federal funds with little real benefit for stakeholders. While we recognize that Amtrak is subject to oversight already, we believe there are opportunities to improve reporting practices, while identifying opportunities for potential streamlining of Amtrak’s current reporting and related oversight. These opportunities should be considered as part of the evaluation of Amtrak’s current accountability requirements and practices. Amtrak also commented on a number of other issues. These included (1) the Amtrak deficit, (2) passenger revenues, (3) public benefits of Amtrak services, (4) state corridors, and (5) freight railroad impacts. These comments and our evaluation can be found in appendix VIII. Finally, Amtrak offered technical comments that we incorporated where appropriate. DOT provided its comments in an e-mail message on October 12, 2006. The department did not indicate agreement or disagreement with the report or its recommendations but primarily provided technical comments that we incorporated where appropriate. However, the department did observe that effectively targeting federal funds where they may achieve the greatest level of public benefits is not one of the existing goals for Amtrak. The department also commented that it has never been FRA’s role to “establish a vision for intercity passenger rail” regardless of resources that might be available to the agency. While we recognize that FRA’s involvement with and oversight of Amtrak has increased in recent years, our report makes it clear that, as currently structured, intercity passenger rail does not maximize either transportation benefits or public benefits for federal funds expended. Although Congress will play the key role in establishing a national vision for intercity passenger rail service and putting in place a structure for maximizing the benefits from this service, we believe executive branch leadership, particularly from DOT as being responsible for transportation issues and FRA for rail matters, would be helpful in establishing this vision. DOT and FRA leadership will also be essential for identifying the optimum structure for meeting this vision and the role stakeholders will be expected to play within this structure, as well as in identifying potential funding sources to ensure sustainability of the system. Such leadership and participation by these agencies will be even more important in light of the growing fiscal challenges faced by the federal government and the resulting constraints these challenges will place on resources provided to all modes of transportation. As agreed with your office, unless you publicly announce the contents of this report earlier, we plan no further distribution until 14 days from the report date. We will then send copies to other appropriate congressional committees, the President of Amtrak, the Secretary of Transportation, the Administrator of the Federal Railroad Administration, and the Director, Office of Management and Budget. We will also make copies available to others upon request. In addition, the report will be available at no charge on the GAO Web site at www.gao.gov. If you or your staff have any questions concerning this report, please contact me at (202) 512-2834 or [email protected]. Contact points for our Office of Congressional Relations and Public Affairs Office may be found on the last page of this report. GAO staff that made major contributions to this report are listed in appendix IX. Our work was focused on identifying the critical issues and options that Congress could consider in providing more cost-effective intercity passenger rail. In particular, we focused on: (1) the characteristics of the U.S. intercity passenger rail system and the value and benefits provided by this system, (2) foreign experiences with passenger rail reform and lessons learned for the United States, (3) how well the United States is positioned to reform intercity passenger rail, (4) challenges that must be addressed in any reform efforts, and (5) potential options for the federal role in intercity passenger rail. Our scope was primarily limited to identifying the financial characteristics and other characteristics of the U.S. intercity passenger rail system from fiscal years 2001 to 2005. In reviewing route-related information, it was not the intent of our work to suggest that any particular routes or services be retained or eliminated. Similarly, in reviewing potential options for the federal role in intercity passenger rail it was not our intent to suggest that any particular option should be selected over any other option. Rather, the scope of our work was intended to identify a series of options that might exist for addressing the future federal role in intercity passenger rail service. To determine the characteristics of the current U.S. intercity passenger rail system we collected information on all of the National Railroad Passenger Corporation’s (Amtrak) routes, including ridership, revenues and costs, federal grants and state payments to Amtrak, and on-time performance for fiscal years 2000 through 2005. We also gathered and analyzed data provided by Amtrak to determine passenger demographics, connectivity between routes, and the potential transportation benefits and public benefits provided by Amtrak’s different route types. We utilized route ridership data provided by Amtrak from their “data warehouse” database. To assess the reliability of this data and address discrepancies from figures reported in Amtrak’s Route Profitability System (RPS), we conducted interviews with Amtrak officials and assessed the methodology used to develop this database. Based on this assessment, we determined that the data were sufficiently reliable for our purposes. To evaluate the financial performance of Amtrak’s routes, we utilized information from the RPS database. Due to previously identified concerns regarding the reliability of this database, we conducted an interview with Amtrak’s Chief Financial Officer, reviewed documentation of RPS’s sources and methodology, and compared route-related financial information to Amtrak’s “data warehouse” database to determine any major discrepancies. While these databases exhibit some variation due to the reporting format and source information, we determined that the financial information provided by the RPS database was sufficiently reliable to illustrate aggregate route-related costs, and general trends between Amtrak’s different route types, for the purposes of this report. For the purposes of reporting on-time performance we utilized data provided by Amtrak. We compared these figures to other reports issued by Amtrak and the Department of Transportation (DOT) and determined that the data were sufficiently reliable for our purposes. To determine passenger demographic information, we utilized survey data for all long-distance routes and select corridor routes in the Northeast and California in 2004 and 2005; these data were provided by Amtrak and collected by a third party contractor to Amtrak. We did not independently determine the accuracy or precision of Amtrak's survey estimates, however, based on our understanding of the overall survey methodology, we determined that the estimates were sufficiently reliable for our purposes in illustrating general demographic differences in riders across route types. Finally, to identify potential transportation benefits and public benefits provided by intercity passenger rail, we spoke with officials in five states; private transportation companies; and transportation officials in several foreign countries. We also reviewed our previous work and reports issued by the Congressional Budget Office (CBO), Congressional Research Service, the Bureau of Transportation Statistics, the American Association of State Highway and Transportation Officials, and statements by officials at DOT. To learn about foreign experiences with passenger rail restructuring and lessons learned for the United States, we collected data on several foreign countries that have reformed their intercity passenger rail system. This data included reports from the World Bank, the European Commission, the Congressional Research Service, as well as reports drafted by several private consulting firms at the request of the European Union. We conducted interviews with World Bank and European Commission officials, and using these reports and interviews, we developed criteria for selecting countries for site visits. These criteria included: the extent of rail privatization or competition introduced, geographic characteristics, market characteristics, national funding levels and sources, and the legislative regulatory environment. We reviewed data for Australia, Canada, France, Germany, Japan, Sweden, and the United Kingdom (U.K.). Five countries— Canada, France, Germany, Japan, and the U.K.—were all selected because they represented a wide range of reform experiences, and implemented a variety of approaches in reforming their systems. We conducted site visits to these countries, which included interviews with the Ministries of Transport for each of these countries. We also interviewed the primary rail operators in Canada, France, Germany, and Japan. In the U.K. we conducted interviews with one train operator, as well as the Association of Train Operating Companies. In France, Germany, the U.K., and Japan we also met with the infrastructure managers. Additionally, we met with other rail industry groups, such as Angel Trains and HSBC (rolling stock leasing companies) in the U.K., and the Paris Ile de France Public Transport Authority. To determine the extent to which the United States is positioned to reform intercity passenger rail we analyzed the information we learned from the experiences of the five countries described above, and reviewed statutes related to intercity passenger rail, historical information on federal grants requested by and provided to Amtrak, government and association reports on Amtrak, and our past reports on various issues (including reports on Amtrak’s management, commuter rail issues, and funding for other modes of transportation). We used the three key lessons learned from the five countries as our criteria for assessing how well the United States is positioned to reform intercity passenger rail; these criteria were (1) clearly defining national policy goals; (2) clearly defining the various roles and responsibilities of all government entities involved; and (3) establishing consistent committed funding for intercity passenger rail. For example, we compared the current U.S. intercity passenger rail policy to policies formed in other countries during the process of reform. A limitation of our assessment is that we only focused on comparing the United States to five countries with relatively different compositions in railroad infrastructure ownership, freight and passenger railroad markets, geography, and demographics. To determine the extent to which Amtrak’s efforts address the three criteria, we obtained and analyzed a list of planned and under-way initiatives from Amtrak. We also reviewed Amtrak’s April 2005 Strategic Reform Initiatives, congressional hearings on intercity passenger rail, and DOT’s financial study on Amtrak’s initiatives. In addition, we interviewed Amtrak officials about the status of reform initiatives and intercity passenger rail reform in general. To address the challenges associated with addressing reform elements we reviewed pertinent legislation related to federal involvement with Amtrak and intercity passenger rail issues. We also reviewed various legislative proposals that have been introduced in recent years addressing intercity passenger rail issues and reviewed Amtrak’s April 2005 Strategic Reform Initiatives to identify the wide diversity of views on what intercity passenger rail service can and should be. We also obtained data from Amtrak showing state payments in fiscal year 2005 for additional passenger rail service and state contributions for capital improvement projects. We reviewed our previous reports addressing, among other things, infrastructure access and workforce issues, as well as Amtrak management and performance issues. We also reviewed reports from the CBO and the Department of Energy, and testimony from the Association of American Railroads on infrastructure capacity issues. As part of our work we solicited information from both Amtrak and selected commuter railroads about infrastructure access and liability costs. We used the types and amounts of costs incurred by Amtrak and the commuter railroads to develop a comparison that highlights the differences between Amtrak’s access agreements and access agreements negotiated under commercial arrangements. We did not perform a quantitative analysis of the differences in access charges between Amtrak and commuter railroads. Rather, our focus was limited to a qualitative description of the types and ranges of costs. Finally, we interviewed officials from Amtrak, the Federal Railroad Administration (FRA), state departments of transportation, rail labor unions, and freight railroads about issues they see in addressing the potential reform of intercity passenger rail. We also interviewed officials from the Appalachian Regional Commission about the structure of the organization, how it is governed, and the potential application of this federal–state governance structure to intercity passenger rail service. To address future intercity passenger rail options, we reviewed pertinent legislation and our past reports, along with reports from the World Bank, the DOT Inspector General, the CBO, and the Congressional Research Service. We also interviewed railroad and government officials in the United States and the countries we visited. We reviewed the reports of various commissions including: the House Committee on Transportation and Infrastructure's Working Group on Intercity Passenger Rail, the Amtrak Reform Council, the President's Commission on the United States Postal Service, and the National Commission of Social Security Reform. The criteria for a fundamental reexamination of the federal role were developed in our report on 21st Century Challenges, and the framework to guide the implementation of the options was reported in several of our previous reports and testimonies. Our work was conducted from January 2006 to October 2006 in accordance with generally accepted government auditing standards. The following are selected performance characteristics of Amtrak’s long distance and corridor routes. The following is an overview of the five countries we visited as part of this review. Reformation of Canada’s intercity passenger rail system initially took place in 1978 with the creation of VIA Rail, a state-owned corporation. Prior to this, both the passenger and freight rail systems were integrated and service was provided by two companies, Canadian National Railway and Canadian Pacific Railway. While there has been no major organizational changes since its creation, VIA Rail was subject to several national policy actions throughout the 1990s leading to significant changes in how the rail operator conducted its business, in addition to the changes in the amount of funding it receives. Snapshot of the Canadian Rail System Monopoly state owned operator, VIA Rail. Almost all infrastructure is owned by two freight rail companies. Operating subsidies are consistent from year to year in order to force efficiencies and enable better planning for VIA Rail’s management. VIA’s corporate plan is approved annually by the federal cabinet. The primary provider of intercity passenger rail operations in Canada is VIA Rail, a government-owned corporation with shares held solely by the Canadian government. However, the government agency, Transport Canada, is responsible for overseeing VIA Rail. VIA Rail operates almost all of the intercity corridor and long-distance routes throughout Canada, and has some flexibility in setting its routes and services: however, all route and service changes must be approved by Transport Canada, the Canadian Minister of Transport, and the Canadian government. The majority of VIA Rail’s usage occurs on a corridor that runs between Québec City, Québec, and Windsor, Ontario. (This corridor is in the southeast part of the country, and shares similarities with the Amtrak’s Northeast Corridor, but with a lower population density.) Similar to the United States, Canada’s long- distance routes operated with higher losses than the corridor service, and because of this in 1992 a reevaluation of the Canadian (a long-distance train which runs across the country from Toronto, Ontario, to Vancouver, British Columbia) was conducted. Analysis of this route revealed that it was primarily serving a leisure/tourist market, and a decision was made to transition service on the Canadian to a luxury train offering “premium service at a premium price” along with its coach service. In addition, cutbacks in all cost categories and labor renegotiations, combined with substantial revenue growth, allowed VIA Rail to operate more efficiently within its budget. VIA Rail does not own most of the tracks on which it operates, and similar to Amtrak, operates on private tracks owned by freight rail. VIA Rail does not have any statutory guarantee of access to tracks, and must negotiate access agreements with the freight operators. Current access agreements with freight railroads are 10-year agreements and are set to expire in 2008. VIA Rail owns and maintain most of its stations. VIA Rail receives an annual subsidy from the Canadian Parliament. Currently VIA Rail receives about $170 million (CAD) annually to support its rail operations. In 1991, the Canadian government began informally capping the subsidy received by VIA Rail. The subsidy at the time was $350 million (CAD) and, due to governmentwide cost cutting, was gradually reduced to its current level. Despite the decrease in its subsidy, VIA Rail did not make any reductions in its service offerings—it concentrated on improving customer service while reducing costs through more efficient management, instead. This operating subsidy does not include funds for capital improvements. VIA Rail does not receive a capital subsidy each year, but instead must request special capital subsidies from Parliament. The last funding it received for capital improvements was in 2000 for $400 million (CAD) to replace locomotives and rolling stock, and to perform work on its Montreal, Québec–Ottawa, Ontario, line. VIA Rail has no authority to issue debt instruments, or to go into the debt market to fund rail operations. Any attempt to do this would require permission from Transport Canada, the Minister of Transport, and the Minister of Finance. At the time of its creation, VIA Rail did not have any debt, and currently has no authority to issue debt instruments or to go into the debt market to raise funds. The French intercity passenger rail system was reformed in 1997 in order to create an infrastructure manager distinct from the national operator and address the financial crisis that had been created by the fully integrated intercity passenger rail system. The monopoly intercity passenger rail operator in France is Société Nationale des Chemins de Fer Français (SNCF), a public company with 100 percent of its assets owned by the state. Until the 1997 reform, SNCF was responsible for both intercity passenger rail operations, as well as for managing the country’s rail infrastructure. During the reform, Réseau Ferré de France (RFF) was created to take over management of the infrastructure. RFF is also a public company with 100 percent of its assets owned by the state. Snapshot of the French Rail System Monopoly operator and infrastructure manager; both are state-owned public companies. National subsidies for intercity passenger rail operations are provided to the regions, and not directly to the operator. System comprises the largest use of high-speed trains in the world (6,000 miles operated by Train a Grande Vitesse trains). Will be required by the European Union to begin to open its passenger rail market to competition by 2010-2012 (freight market already open to competion). SNCF is the monopoly intercity passenger rail operator in France. SNCF primarily provides intercity rail service through contracts with 20 geographical regions of France. At the time of the 1997 reform, the French government began experimenting with regionalization of its intercity passenger rail system. Through this experiment six geographic regions were provided with subsidies so that intercity passenger rail needs could be purchased from SNCF. This was successful, and, as of 2002, 20 regions in France are given direct subsidies to purchase intercity passenger rail service. This allows the regions to enter into contracts with SNCF for the appropriate quantity and frequency of service needed to meet the unique characteristics of the region’s passengers. In addition to operating passenger rail services, SNCF provides infrastructure management services under contract with RFF. SNCF performs traffic management on the national network, and operates and maintains the national safety system. RFF was created through the reform in order to establish an infrastructure manager separate from the national operator. This was intended to clarify the responsibilities and costs for rail infrastructure in France. All rail infrastructure is owned by RFF, and it was given the mission of ensuring coherence of the French rail network through improving existing lines, developing the network through building new lines, and enhancing the network by selling land property and lines not in use. RFF’s main sources of income are access charges for use of the rail network, income relative to land properties included in the network, and a state subsidy. As part of the creation of RFF, two-thirds of the former SNCF’s debt was transferred to RFF in exchange for SNCF’s infrastructure assets (31,000 km of track). Funding for both RFF and SNCF is provided by the French Ministry for Transport. The state provides about 7.5€ billion to subsidize the rail system each year including 2€ billion to France’s 21 geographic regions so that intercity passenger rail service can be purchased from SNCF. The state provides RFF about 800€ million annually to pay off the debt it inherited during the reform, and about 900€ million each year to perform infrastructure renewal. The cost of track maintenance is supported through infrastructure access fees. RFF contracts with SNCF to perform some infrastructure management, and in 2004 RFF paid SNCF 2.6€ billion (approximately $3.2 billion (USD)) for its services. SNCF pays RFF access fees in order to operate its trains on RFF tracks, and in 2004 it paid 2.16€ billion (approximately $2.6 billion (USD)) in access fees. Since the reform, these access fees have continued to increase, and the public subsidy for infrastructure is decreasing proportionally. At the time of the reform, SNCF was carrying about 30€ billion in debt (approximately $25 billion (USD)), and was operating with a 2€ billion (approximately $2.4 billion (USD)) deficit. 20€ billion (approximately $18 billion) of this debt was transferred to RFF in exchange for infrastructure, and the remainder stayed with SNCF. RFF’s debt has stabilized since the 1997 reform, and a public financial agency for funding transportation infrastructure was recently formed to provide infrastructure subsidies and zero-percent interest loans for new projects. RFF receives on average 2€ billion annually for capital investments for new lines and anticipates 7.5€ billion from this agency for 2005 through 2012 (currently this is approximately $9.6 billion). In 1994, Germany implemented its first rail reform initiative. Germany began by separating its governmental and commercial rail-related tasks and by opening its markets to competition. This was done by merging the two preexisting national railway properties, Deutsche Bundesbahn (West Germany) and Deutsche Reichsbahn (East Germany) into the Federal Railway Property Agency (BEV). The commercial section of BEV was then separated and transformed into DB, a state-owned joint-stock company that acts independently in the transport market, and includes separate business units for both long and short distance passenger rail operations and infrastructure management. Although DB owns the entire rail infrastructure network in Germany, all shares of the DB infrastructure company are held by the state. The German intercity passenger rail system is also open to competition. Any rail operator who wants to enter the market is free to bid on contracts to provide service, and while this has yielded a large number of intercity passenger rail operators in Germany, DB remains the primary operator in most markets. Snapshot of the German Rail System Multiple operators, market open to competition (over 300 competing operators). Single infrastructure manager; private company that is part of a state owned holding company. National subsidies for regional passenger rail operations are provided to the Länder (the German federal states), and not directly to the operators. The German passenger rail market is open to competition, and currently there are over 300 different operators providing rail service in Germany. Despite this, most rail service in Germany is operated by DB. National funding for short-distance passenger rail service is provided directly to the Länder by the national government and the Länder then receive bids for service from operators based on the specific needs they outline in a request for proposal. Länder are not required to tender the service to multiple operators, and can provide payment directly to DB for it to continue operating preexisting service. The contracts established with operators are generally for about 10–15 years. If the Länder want to purchase service that exceeds the amount of the subsidy available to them, they are welcome to do so, and can spend their own funds to do this. In some cases, the Länder have further delegated the authority to decide rail services to the local level. In addition to winning contracts to provide regional service, passenger operators can provide long-distance service at their own risk. However, long-distance rail operators are required to pay infrastructure access fees. After reform, several of the money-losing long-distance routes that were in existence were shut down by DB, in compliance with public law. Most of the infrastructure in Germany is owned by DB Netz, one of DB’s corporate business units. Currently DB Netz is part of a state owned holding company. All operators that use infrastructure in Germany pay access fees to DB Netz, including other DB business units (freight, commuter rail and intercity passenger rail). Currently there is ongoing debate about transforming DB’s status as a state-owned private-stock company to a publicly traded company. The largest issue at hand is whether or not to include DB Netz as part of the initial public offering. According to DB officials, the company sees an advantage to including the infrastructure in an initial public offering. Based on several reports, government representatives also expect significant public financial benefits from an integrated initial public offering, but some fear this model will lessen their ability to influence infrastructure decisions. The national government provides about 7€ billion annually to the Länder to operate regional passenger rail. The source of this federal subsidy is a transportation fund, which is supported by an automobile fuel tax. DB Netz receives about 4€ billion each year in federal subsidies in order to renew and develop new infrastructure (including stations). About 2.5€ billion of this goes towards maintaining the current infrastructure, and about 1.5€ billion goes towards renewal and new infrastructure. By establishing DB, the German government relieved it of approximately 35€ billion debt (approximately $38 billion at the time of reform in 1994) and transferred the responsibility for paying and managing this debt to BEV. About 10€ billion per year is paid to BEV for debt relief and other administrative responsibilities (e.g., pensions). Reform of the Japanese rail system through privatization was initiated in 1987. Before reform, the Japanese railway was a fully integrated state- owned monolithic railway entity, Japan National Railways, which operated at considerable cost to the government and carried extensive debt. After reform, Japan kept its intercity passenger rail system vertically integrated, that is, it did not separate out operations from infrastructure, but instead it divided the system geographically, and created separate private intercity passenger railways for the country based on six distinct geographic regions (and a separate company for freight rail). The government also assumed the majority of the debt for the preexisting state-owned system, which at about $300 billion was a substantial sum. Snapshot of Japanese Rail System Vertically integrated operations and infrastructure; market split into six geographic regions. Each region has its own rail company. Debt of pre-existing state owned railway divided among three largest passenger rail companies, JR Freight, Shinkansen Holding Corporation, and JNR Settlement Corporation. Three largest intercity passenger rail companies are fully private, while government supports the other three. After the reform, the fully integrated state owned operator, Japan National Rail, was broken up into six passenger rail entities based on six geographic regions. Three of these regions are on the mainland (JR East, JR Central, and JR West) and the other three are each on an island (JR Hokkaido, JR Shikoku, and JR Kyushu). A freight company was also created to serve the entire country. Each of these six passenger rail operations are vertically integrated, that is within each rail company infrastructure and operations are both managed by the same company. The three companies on the mainland are fully privatized, and do not receive any financial assistance from the government. The other three passenger companies have not yet reached a point where they are financially independent from the state. The six passenger railway companies own their own tracks and JR Freight has legal access to the JR’s tracks at marginal or incremental cost. In 1991, JR West, East and Central purchased their tracks from the Shinkansen Holding Company and the proceeds went toward paying down the company’s portion of Japan National Railway’s long term debt. The Japan National Railway developed an implementation plan for its division that included how much land was needed for each railroad, which was approved by the Ministry of Land, Infrastructure and Transport. The companies were then given existing stations and offices from the old Japan National Railway. Some of the non-railroad-oriented land was retained by the Japan National Railway Settlement Corporation because it was not needed by the new railroads for operations. JR Freight pays a relatively low state-determined access fee for using the tracks of the other passenger railroads. Japan also has Shinkansen (high-speed) lines that connect most of the highly populated cities. The Japan Railway Construction, Transportation, and Technology Agency builds new Shinkansen lines; it also holds title to some existing Shinkansen lines and leases them to the passenger railroads for high-speed train operations. When reform occurred in 1987, the Japanese government provided a one- time Business Stabilization Fund, which provided funding for three passenger railroads that were not yet privatized and needed subsidies to survive. JR Hokkaido was given ¥682 billion, JR Shikoku was given ¥208 billion, and JR Kyushu was given about ¥388 billion. These three railroads were allowed to invest these funds and use any money made from them for operations and capital improvements. However, they were not allowed to draw down any principal—only the profits or interest from investments. Therefore, currently the three companies have maintained the original amounts given to them by the state in 1987. However, the performance of the fund has been declining as Japanese interest rates have declined since the establishment of the fund. It is not clear what will happen to these amounts if any of these three companies are fully privatized at a later date. However, Japanese Board of Audit officials feel that it will be a long time, if ever, before the three companies are financially able to achieve privatization. Of these three passenger railroads, only JR Kyushu is given a reasonable chance of achieving the financial stability necessary to privatize. There are two other forms of assistance to JR Hokkaido, JR Shikoku, and JR Kyushu. A guaranteed interest rate was offered for the stabilization fund that was higher than the market rate available to the three mainland JR’s. The government reduced the tax rate on fixed railroad assets as well. In addition, at the time of reform, the Japan National Railways had accumulated about ¥37 trillion of long-term debt. About ¥25.5 trillion was placed with a newly created entity, called the Japan National Railways Settlement Corporation, and the remaining debt was distributed among the three mainland railroads, JR Freight, and the Shinkansen Holding Company. The state government determined the debt allocation, apparently on the basis of expected future profits of each entity. The Hokkaido, Shikoku, and Kyushu railroads were not allocated any of this debt because of their more precarious financial positions. The U.K. began its major reform in 1993 in an effort to privatize its rail system, and then undertook another significant restructuring effort in its 2004. The 1993 reform took place over 5 years and involved radical restructuring. The preexisting monolith, British Railways, was broken up into many pieces, including a private infrastructure company, Railtrack, which was replaced in 2002 with Network Rail, over 20 train operating companies, three rolling stock ownership and leasing companies, and three government regulators (currently there is only one entity, the Office of Rail Regulations). In 2004, the U.K. restructured again to restore the long-term efficiency and keep the affordability of rail within the level of public expenditures defined by the British government, as well as to recover performance levels, maintain high standards of safety, and enable the industry to meet its customers’ needs. Snapshot of the U.K. Rail System Multiple operators; market split into franchises which are open to competition. Single infrastructure manager; owned “members” consisting of representatives from a range of industry interests. British Rail’s rolling stock was divided between the three rolling stock ownership and leasing companies and is available for lease to interested operators. The national government was unable to completely exit the industry, and mainly plays a role in setting the strategic direction for the railways. After the initial reform effort, intercity passenger rail operations were no longer conducted by British Railways but were instead turned over to the private sector. The rail network was broken up into different franchises, and private operators were permitted to bid on franchises for the provision of services. These operators are essentially private companies that enter into franchise agreements with the government, where the government will subsidize unprofitable service or receive a premium for services that see excess profits. In addition, these operators pay access fees to the infrastructure manager in order to access the tracks, and the U.K. government adjusts subsides paid to, or premium received from, operators to compensate for any change to the fixed access charge made by the independent regulator. Rail infrastructure in the U.K. is currently all managed by Network Rail. Network Rail is a private corporation, run by a board of directors, and overseen by more than 100 members of the railroad industry and some members of the general public. The members do not have day-to-day responsibilities for making management decisions, but they do elect and dismiss the board of directors, approve the long-term remuneration of board members, approve Networks Rail’s annual report, and approve specific resolutions put forth before the membership. Network Rail was not the first infrastructure company formed after the U.K.’s reform. At the time of reform, a private for-profit corporation, Railtrack, was established to own and manage all of the U.K.’s infrastructure. In 2001, Railtrack went bankrupt, and Network Rail’s bid to take over Railtrack was accepted; it then assumed control over the infrastructure in 2002. Currently, Network Rail earns income from three sources—network access fees paid by the operators (and which are set by the Office of Rail Regulation), direct government grants, and other income such as commercial property. Although privatized, the intercity passenger rail system in the U.K. receives operating subsidies from the government. Generally about 50 percent of all costs are covered through public subsidies, but U.K. government officials expect this percentage to fall in the future. Total debt for Network Rail is currently at £18 billion and is projected to peak at £21 billion between 2008–2009. This debt did not exist at the time of reform, and was incurred through paying for enhancements to its regulatory asset base. Network Rail also assumed £8 billion of this debt from Railtrack. In April 2005, Amtrak’s board of directors and management proposed a set of broad strategic reform initiatives. Since the release of these initiatives, Amtrak formed a new planning and analysis department to manage the strategic reform initiative plan and implementation, among other duties (such as developing a capital and asset plan). Thus far, 15 operational initiatives have been developed, which are described as either corporate or business-line initiatives (see table 9). Recently, to further develop these initiatives, Amtrak has begun to refine the structure of these initiatives into five issue areas: (1) business efficiencies, (2) service levels, (3) cost recovery, (4) labor, and (5) legislative. According to Amtrak, most of the 15 initiatives will fall into the business efficiency category, which the company views as having greater control over. The labor, long-distance, corridor, and infrastructure initiatives will fall within more than one of the categories, and full implementation of these initiatives would require legislative action. In addition, initiatives associated with each of the train operations business lines (long distance, NEC, and state corridor) will fall under all five categories. Amtrak’s 15 initiatives are largely designed to reduce costs, increase revenue, and improve its financial reporting. Among the initiatives Amtrak has planned or undertaken to reduce costs is the overhead function initiative, which it estimates will save $5.1 million in fiscal year 2006 through reductions in outside legal fees, software, and communications costs. The NEC operations initiative is designed to increase revenue, partly through the implementation of revenue management on NEC’s Regional Service, by charging variable rates. The management information initiative calls for reforming how Amtrak currently reports financial and operating information. Amtrak’s Chief Financial Officer told us that reports to management will focus more on performance outcomes, such as performance per passenger mile. In addition, Amtrak is in the process of developing a new cost-accounting system as directed through fiscal year 2006 appropriations to improve accountability. As of May 2006, the operational initiatives have resulted in annual savings of $46 million for fiscal year 2006, but are expected to save $190 million a year when fully implemented. Any effort to reform the United States’ intercity passenger rail system must recognize that there are access, capacity, liability, and workforce issues. For instance, Amtrak benefits from a number of statutory access rights that mask the potential capacity impacts of passenger rail service on freight traffic. In addition, the potential liability associated with operating passenger rail must be accounted for, as must statutory and contractual workforce requirements. Currently, the liability framework surrounding intercity passenger rail is complex, with statutory exceptions and negotiated indemnification agreements altering default negligence rules. Amtrak’s statutory access and priority rights for intercity passenger service—and the subsequent impact on freight capacity—is a source of contention in the rail industry. Amtrak owns very little of the infrastructure that it uses, and, in fact, most of the 22,000 miles of rail lines that Amtrak uses are owned by four private, U.S.-based Class I freight companies—CSX, Union Pacific, BNSF, and Norfolk Southern. Amtrak has three statutory rights to privately owned rail infrastructure that no other operator has: (1) access to tracks and facilities of railroads and regional transportation authorities; (2) access charges at incremental cost; and (3) priority over freight trains. No other passenger rail service receives the benefit of statutory rights. For instance, commuter rail agencies must negotiate with host railroads for infrastructure access. Similarly, any private operator of intercity passenger rail in the United States would have to negotiate for access to host-railroad infrastructure without the benefit of these statutory rights. Because other operators do not have these statutory rights, one state official said that his state feels “stuck” with Amtrak. This state official said his state is frustrated because there is no real alternative to Amtrak as long as these rights belong solely to Amtrak. The freight railroad industry is adamantly opposed to permitting a transfer of Amtrak access and incremental charge rights to non-Amtrak operators, which was confirmed by officials from freight railroads with whom we spoke. One state official told us that, without Amtrak’s access rights, passenger rail access fees are a “seller’s market”—that is, freight railroads can charge whatever they want. State officials with whom we spoke generally estimate that Amtrak’s per train-mile costs are approximately one quarter to one half of what the freight railroads would charge another operator. Similarly, an official from one freight railroad estimated that infrastructure access costs for an intercity passenger rail operator negotiating “at arm’s length” would be three to four times Amtrak’s current costs, and possibly as high as ten times as much as current rates. According to this official, even these rates would not capture the full impact of passenger trains on freight line capacity. While Amtrak’s access costs cannot be directly compared with a competing intercity passenger rail operator, a comparison with commuter rail access costs is informative. According to information provided by Amtrak, on average, Amtrak paid $1.16 per train-mile for access to freight-owned infrastructure in fiscal year 2005. In contrast, commuter rail agencies with whom we spoke that operate primarily on freight railroad infrastructure identified three types of access charges: per train-mile fees, fixed-access fees, and capital contributions. All of these commuter agencies reported paying per train-mile access fees for each line, with a range from $3.38 to $40 per train-mile. These agencies reported paying either a one-time up front access fee or an annual access fee for most lines as well (see table 10). In addition, all four commuter rail agencies with whom we spoke made capital contributions to freight infrastructure for each line, either to gain initial access to the freight infrastructure or to expand established commuter rail operations. According to Amtrak, commuter rail trains— which are concentrated in the morning and evening weekday peak periods and have long track occupancy due to frequent stops—require greater rail line capacity, and therefore, impose much higher costs on the track owner than a comparable number of intercity passenger rail trains that are spread throughout the day or week. According to several state officials, increases in intercity passenger rail service, particularly corridor services, could conflict with freight rail traffic for line capacity. For example, one state official stated that the rail lines between New York City and Albany, New York, are heavily used by freight railroads, commuter rail service, and Amtrak. Even today this line has congestion problems, leading to delays for both passenger and freight traffic. Desired improvements to address capacity restrictions will cost about $700 million in capital improvements. An official with another state, talking about the line between Washington, D.C., and Richmond, Virginia, said that—between freight, Amtrak, and commuter service—the amount of traffic on the corridor is increasing and delays are becoming more common. Further, capacity constraints are causing delays that cause dissatisfaction among riders. Freight railroad officials have emphasized the growing challenge associated with infrastructure capacity issues. An official at one railroad said that, while freight traffic on his railroad had grown and decreased capacity, nothing in the Amtrak model had changed, which he described as increasing his railroad’s subsidy to Amtrak. An official of another railroad stated that under the current Amtrak model—with guaranteed access to track at incremental cost—freight railroads do not recover the lost value created when freight trains are delayed because of passenger train priority. He also stated that the current Amtrak model skews the incremental value of freight and passenger train slots on a line in such a way that freight railroads cannot capture the difference in value between low value passenger train slots and higher value freight train slots. This official went on to say that, without new capacity, there would be ripple effects throughout the entire freight railroad industry as both freight and passenger railroads try to accommodate ever-increasing traffic on a fixed- infrastructure network. He also stated that for intercity passenger rail to be successful it must be attractive, efficient, and reliable. In addressing capacity issues associated with passenger rail reform it will be important to recognize balancing public and private investment with public and private benefits. An official with the Washington State Department of Transportation said his state is willing to pay for capital projects that benefit passenger rail, and that freight railroads should pay for projects, or parts of projects, that benefit their operations. This official said most states use the “but for” argument in determining public rail infrastructure investments—that is, would there be a need for investment but for the passenger rail service? Similarly, the state of Virginia works with host railroads to fund rail projects that increase both the freight and passenger rail capacity of privately owned rail infrastructure in the state to achieve public benefits. As we testified in June 2006, federal involvement with rail infrastructure should depend on identifying wide-ranging public benefits from potential projects and appropriately allocate the cost of financing these benefits between public and private sectors, and, to the extent possible, focus investments that yield national rather than just local benefits. In addition to the access-to-infrastructure issues, there are also challenges associated with liability against accident and other train-related risks. If a passenger rail accident should occur, injured passengers may sue the transportation provider for their damages. As our January 2004 report on commuter rail noted, freight railroads have been traditionally sheltered from this exposure when they haul freight. However, when a freight railroad allows a commuter rail service (or intercity passenger rail service) to operate over its rights-of-way, the freight railroad becomes exposed to these risks—as passengers may sue the commuter rail’s (or intercity passenger rail’s) provider and owner of the tracks. Consequently, freight railroads do not want to allow such service on their rights-of-way unless they are protected from liability. Freight railroads often use the “but for” argument for requiring passenger rail operators to assume all risks associated with their presence—that is, but for the presence of the service, the freight railroad would not be exposed to certain risks and therefore should be held harmless. Freight railroad officials have stated that they must take this position to protect their businesses and shareholders from lawsuits. As a result, passenger rail operators must contractually indemnify freight railroads against all liability and obtain insurance as a guarantee that payments will be made for any damages. Amtrak currently has no fault liability agreements with most freight railroads to cover risks associated with its operations. Under these agreements, Amtrak indemnifies the host railroads against liability resulting from any damages that occur to Amtrak passengers, equipment, or employees regardless of fault if an Amtrak train is involved. Similarly, the host railroads indemnify Amtrak against any liability resulting from damages to host railroad employees and property regardless of fault. At one time, Amtrak compensated the host railroads for the risk that they bear by paying a negotiated risk charge of 7.34 cents per train-mile to the host railroad. Amtrak has subsequently negotiated away this charge for all but one line. In contrast, commuter rail operators with whom we spoke manage liability with the freight railroads their own way. In the view of one commuter rail official, the host railroads charge his company more per train-mile for infrastructure access that Amtrak to compensate for the liability costs associated with commuter rail operations. Another commuter rail official stated that in addition to the per train-mile fees, his agency purchases an insurance policy that indemnifies the host railroads against all liability, including gross negligence and willful misconduct. Both railroad and state officials with whom we spoke believe liability will be a major issue should competition for intercity passenger rail service be introduced. Officials from all 5 states cited concerns about liability issues, particularly the potential cost of liability coverage. An official from one state, Washington, told us that his state would not be able to pay for the liability coverage freight railroads would require if Amtrak ceased operating intercity passenger rail service and this service was taken over by the state—the cost would be too prohibitive. An official from California also said that liability would be a significant issue associated with competition. Besides cost, this official said California is prohibited by law from providing full indemnification to third parties. Consequently, any non- Amtrak passenger rail operators would have to provide their own liability coverage that would indemnify not only the state, but also any freight railroads they operated over. Freight railroad operators also expressed concern about liability issues. An official from one freight railroad said his company would not “bet the company” on the liability risk that could exist with multiple passenger rail operators, and that his company would expect full indemnity against liability risks created by passenger rail operators. It would also be expected that this indemnity be backed up with sufficient insurance coverage similar to the arrangement this company currently has with Amtrak. Similar sentiments were expressed by another freight railroad official. Recognizing the freight railroads’ exposure to liability when hosting passenger rail trains, Congress established liability provisions in the Amtrak Reform and Accountability Act of 1997. Specifically, the act limits the aggregate overall damages that may be awarded to all passengers for all claims (including punitive damages) from a particular rail accident to $200 million. The act also permits Amtrak and other providers of rail transportation to enter into indemnification agreements allocating financial responsibility for passenger claims arising from accidents involving passenger rail. As we reported in January 2004, our review of this legislation concluded that the liability cap applies to commuter rail operations on the basis of the plain language of the statute and our review of pertinent legislative history. Our review of the statute and legislative history also indicates this cap would apply to non-Amtrak providers of intercity passenger rail service. However, our report goes on to note that there are limitations to the protections provided by the legislation, such as the fact that the legislation does not limit damages for claims brought by nonpassengers; in addition, the application of the liability cap has not been tested in federal court. As a result of these limitations many carriers are being “super cautious” in requiring high levels of insurance. Efforts to reform or restructure intercity passenger rail require consideration of workforce issues that is, having enough people with the requisite knowledge and skills to provide the amount and type of service called for in a restructured system. This may not be as easy as it seems. Amtrak employees currently provide a number of services that are integral to operation of intercity passenger rail. This includes train and engine crews that operate trains, on-board staff such as conductors and attendants that take tickets and arrange for sleeping accommodations, and maintenance staff that repair equipment and maintain the rights-of-way over which trains operate. In addition, Amtrak employees dispatch trains and maintain communication and signal systems, among other things. Over the last several years Amtrak has reduced its employment levels as it has tried to control costs (see fig. 17). In fiscal year 2005, 87 percent of Amtrak’s workforce was unionized (14 unions and two councils covering a variety of crafts and skills) and covered by collective bargaining agreements. These employees are referred to as agreement employees. The collective bargaining agreements specify not only wage and benefit rates but also specific duties (defined in work rules) that employees can perform. Between fiscal years 2001 and 2005 the number of unionized employees decreased from 22,163 to 16,687 (a 25 percent decrease). There has also been an overall 7 percent decrease in non-union employees over this time period, with a slight increase in the number of non-union employees between fiscal years 2003 and 2005. While these decreases might have benefits in terms of cost reduction, they might also limit the pool of qualified people available to operate intercity passenger rail under a restructuring scenario. There are several workforce issues that will likely present challenges in efforts to reform or restructure intercity passenger rail. These include: Availability of a qualified labor pool. Reform of intercity passenger rail that results in new services or operators will require that there be sufficient staff to provide service, conduct maintenance, and perform other duties related to running passenger railroads. In the short term, obtaining sufficient staff could be a challenge. As we reported in April 2006, in the context of commuter railroad service, if Amtrak were to abruptly cease to provide service, some commuter railroad agencies might be able to replace Amtrak employees dedicated to their particular commuter rail service with employees from another railroad. However, according to agency officials, a number of agencies would not be able to quickly replace current Amtrak employees because of workforce limitations, such as the availability of a qualified labor pool. In part, this is because of strains on the current workforce due to growth in the demand for freight rail transportation. In addition, it was estimated that it could take months to train replacements if Amtrak train crews were unavailable. Over the short term it is feasible that a restructuring that resulted in new intercity passenger rail services could face a shortage of qualified employees if (1) Amtrak employees did not transfer to the new services or operators, (2) they retire or leave the railroad industry, or (3) there are insufficient applicants with necessarily skills to provide the employees needed. Workforce flexibility and productivity. Reform of intercity passenger rail resulting in new services or operators will also require consideration of workforce flexibility and the extent labor productivity can be increased. One key to providing cost-effective service is to have high levels of labor productivity. Collective bargaining agreements and their related work rules specify the work that employees are expected to do and the amount of compensation they will receive for performing this work. Although such agreements can and do include changes designed to increase employee productivity by increasing or broadening the types of tasks that employees can perform, such agreements can also affect productivity by limiting the amount or type of work that employees can perform. Foreign passenger rail reform efforts have included actions to increase workforce flexibility and productivity. For example, from 1993 to 1998, as a result of revenue growth and an increased focus on cost control, VIA Rail entered into negotiations with rail labor in order to obtain more flexibility in its workforce. Among other things, these negotiations resulted in a significant consolidation of jobs. According to VIA Rail, union members got enhanced pension benefits in return for reduced employment levels and increased job responsibility. The latter included consolidating a number of on-board service and conductor positions into one customer-service manager who has the flexibility to interchange positions for on-board service staff and is responsible for everything that goes on inside a train. Potential labor protection payments. If, as the result of reforming intercity passenger rail, Amtrak employees lose their jobs, there could be liability for labor protection payments. In general, labor protection payments are made to employees who lose their jobs as a result of a discontinuation of service. The Amtrak Reform and Accountability Act of 1997 made a number of changes to labor protection, including eliminating existing rights to such protection—again subjecting labor protection to collective bargaining, and requiring Amtrak to negotiate new labor protection arrangements with its employees. As we have previously reported, after Amtrak and its employees could not reach agreement, an October 1999 arbitration decision (1) capped labor protection payments at a 5-year maximum (rather than 6 years under the statutory arrangement), (2) made employees with less than 2 years of service ineligible for payments, and (3) based payments on a sliding scale that provided less payout for each year worked than did the previous system. Even with these changes, in September 2002, we reported that Amtrak would have had unsecured labor protection claims of about $3.2 billion had Amtrak been liquidated on December 31, 2001. Although a reform of intercity passenger rail may or may not involve a liquidation of Amtrak, it is clear that should Amtrak employees lose their jobs as the result of a discontinuation of service there could be substantial financial obligations as a result. To the extent that Amtrak employees can and do accept jobs elsewhere (whether in the railroad industry or not) this obligation could be reduced. In general, should this be the case, then labor protection payments would be limited to the differences, if any, between what the employees were previously making at Amtrak and their wages at the new jobs. Amtrak labor-relations officials state that a significant barrier to any attempts to reform—or to negotiating their collective bargaining agreements even in the absence of broader corporate restructuring—is the lack of flexibility in the current labor agreements. First, the provision of the Amtrak Reform and Accountability Act of 1997 that altered rail labor protection—eliminating the statutory labor protection provision and allowing Amtrak and the affected labor unions to negotiate contractual labor protection arrangements in their place—did not give Amtrak as much flexibility as it had hoped. Although significant changes resulted from negotiations about new labor protection arrangements (such as limiting the maximum number of years’ wages that could be received in the event of job loss to 5 years instead of 6), Amtrak is still bound by expensive labor protection obligations if jobs are lost because of route cancellations or service reductions. Amtrak officials referred to rail labor protection as the “last of the last” of the old type of unemployment benefits. As such, labor protection continues to be a stumbling block in Amtrak’s internal restructuring efforts, as well as collective bargaining. In addition, Amtrak officials stated that Amtrak would like additional flexibility in the work rules that define the tasks that employees can perform to improve productivity. The current work rules allow most employees to perform tasks outside their enumerated work duties only 2 hours per day. According to Amtrak labor relations officials, current work rules allow Acela employees 4 hours of flexibility per day. Amtrak would like to extend this to all labor contracts. Amtrak officials stated that Amtrak wants the increase to 4 hours of flexibility to gain desired improvements in efficiency of operations. Without the work rule change, these improvements will be difficult to achieve. Workforce challenges also include determining how a potentially reformed intercity passenger rail system fits into the current scheme of railroad- specific labor-management, retirement, and injury compensation systems. Amtrak is currently subject to, among other things, the Railway Labor Act, the Railroad Retirement Tax Act, and the Federal Employers’ Liability Act, which govern labor-management relations, retirement, and injury compensation, respectively, in the railroad industry. Amtrak’s collective bargaining agreements generally do not expire and are subject to requirements designed to reduce labor strikes; Amtrak participates in, and provides financial contributions to, the railroad retirement-system (approximately $400 million annually); and Amtrak and its employees are subject to a tort-based injury compensation system under the Federal Employers’ Liability Act. We have reported that these legal requirements raise railroad costs compared to nonrailroad industries. Amtrak’s April 2005 Strategic Reform Initiatives also suggested that meaningful reform of intercity passenger rail will require changing how these apply to passenger rail. On the other hand, rail labor has argued for the importance of these laws in protecting employee rights, ensuring a sustainable retirement system, and adequately compensating employees injured on the job. State officials we interviewed expressed more general concern about the potential impact of Amtrak’s labor agreements and obligations on the future of passenger rail. Some state officials viewed Amtrak’s labor agreements as a significant barrier to reform. One official stated that serious labor reform is needed for intercity passenger rail reform to succeed. Some state officials with whom we spoke also questioned whether alternative operators would be bound by Amtrak’s labor agreements and thought that it was unlikely another operator could provide significant improvements in cost savings or quality of service if they were. Another official stated that Amtrak’s labor agreements would put Amtrak at a considerable disadvantage over alternative operators in a competitive market if the alternative operators were not bound by the same agreements. Rail labor union officials with whom we spoke expressed several concerns about the effects any potential reform of intercity passenger rail might have on their members. Foremost, union officials expressed concern about the history of Amtrak’s successive “reforms” and the detrimental effects on labor–management relations and employee morale. In their view, past Amtrak reforms have brought fewer union jobs and the loss of health and safety programs with no improvement in Amtrak’s service to the public, while it continues to flounder with funding uncertainty. A union official stated that the first step should be getting Amtrak to operate like other for- profit businesses, including the freight railroads. The emphasis should be on applying basic business principles, including transparent accounting, and repairing its relationship with the unions and improving national railroad passenger service—rather than on reducing the federal subsidy. This should be addressed before moving on to something other than the current system and route structure. In addition, union officials emphasized that some union members are highly skilled and highly specialized and cannot be easily replaced. Any restructuring of intercity passenger rail would still require any operator—Amtrak, alternative operators, or a successor to Amtrak—to work through the unions to maintain a labor force or to train additional workers. Total compensation for employees moving forward is another concern; however, union officials told us, where alternative operators have succeeded Amtrak in operating commuter railroads, unionized employees have been offered more compensation than they received from Amtrak with no accompanying change in work rules. The Amtrak Reform and Accountability Act of 1997 removed Amtrak from the list of government corporations subject to the Government Corporation Control Act of 1945. The 1997 act, however, did not change Amtrak’s status as a private, for-profit corporation established to provide intercity and commuter rail passenger transportation in the United States and is neither an agency nor an instrumentality of the U.S. government, nor an issuer of securities to the public. Consequently, Amtrak is not subject to the basic accountability requirements of either federal entities or public companies, but has been subject to specific reporting requirements contained in its grant and loan agreements and Amtrak-specific statutory provisions in Title 49 of the U.S. Code. Following are the basic accountability requirements that encompass financial reporting, internal controls, and governance at these organizations. The Chief Financial Officers Act of 1990 (CFO Act), as amended by the Government Management Reform Act of 1994 (GMRA), requires the major 24 agencies of the federal government to submit annual audited financial statements to the Office of Management and Budget (OMB). The Accountability of Tax Dollars Act of 2002 (ATDA) expanded this requirement to include most other executive agencies. Federal government corporations had been subject to financial reporting requirements for many years under the Government Corporation Control Act. Quarterly, the executive agencies required to submit annual financial statements under the CFO Act, GMRA, and ATDA (31 U.S.C. § 3515) are required by OMB to submit unaudited financial information to OMB. These interim unaudited financial statements, required on a quarterly basis, may be submitted without footnotes and limited to a balance sheet, statement of net cost, and statement of budgetary resources. Management discussion and analysis and supplementary information are not required for quarterly reporting. Chapter 91 of Title 31 of the U.S. Code, commonly known as the Government Corporations Control Act, requires government corporations to submit annual management reports to Congress (with copies to the President, OMB, and us) no later than 180 days after the end of the government corporation’s fiscal year. OMB has accelerated the submission deadline to no later than 45 days after the end of the government corporation’s fiscal year. Annual management reports are therefore required to include the following: a statement of financial position; a statement of operations; a statement of cash flows; reconciliation to the budget report of the corporation, if applicable; a statement of internal accounting and administrative control systems by the head of corporation management, consistent with the requirements under amendments to the act made by 31 U.S.C. § 3512 (c), (d), commonly referred to as the Federal Managers’ Financial Integrity Act of 1982 (FMFIA); a financial statement audit report; and any other information necessary to inform Congress about the operations and financial condition of the corporation. Government corporations are not required by OMB to submit quarterly information. The federal government does not have a certification for government corporations or federal agencies comparable to section 302 of the Sarbanes–Oxley Act of 2002, which requires the chief executive officers (CEO) and chief financial officers (CFO) of public companies to certify their company’s financial statements. Under OMB Circular No. A-136, Financial Reporting Requirements (rev. July 24, 2006), annual performance and accountability reports (PAR) issued by federal government agencies consist of the Annual Performance Report required by the Government Performance and Results Act of 1993 (GPRA) with audited financial statements and other disclosures, such as agencies’ (1) assurances on internal control, (2) accountability reports by agency heads, and (3) Inspectors General’s assessments of the agencies’ most serious management and performance challenges. OMB Circular No. A- 136 states that PARs are intended to provide financial and performance information to enable the President, Congress, and the public to assess the performance of an agency relative to its mission and to demonstrate the agency’s accountability. The PAR’s management’s discussion and analysis (MD&A) section, which serves as a brief overview of the entire PAR, should include the most important matters that could lead to significant actions or proposals by top management of the reporting unit; are significant to the managing, budgeting, and oversight functions of Congress and the administration; or could significantly affect the judgment of citizens about the efficiency and effectiveness of their federal government. OMB Circular No. A-136 also requires federal entities in their MD&A to include information to help users understand the entity’s financial results, position, and condition as conveyed in the principal financial statements. The MD&A also includes comparisons of the current year to the prior year and should provide an analysis of the agency’s overall financial position and results of operations to assist users in assessing whether that financial position has improved or deteriorated as a result of the year’s activities. The MD&A should also include a discussion of key financial measures that emphasize financial trends and assess financial operations. According to OMB, the passage of the Sarbanes–Oxley Act of 2002 served as an impetus for the federal government to reevaluate its current policies related to internal control over financial reporting and management’s related responsibilities. While section 404 of the Sarbanes–Oxley Act created a new requirement for managers of publicly traded companies to report on the internal controls over financial reporting, federal managers have been subject to similar internal-control reporting requirements for many years. Federal agencies are subject to many legislative and regulatory requirements that promote and support effective internal control: 31 U.S.C. § 3512(c), (d), commonly referred to as FMFIA, provides the statutory basis for management’s responsibility for, and assessment of, internal control. OMB Circular No. A-123, Management’s Responsibility for Internal Control (rev. Dec. 21, 2004), sets out the guidance for implementing the statute’s provisions. The CFO Act of 1990 requires agency CFOs to maintain an integrated accounting and financial management system that includes financial reporting and internal controls. 31 U.S.C. § 902(a)(3). The Federal Financial Management Improvement Act (FFMIA) of 1996, as implemented by OMB Circular No. A-127, Financial Management Systems (rev. Dec. 1, 2004), requires the 24 CFO Act agencies to implement and maintain integrated financial management systems that comply substantially with federal financial management system requirements, applicable federal accounting standards, and the U.S. Standard Government Ledger at the transaction level. The Inspector General Act of 1978, as amended, requires Inspectors General to submit semiannual reports to Congress on significant abuses and deficiencies identified during agency reviews, and recommended actions to correct those deficiencies. 5 U.S.C. Appx. § 5. Government Auditing Standards, GAO-03-673G (rev. June 2003) (commonly referred to as the “Yellow Book”), and OMB Bulletin No. 06- 03, Audit Requirements for Federal Financial Statements, (Aug. 23, 2006), require auditors to report on internal control as part of a federal agency financial-statement audit, including a description of reportable conditions and material weaknesses in internal control over financial reporting. Recent federal governmentwide initiatives have contributed to improvements in financial management and placed greater emphasis on implementing and maintaining effective internal control over financial reporting. In December 2004, OMB issued a significant update to its Circular No. A-123, the implementing guidance for FMFIA. The update requires the 24 CFO Act agencies to include the FMFIA annual report in their PAR, under the heading “Management Assurances.” The FMFIA annual report must include a separate assurance on internal control over financial reporting, along with a report on identified material weaknesses and actions taken by management to correct those weaknesses. FMFIA and OMB Circular No. A-123 apply to each of the three objectives of internal control outlined in our Standards For Internal Control in the Federal Government: effective and efficient operations, reliable financial reporting, and compliance with applicable laws and regulations. OMB Circular No. A-123 calls for internal control standards to be applied consistently toward each of the objectives. The circular’s new Appendix A, which applies only to the 24 CFO Act agencies, requires management to document the process and methodology for applying A-123 standards when assessing internal control over financial reporting. Appendix A also requires management to use a separate materiality level when assessing internal control over financial reporting. The agency head’s annual assurance statement on the effectiveness of internal control over financial reporting required by Appendix A is a subset of the assurance statement required under FMFIA on the overall internal control of the agency. Audit committees are becoming increasingly important in federal entities and public companies as a mechanism to improve accountability and enhance oversight. Overall, in the federal government, audit committees are intended to protect the public interest by promoting and facilitating effective accountability and financial management, which is accomplished by providing management with independent, objective, and experienced advice and counsel. In 2002, the Government Finance Officers Association (GFOA)—a professional association of state and local finance officers—recommended that every government entity establish an audit committee or its equivalent. An audit committee can facilitate communication between management, the auditor, and the governing board, according to GFOA, and is also useful in focusing on and documenting the process for managing the organization’s financial statement audit. GFOA’s guidelines for establishing an audit committee include recommendations that (1) the audit committee should be formally established by charter, enabling resolution, or other appropriate legal means; (2) the members of the audit committee collectively should possess the expertise and experience in accounting, auditing, financial reporting, and finance needed to understand and resolve issues raised by the independent audit of the financial statements; and (3) a majority of the members of the audit committee should be selected from outside of management. GFOA also states that the audit committee’s primary responsibility should be to oversee the independent audit of the government’s financial statements, from the selection of the independent auditor to the resolution of audit findings. GFOA further recommends that the audit committee should present annually to the governing board and management a written report of how it has discharged its duties and met its responsibilities, and that the report be made public. The corporate failures and fraud that resulted in substantial financial losses to institutional and individual investors at the turn of the 21st century led to renewed focus on accountability and governance in public companies and culminated in the enactment of the Sarbanes-Oxley Act of 2002, which enhanced the disclosure and internal control requirements imposed by the Securities Exchange Act of 1934 as amended (Exchange Act); the Sarbanes-Oxley Act also implemented new accounting reforms for public companies. The Sarbanes-Oxley Act contains provisions for the governance, auditing, and financial reporting of public companies, including provisions intended to deter corporate accounting fraud and corruption and to punish violators. The 2002 act generally applies to companies required to file reports with the Securities and Exchange Commission (SEC) under the Securities and Exchange Act of 1934. The Exchange Act, including SEC implementing regulations, requires publicly traded companies to make periodic filings with the SEC that disclose their financial status and changes in financial condition, including annual and quarterly financial reports. Annually, public companies file reports containing audited financial statements prepared in conformity with generally accepted accounting principles (GAAP) and audited by registered accounting firms. Quarterly reports, which may be unaudited, contain financial statements and the MD&A. In addition to the company’s financial statements, annual filings contain information including (1) selected financial data, (2) supplementary financial information, and (3) the MD&A of the company’s financial condition and results of operations. The objective of the MD&A is to enable the reader to assess material changes in financial condition and the results of operations of the company. The MD&A is not audited; however, the auditor is required to consider whether the information is materially consistent with information appearing in the financial statements. The SEC reviews a selection of annual and quarterly filings for compliance with accounting and disclosure requirements. Generally, the MD&A is required to contain a discussion of material changes in liquidity, capital resources, off-balance sheet arrangements, aggregate contractual obligations, and results of operations; known material trends, events, and uncertainties that could render historical financial information non-indicative of future operations or financial condition; the cause of material changes in line items of the interim financial statements from prior-period amounts; and any other information necessary for an understanding of the company’s financial condition, changes in financial condition, and results of operations. Since the enactment in 2002 of the Sarbanes-Oxley Act, public companies have been required by section 404 to file annual reports with the SEC that include (1) management’s assessment of the effectiveness of internal controls over financial reporting, and (2) the auditor’s attestation and report on management’s assessment. Public companies are also required to disclose in both quarterly and annual reports filed with the SEC any changes in their internal control over financial reporting that occurred during the last fiscal quarter that has materially affected, or is reasonably likely to affect, the company’s internal control over financial reporting. In addition, most companies are required to evaluate the effectiveness, as of the end of each fiscal quarter, of its disclosure controls and procedures and disclose in its quarterly report filed with the SEC the conclusions of the company's CEO and CFO regarding the effectiveness of such procedures. Under SEC rules adopted pursuant to section 302 of the Sarbanes–Oxley Act, each annual and quarterly report a public company files with the SEC must include, as an exhibit, the certification signed by the company’s CEO and CFO stating in pertinent part that they each have reviewed the report being filed and that, based on their knowledge, it does not contain untrue statements or omissions of a material fact resulting in a misleading report and that, based on their knowledge, the financial information in the report is fairly presented. The act includes criminal penalties for certifying the financial statements while knowing that the financial statements do not fairly present the financial condition and results of the public company. The certification requirement motivated corporate executives and managers to increase their scrutiny of the company financial statements and, in many cases, put specific accountability mechanisms in place in their companies to help assure reliable financial statements. The SEC’s Division of Corporate Finance reviews public company filings periodically to determine whether publicly held companies are meeting their disclosure requirements and whether improvements are needed in the quality of the disclosures. To meet the SEC's requirements for disclosure, a company issuing securities must make available all information, whether it is positive or negative, that might be relevant to an investor's decision to buy, sell, or hold securities in the company. Internal control serves as a first line of defense in safeguarding assets, preventing and detecting errors and fraud, and in providing assurance over the reliability of financial reporting. Internal control is defined as a process that is effected by an entity’s board of directors, management, and other personnel, and is designed to provide reasonable assurance regarding the achievement of the following objectives: (1) effectiveness and efficiency of operations; (2) reliability of financial reporting; and (3) compliance with laws and regulations. Section 404 of the Sarbanes–Oxley Act establishes requirements on internal control for companies and auditors. It requires companies to publicly report on (1) management’s responsibility for establishing and maintaining an adequate internal control structure, including controls over financial reporting and (2) the results of management’s assessment of the effectiveness of internal control over financial reporting. Section 404 requires accounting firms that serve as external auditors for public companies to (1) attest to the assessment made by the companies’ management and (2) report on the results of their attestation and whether they agree with management’s assessment of the company’s internal control over financial reporting. Internal control over financial reporting is further defined in SEC regulations implementing Section 404. These regulations define internal control over financial reporting as a process providing reasonable assurance regarding the preparation of financial statements and the reliability of financial reporting, including policies and procedures that do the following: pertain to the maintenance of records that accurately and fairly reflect the transactions and dispositions of company assets; provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in conformity with GAAP, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of company assets. Independent audit committees have become, within public companies, an integral part of governance and oversight over financial reporting, internal control, and the audit process. The 1987 Treadway Commission’s Report on Fraudulent Financial Reporting recognized as a key practice in reducing fraudulent financial reporting the establishment by the company’s board of directors of “an informed, vigilant, and effective” audit committee to oversee the financial reporting process. In 1998, the New York Stock Exchange (NYSE) and the National Association of Securities Dealers (NASD) formed the Blue Ribbon Committee on Improving the Effectiveness of Corporate Audit Committees. The committee released a 10-point plan in 1999 toward improving audit committee effectiveness. NYSE-, Amex-, and NASD-listing standards—which were the primary guidance for audit committees of public companies—were changed to reflect the recommendations of the Blue Ribbon Committee. Although this guidance, as well as recommendations of the Treadway Commission, existed prior to enactment of the Sarbanes–Oxley Act of 2002, the act provided a statutory basis—primarily in sections 202, 204, 301, and 407— for the composition and responsibilities of public-company audit committees in provisions similar to the Treadway Commission and the Blue Ribbon Committee recommendations. Section 301 of the Sarbanes–Oxley Act of 2002 requires that audit committee members be selected from the company’s board of directors and that they be independent (i.e., unaffiliated with the company and receiving no consulting fee, advisory fee, or other compensatory fee from the company). The audit committee is responsible for the appointment, compensation, and oversight of the auditor, oversight of company management regarding financial reporting, and the resolution of disagreements between management and the auditor. Finally, Section 301 provides that the audit committee should have the authority and funding to engage advisors when necessary; ensure that processes are in place for the receipt, retention, and treatment of any complaints from “whistle-blowers” about accounting, internal controls, or auditing issues; and maintain open channels for employees to use in communicating knowledge of malfeasance or errors to the audit committee without fear of management retaliation. Section 202 of the act requires the audit committee to preapprove all audit and nonaudit services by an auditor to guard against potential conflicts that could occur if services such as bookkeeping and information-system design and implementation are provided by the company’s auditor. Section 204 of the act requires that the auditor report to the audit committee all critical accounting policies followed in the course of an audit, all alternative accounting treatments within GAAP related to material items discussed with company management, and other material written communications between the auditor and company management. Finally, Section 407 of the act and implementing SEC regulations requires public companies to disclose whether the audit committee has at least one financial expert, the expert’s name, and the expert’s independence from management. If the company does not have a financial expert on the audit committee, it is required to explain why. Until 1997, Amtrak was classified as a mixed-ownership government corporation under the Government Corporation Control Act. Government Corporation Control Act was intended to make government corporations accountable to Congress for their operations while allowing them the flexibility and autonomy needed for their commercial activities. Generally, a mixed-ownership corporation can be defined as a corporation with both government and private equity. In the case of Amtrak, the federal government held its preferred stock, and there were private entities that held common stock (three railroads and a holding company). The Amtrak Reform and Accountability Act of 1997 changed Amtrak’s status as a mixed- ownership government corporation by removing Amtrak from the list of mixed-ownership government corporations in the context of making Amtrak operationally self-sufficient by 2002. As we noted in our October 2005 report, today Amtrak is most similar to a “government-established private corporation.” Consistent with Amtrak-specific statutory provisions in Title 49 of the U.S. Code, Amtrak’s management and Board of Directors annually shall submit the financial statements to Congress with its operations reports. The annual financial report prepared and issued by Amtrak includes the audited financial statements and accompanying notes. However, the report does not include an MD&A section. Amtrak’s annual financial statements are required to be submitted to Congress, but are not submitted to, or formally reviewed by, OMB or any regulatory agency. However, Amtrak is required in its grant and loan agreement to produce a variety of daily, monthly, and annual reports that are submitted to its board, Congress, and FRA. The monthly performance report is an extensive report averaging 80 to 90 pages that contains financial results, route performance, workforce statistics, and performance indicators; it is also posted to Amtrak’s Web site. As a government-established private corporation, Amtrak is not subject to the internal control requirements that govern either federal entities or publicly traded companies, and thus its annual report does not include a management report on internal control. An annual audit is performed using Government Auditing Standards; therefore, Amtrak’s management and Board of Directors receive a report on internal controls and compliance with laws, regulations, contracts, and grant agreements. However, the internal control report is not included in Amtrak’s annual report. In our October 2005 report, we noted that DOT officials told us that they receive the internal control and compliance report. We also stated in our October 2005 report that Amtrak officials were not able to provide us with a distribution list and they had no recollection of the report being requested by, or sent to, any external party. In its original authorizing legislation in 1970, Amtrak’s Board of Directors was authorized for 15 members, but there have never been more than 13 members serving. The current limit of 7 members was a reduction from 9 made by the Amtrak Reform and Accountability Act of 1997. The members are appointed by the President with the advice and consent of the Senate. The board has operated with less than a full complement of 7 voting members since July 2003. Between October 2003 and June 2004, the board had only 2 voting members (excluding the Secretary of Transportation or his designee). As of September 2006, the board had 5 members (excluding the Secretary of Transportation or his designee and the President of Amtrak); however, the term of 2 members is expiring in January 2007, so the board will be back to 3 members. Amtrak’s bylaws also authorize the establishment of committees to assist the board in carrying out its management responsibilities. In March 2002, the board eliminated ad hoc committees, along with the Corporate Strategy Committee and the Safety, Service, and Quality Committee. At that time, committees were established for audits, corporate affairs, finance, compensation and personnel, and legal affairs. Amtrak’s bylaws permit it to conduct periodic meetings between the Board of Directors and the shareholders, as necessary. Following enactment of the Amtrak Improvement Act of 1981, which abolished the election of any members of the Board of Directors by the common or preferred shareholders, Amtrak has not held a shareholders’ meeting. Currently the board is using the former audit committee charter in carrying out its responsibilities for the oversight of its accounting and financial reporting processes and the audits of Amtrak’s financial statements by an independent auditor. Since the Board of Directors includes the President and CEO, the audit committee would not be considered “independent” under the requirements and practices for public companies, as provided in section 301 of the Sarbanes–Oxley Act of 2002. In commenting on a draft of our October 2005 report, both DOT and Amtrak officials told us that, given the limited number of board members, Amtrak’s full board of directors had assumed the functions of the audit committee. DOT officials said these functions included meeting with Amtrak’s auditor to discuss audit and internal control issues, and that some of these meetings were held without the presence of Amtrak management. Our analysis showed that the board performed some audit committee oversight functions. Currently, the board is using the audit committee charter in carrying out its responsibilities for the oversight of the corporation’s accounting and financial reporting processes and the audits of Amtrak’s financial statements by an independent auditor. Currently, Amtrak’s financial statements do not include an MD&A, an important part of financial statements that is required for federal entities and public companies. The MD&A provides users with information relevant to an assessment of the organization’s financial condition and the results of its operations as determined by an evaluation of the amounts and certainty of cash flows from operations and from outside sources. For a hybrid organization such as Amtrak—a for-profit corporation that receives substantial federal subsidies—an MD&A would seem especially important to understand the numbers presented in its financial statements, and for users of the financial statements to interpret material changes in financial condition and the results of operations. Currently, Amtrak does issue a variety of reports, but does not issue quarterly financial statements that include footnotes. Public companies are required to file quarterly financial statements with footnotes and MD&A with the SEC. Under OMB Circular No. A-136, the executive agencies required to submit annual financial statements under the CFO Act, GMRA, and ATDA (whose requirements are now all codified at 31 U.S.C. § 3515) are also required to submit quarterly financial statements without footnotes to OMB. To issue quarterly financial statements, an organization must adopt a rigorous financial reporting process that, by its frequency, becomes more practiced and routine. Companies that are more successful at closing their accounting systems and issuing financial statements on a regular basis tend to have more automated systems and routine processes, which can minimize fraud and errors. We previously recommended that Amtrak should engage an independent public accountant to provide review-level attestation work on Amtrak’s quarterly financial statements in order to strengthen financial reporting procedures. Preparation of quarterly financial statements with footnotes is a basic financial reporting function that contributes to the overall effectiveness of financial reporting and the organization’s control environment. An important provision of the Sarbanes–Oxley Act, section 302, requires the CEO and CFO of public companies to certify that they have reviewed the company’s financial statements and that, based on their knowledge, the financial statements do not contain any untrue statements or omissions of material fact; also, they must certify that the financial statements are fairly presented. Amtrak’s executives are not required to so certify the organization’s financial statements. Amtrak’s CEO and CFO would need to implement additional internal processes and controls to allow them to make such a certification. Because Amtrak relies heavily on federal subsidies, such a certification process would be useful for those charged with making decisions about the level of financial subsidies that are being used. Currently, Amtrak is required to provide various financial and performance reports to FRA and/or DOT; however, Amtrak’s financial statements are not reviewed by OMB or any other regulatory agency. Requiring Amtrak’s financial statements to be filed with, and subject to review by, SEC or OMB (or both) could further strengthen accountability and assurance that Amtrak’s financial statements represent its true financial condition. If Congress were to require Amtrak to file annual reports and other periodic reports with the SEC, Amtrak would need to adhere to the SEC’s regulations and guidance, which require consistent disclosure of financial and operations information. If Congress were to require Amtrak to submit its financial report to OMB, Amtrak would need to comply with appropriate OMB and federal financial reporting regulations and guidance, and respond to OMB’s inquiries about Amtrak’s reported financial information. Currently, Amtrak does not have requirements for management to evaluate and report on internal control effectiveness. A management evaluation of the effectiveness of internal control and a management report on the results of the assessment holds management accountable for understanding the organization’s internal control, recognizing and correcting deficiencies, and maintaining effective internal controls. FMFIA and OMB Circular No. A-123 and section 404(a) of the Sarbanes–Oxley Act have requirements for management’s assessment of internal controls for federal agencies and public companies, respectively. An auditor’s opinion on the effectiveness of internal control provides an independent assessment of management’s assessment of its internal controls. Although not required for federal entities, we support internal control opinions as an important accountability mechanism. In addition, an independent auditor’s opinion on internal control was a key provision of the Sarbanes–Oxley Act. Under section 404(b), public companies are required to have an independent auditor attest to, and report on, management’s assessment of the effectiveness of internal control over financial reporting. Amtrak currently does not have an audit committee separate from its Board of Directors due to its current board size. A minimum of three audit committee members is required for NYSE-listed companies, and a minimum of three members was recommended by the Blue Ribbon Committee on Improving the Effectiveness of Corporate Audit Committees. Because Amtrak relies heavily on federal subsidies, an audit committee with duties and responsibilities that mirror those of publicly traded companies and meets regularly is important to oversight of Amtrak’s accountability for federal funds. The following are GAO’s comments on National Railroad Passenger Corporation’s letter dated October 23, 2006. 1. Our report is not intended to imply that Amtrak’s mission is to generate profits rather than provide services that produce public benefits on a break-even basis. In fact, the first section of the report discusses the characteristics (both financial and non-financial) of the types of service provided by intercity passenger rail in the United States and the types of service that could increase the transportation benefits and public benefits of intercity passenger rail. Regarding operating losses, we recognize that Amtrak’s operating loss is projected to decrease in fiscal year 2006 and have changed the report to reflect that, instead of increasing, operating losses continue to remain high. Finally, we do not believe our report is inconsistent in how operating loss is portrayed. Non-cash items such as depreciation and interest expenses are legitimate expenses to the business and were reported based on Amtrak’s audited financial statements. The report also includes a figure excluding these items to illustrate their relative contribution over Amtrak’s reported cash losses. In our discussion of the financial performance of routes, we used the route financial data provided to us by Amtrak, which does not include non-cash items such as depreciation charges. 2. The trend in passenger rail revenue between fiscal years 2002 and 2005 was stable. Based on data provided by Amtrak we included a footnote to recognize the projected increase in passenger rail revenue in fiscal year 2006. We have eliminated any reference to “promotional pricing” being the reason for revenue decreases. 3. We recognize that a significant percentage of long distance passengers that are not traveling for work purposes may be traveling for family or personal/family business reasons. This is still a form of leisure travel and we have modified our definition of “leisure” to include travel for family or personal business reasons. Regarding long distance passengers traveling less than 500 miles, our report notes that many— but certainly not all—of these passenger trips may have characteristics similar to those on corridor routes. The example cited in the report, on the Empire Builder route, is intended to illustrate the type of circumstances where this may apply. Regarding the financial performance of long distance routes, we agree that on a per passenger mile basis the difference between long distance service and other non- NEC trains may be attributable to state subsidies. Our report notes that one reason for the wide variance in financial performance among corridor routes is the level of state support. 4. Our report also recognizes the growth in state-supported services and that these services are the fastest growing in terms of ridership and illustrate the significant potential for further growth. Finally, we agree that on state-supported routes, states play a much greater decision making role. We have changed our report to recognize this role. 5. We agree that rail network capacity is an important national policy issue and that freight and passenger railroads, as well as governments at all levels need to work together to address this issue. This will be particularly important in the future as rail infrastructure capacity continues to become constrained. Our report discusses the challenges associated with addressing this issue. We also address the issue of cost sharing between the federal and state governments and how this is common in some transportation modes other than intercity passenger rail. Moreover, we identify factors that need to be considered in making federal investments in private infrastructure. Finally, the report identifies some of the factors as to why commuter railroads pay amounts different from incremental cost to access freight and other privately owned infrastructure. It was for this reason that we made a qualitative, rather than a quantitative, comparison between Amtrak and commuter rail infrastructure access costs. In addition to the above individual, Randy Williamson (Assistant Director), Tida Barakat, Jay Cherlow, Jeanette Franzel, Greg Hanna, Bert Japikse, Richard Jorgenson, Ryan Lambert, Kimberly McGatlin, John Saylor, Stan Stenersen, Lacy Vong, and Diana Zinkl made key contributions to this report. | Intercity passenger rail service is at a critical juncture in the United States. Amtrak, the current service provider, requires $1 billion a year in federal subsidies to stay financially viable but cannot keep pace with its deteriorating infrastructure. At the same time, the federal government faces growing fiscal challenges. To assist the Congress, GAO reviewed (1) the existing U.S. system and its potential benefits, (2) how foreign countries have handled passenger rail reform and how well the United States is positioned to consider reform, (3) challenges inherent in attempting reform efforts, and (4) potential options for the federal role in intercity passenger rail. GAO analyzed data on intercity passenger rail performance and studied reform efforts in Canada, France, Germany, Japan, and the United Kingdom. The existing intercity passenger rail system is in poor financial condition and the current structure does not effectively target federal funds to where they provide the greatest public benefits, such as transportation congestion relief. Routes of 750 miles or more, while providing service for some rural areas and connections between regions, show limited public benefits for dollars expended. These routes account for 15 percent of riders but 80 percent of financial losses. "Corridor" routes (generally less than 500 miles in length) have higher ridership, perform better financially, and appear to offer greater potential for public benefits. The countries GAO studied varied in their reform approach, but their experience shows the United States needs to consider three key elements in attempting any reform: (1) define national policy goals, (2) define the roles of government and other participants, and (3) establish stable funding. Countries found these elements important in setting the role of passenger rail in the national transportation system and increasing the benefit from investing in passenger rail. Currently, however, the United States is not well positioned to address these key elements. The goals or expected outcomes of intercity passenger rail policies are ambiguous, participants' roles are unclear, and there is widespread disagreement about the level of funding to devote to this effort. Amtrak is taking actions within its authority to reduce costs and increase efficiency, but Amtrak is not in a position to address all key elements. To undertake reform, federal leadership is needed. Addressing key elements of reform poses many challenges, because those who have a stake in the process have divergent goals or points of view. Amtrak workers, freight railroads that own much of the rail system over which passenger trains operate, and federal and state governments would be among those affected. The diversity of viewpoints poses challenges for determining both the overall goal for passenger rail in the United States and the federal role in achieving this goal. Funding-related challenges include identifying how to pay for achieving these goals and how to overcome disadvantages intercity passenger rail faces relative to leveraging of federal funds. Although federal-state cost sharing is common in highway and transit programs, states face difficulty leveraging their expenditures on rail service. There are four main options for the federal role in intercity passenger rail service: (1) keep the existing structure and funding, (2) make incremental changes to improve financial or operational performance, (3) discontinue federal involvement, or (4) fundamentally restructure the system. Each option has advantages and disadvantages, and each faces its own challenges. Each requires some level of federal funding, a clear articulation of expected goals, and, except for the status quo option, substantial time to implement. Of these options, the fourth--fundamental restructuring--would allow for effectively integrating rail into the national transportation system and substantially improving overall performance and accountability. |
As the lead federal agency for maritime homeland security within the Department of Homeland Security, the Coast Guard is responsible for homeland and nonhomeland security missions, including ensuring security in ports and waterways and along coastlines, conducting search and rescue missions, interdicting drug shipments and illegal aliens, enforcing fisheries laws, and responding to reports of pollution. The deepwater fleet, which consists of 186 aircraft and 88 cutters of various sizes and capabilities, plays a critical role in all of these missions. As shown in table 1, the fleet includes fixed-wing aircraft, helicopters, and cutters of varying lengths. Some Coast Guard deepwater cutters were built in the 1960s. Notwithstanding extensive overhauls and other upgrades, a number of the cutters are nearing the end of their estimated service lives. Similarly, while a number of the deepwater legacy aircraft have received upgrades in engines, operating systems, and sensor equipment since they were originally built, they too have limitations in their operating capabilities. In 1996, the Coast Guard began developing what came to be known as the Integrated Deepwater System acquisition program as its major effort to replace or modernize these aircraft and cutters. This Deepwater program is designed to replace some assets—such as deteriorating cutters—with new cutters and upgrade other assets—such as some types of helicopters—so they can meet new performance requirements. The Deepwater program represents a unique approach to a major acquisition in that the Coast Guard is relying on a prime contractor—the system integrator—to identify and deliver the assets needed to meet a set of mission requirements the Coast Guard has specified. In 2002, the Coast Guard awarded a contract to Integrated Coast Guard Systems (ICGS) as the system integrator for the Deepwater program. ICGS has two main subcontractors—Lockheed Martin and Northrop Grumman—that in turn contract with other subcontractors. The resulting program is designed to provide an improved, integrated system of aircraft, cutters, and unmanned aerial vehicles to be linked effectively through systems that provide command, control, communications, computer, intelligence, surveillance, reconnaissance, and supporting logistics. We have been reviewing the Deepwater program for several years. In recent reports we have pointed out difficulties the Coast Guard has been having in managing the Deepwater program and ensuring that the acquisition schedule is up to date and on schedule. The existing schedule calls for acquisition of new assets under the Coast Guard’s Deepwater program to occur over an approximately 20-year period. By 2007, for example, the Coast Guard is to receive the first National Security Cutter, which will have the capability to conduct military missions related to homeland security. Plans call for 6 to 8 of these cutters to replace the 12 existing 378-foot cutters. However, in order to carry out its mission effectively, the Coast Guard will also need to keep all of the deepwater legacy assets operational until they can be replaced or upgraded. Coast Guard condition measures show that the deepwater legacy assets generally declined between 2000 and 2004, but the Coast Guard’s available condition measures are inadequate to capture the full extent of the decline in the condition of deepwater assets with any degree of precision. Other evidence we gathered, such as information from discussions with maintenance personnel, point to conditions that may be more severe than the available measures indicate. The Coast Guard acknowledges that it needs better condition measures but has not yet finalized or implemented such measures. During fiscal years 2000 through 2004, the Coast Guard’s various condition measures show a general decline, although there were year-to-year fluctuations (see table 2). For deepwater legacy aircraft, a key summary measure of the condition—the availability index (the percentage of time aircraft are available to perform their missions)—showed that except for the HU-25 medium-range surveillance aircraft, the assets continued to perform close to or above fleet availability standards over the 5-year period. In contrast, other condition measures for aircraft, such as cost per flight hour and labor hours per flight hour, generally reflected some deterioration. For cutters, a key summary measure of condition—percent of time free of major casualties—fluctuated but generally remained well below target levels. The number of major casualties generally rose from fiscal years 2000 through 2003, and then dropped slightly in fiscal year 2004. Another, albeit less direct, measure of an asset’s condition is deferred maintenance—the amount of scheduled maintenance that must be postponed on an asset in order to pay for unscheduled repairs. Such deferrals can occur when the Coast Guard does not have enough money to absorb unexpected maintenance expenditures and still perform all of its scheduled maintenance, thus creating a backlog. For example, in spring 2004, while on a counter-drug mission, the 210-foot cutter Active experienced problems in the condition of its flight deck that were to be corrected during its scheduled depot-level maintenance. However, because of a shortage of maintenance funds, the maintenance was deferred and the flight deck not repaired. As a result, the cutter lost 50 percent of its patrol time, since the required support helicopters could not take off from or land on it. As table 3 shows, deferred maintenance does not show a clear pattern across all classes of deepwater legacy assets. For the deepwater legacy aircraft, the overall amount of estimated deferred maintenance increased each year during fiscal years 2002 through 2004, from $12.3 million to about $24.6 million. However, most of the increase came for one type of asset, the HH-60 helicopter, and the increase came mainly from shortening the interval between scheduled depot-level maintenance from 60 months to 48 months—thereby increasing the scheduled maintenance workload— and not from having to divert money to deal with unscheduled maintenance. For the deepwater cutters, the amount of estimated deferred maintenance increased from fiscal year 2002 to 2003, but then dropped significantly in fiscal year 2004. The decrease in fiscal year 2004 came mainly because (1) the Coast Guard ceased maintenance on an icebreaker, thus freeing up some maintenance funds; and (2) the Coast Guard also received additional operational and maintenance funding, allowing it to deal with both scheduled and unscheduled maintenance. Thus, the drop in the estimate of deferred maintenance costs for fiscal year 2004 is not necessarily an indicator that the condition of the legacy assets was improving; it could result from the Coast Guard having more money to address the maintenance needs. At the time we began our work, the Coast Guard’s condition measures were not sufficiently robust to systematically link assets’ condition with degradation in mission capabilities. As we discussed with Coast Guard officials, without such condition measures, the extent and severity of the decline in the existing deepwater legacy assets and their true condition cannot be fully determined. As a result, the picture that emerges regarding the condition of the deepwater legacy assets based on current Coast Guard condition measures should be viewed with some caution. While there is no systematic, quantitative evidence sufficient to demonstrate that deepwater legacy assets its deepwater legacy assets are “failing at an unsustainable rate” as the Coast Guard has asserted, this does not mean the assets are in good condition or have been performing their missions safely, reliably and at levels that meet or exceed Coast Guard standards. We identified two factors that need to be considered to put these condition measures in proper context. The first factor deals with limitations in the measures themselves. Simply put, the Coast Guard’s measures of asset condition do not fully capture the extent of the problems. As such, they may understate the decline in the legacy assets’ condition. More specifically, Coast Guard measures focus on events, such as flight mishaps or equipment casualties, but do not measure the extent to which these and other incidents degrade mission capabilities. Here are two examples in which the Coast Guard’s current measures are not sufficiently robust to systematically capture degradation in mission capabilities: The surface search radar system on the HC-130 long-range surveillance aircraft, called the APS-137 radar, is subject to frequent failures and is quickly becoming unsupportable, according to Coast Guard staff with whom we met. Flight crews use this radar to search for vessels in trouble and to monitor ships for illegal activity, such as transporting illicit drugs or illegal immigrants. When the radar fails, flight crews are reduced to looking out the window for targets, greatly reducing mission efficiency and effectiveness. A flight crew in Kodiak, Alaska, described this situation as being “like trying to locate a boat looking through a straw.” Mission capability degradations such as these are not reflected in the Coast Guard’s current condition measures. The 378-foot cutter Jarvis recently experienced a failure in one of its two main gas turbines shortly after embarking on a living marine resources and search and rescue mission. While Jarvis was able to accomplish its given mission, albeit at reduced speeds, this casualty rendered the cutter unable to respond to any emergency request it might have received—but did not in this case—to undertake a mission requiring higher speeds, such as drug interdiction. The Coast Guard condition measures are not robust enough to capture these distinctions in mission capability. The second factor that needs to be kept in mind is the compelling nature of the other evidence we gathered apart from the Coast Guard’s condition measures. This evidence, gleaned from information collected during our site visits and discussions with maintenance personnel, indicated deteriorating and obsolete systems and equipment as a major cause of the reduction in mission capabilities for a number of deepwater legacy aircraft and cutters. Such problems, however, are not captured by the Coast Guard’s condition measures. One example of this involves the HH-65 short-range recovery helicopter. While this helicopter consistently exceeded availability standards established by the Coast Guard over the 5-year period we examined, it is currently operating with underpowered engines that have become increasingly subject to power failures. As a result, Coast Guard pilots employ a number of work arounds, such as dumping fuel or leaving the rescue swimmer on scene if the load becomes too heavy. Further, because of increasing safety and reliability problems, the Coast Guard has also implemented a number of operational restrictions—such as not allowing the helicopter to land on helipads—to safeguard crew and passengers and prevent mishaps until all of the fleet’s engines can be replaced. The Coast Guard has recently recognized the need for improved measures to more accurately capture data on the extent to which its deepwater legacy assets are degraded in their mission capabilities, but as of April 2005, such measures had not yet been finalized or implemented. Subsequent to our inquiries regarding the lack of condition and mission capability measures, Coast Guard naval engineers reported that they had begun developing a “percent of time fully mission capable” measure to reflect the degree of mission capability, as well as measures to track cutter readiness. We agree that measures like this are needed—and as soon as possible. Further, current plans call for the measure, if approved, to be used for cutters, but not for aircraft. Consequently, even if this measure were to be implemented across the Coast Guard, there would still be no measure to address degradation in mission capabilities for aircraft. We will be exploring this issue further in our follow-on report. The Coast Guard has taken several actions to maintain, upgrade, and better manage its deepwater legacy assets. These include establishing a compendium of information for making decisions regarding maintenance and upgrades; performing more extensive maintenance between deployments; applying new business rules and strategies, at the Pacific Area Command, to better sustain the 378-foot high-endurance cutters through 2016; and exploring additional strategies for prioritizing the maintenance and capability enhancement projects needed on its legacy assets in an effort to provide more objective data on where to best spend budget dollars to achieve the greatest enhancements in mission capabilities. These additional efforts are likely helping to prevent a more rapid decline in the condition of these assets, but condition problems continue, and the efforts will likely involve additional costs. Since 2002, the Coast Guard has annually issued a Systems Integrated Near Term Support Strategy compendium. Among other things, this compendium consolidates information needed to make planning and budgeting decisions regarding maintenance and upgrades to sustain legacy assets. Its purpose is to serve as a tool for senior Coast Guard management in setting priorities and planning budgets. From this strategic document, the Coast Guard has identified a number of upgrades to improve the capabilities of the deepwater legacy aircraft and cutters. The most recent compendium (for fiscal year 2006) lists more than $1 billion worth of upgrades to the deepwater legacy assets. The planned upgrades identified in the compendium that have been approved and received initial funding account for an estimated $856 million the Coast Guard anticipates it will need to complete those projects. The approved upgrades for deepwater legacy assets are shown in table 4. Among the projects already begun is the re-engining of the HH-65 helicopters to increase the helicopter’s power and capabilities. The Coast Guard is also upgrading several other aviation systems in an effort to improve aircraft capabilities. Enhancements are also planned for certain classes of deepwater cutters. For example, during this fiscal year, the Coast Guard is to begin a maintenance effectiveness project on the 210 foot and 270-foot cutters. This project includes replacing major engineering subsystems with the goal of extending the cutters’ service lives until their replacement by the Offshore Patrol Cutter. Of the $856 million total estimated costs needed for the planned upgrades to the deepwater legacy assets listed above, $215 million has been allocated through fiscal year 2005 and the Coast Guard has requested another $217.3 million in its fiscal year 2006 budget. The remaining estimated costs of $423.7 million would have to be funded beyond fiscal year 2006. Coast Guard personnel consistently reported to us that crew members have to spend increasingly more time between missions to prepare for the next deployment. For example, to prevent further corrosion-related problems, air station maintenance personnel at the locations we visited said they have instituted additional measures, such as washing and applying fluid film to the aircraft prior to each deployment. Similar accounts were told by personnel working on cutters. For example, officers of the 270-foot cutter Northland told us that because of dated equipment and the deteriorating condition of its piping and other subsystems, crew members have to spend increasingly more time and resources while in port to prepare for their next deployment. While we could not verify these increases in time and resources because the Coast Guard does not capture data on these additional maintenance efforts, the need for increasing amounts of maintenance was a message we consistently heard from the operations and maintenance personnel with whom we met. Such efforts are likely helping to prevent a more rapid decline in the condition of these deepwater legacy assets, but it is important to note that even with the increasing amounts of maintenance, these assets are still losing mission capabilities because of deteriorating equipment and system failures. For example, in fiscal year 2004, one 378-foot cutter lost 98 counterdrug mission days because of a number of patrol-ending casualties—including the loss of ability to raise and lower boats and run major electrical equipment—requiring $1.2 million in emergency maintenance. Another 378-foot cutter lost 27 counterdrug mission days in the fall of 2004 when it required emergency dry-dock maintenance because of hydraulic oil leaking into the reduction gear. One effort is under way at the Coast Guard’s Pacific Area Command to improve maintenance practices for the 378-foot cutters. Pacific Area Command officials have recognized that a different approach to maintaining and sustaining legacy cutters may be needed and, as a first step, they have undertaken an initiative applying what they refer to as “new business rules and strategies” to better maintain the 378-foot high endurance cutters through 2016. Under the original Deepwater proposal, the final 378-foot cutter was to be decommissioned in 2013, but by 2005, that date had slipped to 2016. To help keep these cutters running through this date, Pacific Area Command officials are applying such rules and strategies as (1) ensuring that operations and maintenance staffs work closely together to determine priorities, (2) recognizing that maintaining or enhancing cutter capabilities will involve trade-off determinations, and (3) accepting the proposition that with limited funding not all cutters will be fully capable to perform all types of missions. Pacific Area Command officials believe that in combination, these principles and strategies will result in more cost-effective maintenance and resource allocation decisions—recognizing that difficult decisions will still have to be made to balance maintenance and operations. The Pacific Area Command’s new initiative has the potential for assisting the Coast Guard in making more informed choices regarding the best use of their resources, but the approach will likely require that the Coast Guard allocate additional maintenance funds. In particular, the Pacific Area Commander told us that in order for the 378-foot cutters to be properly maintained until their replacements become operational; the Coast Guard will have to provide additional funding for sustaining the 378 foot cutters. So far, the Coast Guard’s budget plans or requests do not address this potential need. In the past, we have recommended that the Coast Guard develop a long term strategy to set and assess levels of mission performance. We found this was an important step for the Coast Guard to take because it links mission performance levels to measurable outputs and goals so that the Coast Guard can better decide how limited budget dollars should be spent. The Coast Guard has recently begun to apply the principles behind such a strategy to (1) better prioritize the projects needed to upgrade legacy assets that will be part of the Deepwater program and (2) obtain the greatest overall mix of capabilities for its assets within its budget in order to maximize mission performance. The tool it is developing is called the Capital Asset Management Strategy (CAMS). CAMS, once fully implemented, is expected to help the Coast Guard to better manage its assets by linking funding decisions to asset condition. Unlike the Coast Guard’s current compendium, CAMS is designed to provide analyses on the capability trade-offs for upgrades and maintenance projects across asset classes, thereby allowing the Coast Guard to determine which combination of projects will provide the most capability for the dollars invested. For example, when trying to decide among potential project upgrades such as a HC-130 weather radar replacement, an HH-65 sliding cabin door replacement, or a 110-foot patrol boat fin stabilizer replacement, CAMS, once fully implemented, could provide the program managers with a recommended mix of project upgrades that would achieve the greatest capability enhancements based on the available budget. CAMS analyses are to be based on legacy asset condition and readiness data, asset retirement and replacement timelines, asset degradation estimates, project production rates, cost data, and mission utility rankings. Mission utility rankings will grade an asset’s importance to specific missions, such as search and rescue or counterdrug operations. Rankings may also be assigned to an asset’s critical subsystems, or may be altered based on an asset’s geographic location. For example, a 378-foot cutter may be critical to the success of fisheries patrols in the Pacific, but may not be as important for alien/migrant interdiction operations in the Caribbean. In addition, the Coast Guard plans to rank its missions based on their relative importance. Each of these elements is to form the basis for recommendations regarding which combination of upgrade and maintenance projects will provide the greatest enhancements to fleet capabilities. CAMS recommendations are not intended to be a replacement for the budget development process, but rather are to augment the information currently provided to decision-makers and be reviewed by several internal Coast Guard officials before final funding decisions are made. Further, in order to prevent user “gaming”—making assumptions in such a way as to assure a positive recommendation or outcome for a particular project— the Coast Guard is developing a series of job aids, manuals and training courses to ensure data consistency. Coast Guard officials expect to have the CAMS fully implemented by September 2005 and intend to use it while developing the Coast Guard’s fiscal year 2008 budget submission. Although it is too soon to assess the effectiveness of CAMS, we view this approach as a good faith effort toward knowledge-based budgeting for legacy asset sustainment. Since the inception of the Deepwater program, we have expressed concerns about the degree of risk in the acquisition approach and the Coast Guard’s ability to manage and oversee the program. Last year, we reported that, well into the contract’s second year, key components needed to manage the program and oversee the system integrator’s performance had not been effectively implemented. We also reported that the degree to which the program was on track could not be determined, because the Coast Guard was not updating its schedule. We detailed needed improvements in a number of areas, shown in table 5. These concerns have a direct bearing on any consideration to increase the program’s pace. Because the Coast Guard was having difficulty managing the Deepwater program at the pace it had anticipated, increasing the pace by attempting to speed the acquisition would only complicate the problem. The Coast Guard agreed with nearly all of our recommendations and has made progress in implementing some of them. In most cases, however, while actions are under way, management challenges remain that are likely to take some time to fully address. We have seen mixed success in the Coast Guard’s efforts to improve management of the program and contractor oversight. All four areas of concern—improving integrated project teams (IPT) , ensuring adequate staff for the program, planning for human capital requirements for field units receiving new assets, and updating the program’s schedule—have yet to be fully addressed. Although the Deepwater program has made some efforts to improve the effectiveness of IPTs, we continue to see evidence that more improvements are needed for the teams to do their jobs effectively. These teams, the Coast Guard’s primary tool for managing the program and overseeing the contractor, are generally chaired by a subcontractor representative and consist of members from subcontractors and the Coast Guard. The teams are responsible for overall program planning and management, asset integration, and overseeing delivery of specific Deepwater assets. Since our March 2004 report, the teams have been restructured, and 20 teams have charters setting forth their purpose, authority, and performance goals. And new, entry-level training is being provided to team members. Despite this progress, however, the needed changes are not yet sufficiently in place. A recent assessment by the Coast Guard of the system integrator’s performance found that roles and responsibilities in some teams continue to be unclear. Decision making is to a large extent stovepiped, and some teams still lack adequate authority to make decisions within their realm of responsibility. One source of difficulty for some team members has been the fact that each of the two major subcontractors has used its own databases and processes to manage different segments of the program. Decisions on air assets are made by Lockheed Martin, while decisions regarding surface assets are made by Northrop Grumman. This approach can lessen the likelihood that a “system of systems” outcome will be achieved. Officials told us that more attention is being paid to taking a systemwide approach and that the Coast Guard has emphasized the need to ensure that the two major subcontractors integrate their management systems. The Coast Guard has taken steps to more fully staff the Deepwater program, with mixed effects. In February 2005, the Deepwater program executive officer approved a revised human capital plan. The plan emphasizes workforce planning, including determining needed knowledge, skills, and abilities and developing ways to leverage institutional knowledge as staff rotate out of the program. This analysis is intended to help determine what gaps exist between needed skills and existing skills and to develop a plan to bridge these gaps. The Coast Guard has also taken some short-term steps to improve Deepwater program staffing, hiring contractors to assist with program support functions, shifting some positions from military to civilian to mitigate turnover risk, and identifying hard-to-fill positions and developing recruitment plans specifically for them. Finally, the Deepwater program and the Coast Guard’s acquisition branch have begun using an automated system for forecasting military rotation cycles, a step Deepwater officials believe will help with long range strategic workforce planning and analysis. Despite these actions, however, vacancies remain in the program, and some metrics that may have highlighted the need for more stability in the program’s staff have been removed from the new human capital plan. As of January 2005, 244 positions were assigned to the program, but only 206 of these were filled, a 16 percent vacancy rate. A year ago, 209 staff were assigned to the program. Further, the new human capital plan removes a performance goal that measured the percentage of billets filled at any given time. Coast Guard officials acknowledged that the prior plan’s goal of a 95 percent or higher fill rate was unduly optimistic and was a poor measure of the Coast Guard’s ability to meet its hiring goals. For example, billets for military personnel who plan to rotate into the program in the summer are created at the beginning of the budget year, leading the metric to count those positions as vacant from the beginning of the budget year until summer. Other performance metrics that were included in the prior plan to measure progress in human capital issues have also been removed. For example, to help ensure that incoming personnel received acquisition training and on-the-job training, a billet was included in the prior plan to serve as a floating training position that replacement personnel could use for a year before the departure of military incumbents. This position was never funded, and the new plan removes the billet. The Coast Guard recognizes the critical need to inform the operators who are to use the Deepwater assets of progress in the program, and officials stated that, on the basis of our recommendations, they have made a number of improvements in this area. A November 2004 analysis of the Deepwater program’s communication process, conducted in coordination with the National Graduate School, found that the communication and feedback processes were inadequate. Emphasis has now been placed on outreach to field personnel, with a multipronged approach involving customer surveys, face-to-face meetings, and presentations. We have not yet evaluated the effectiveness of the new approach. Human capital requirements for the Deepwater program—such as crew numbers and schedules, training, and support personnel—will have an increasing impact on the program’s ability to meet its goals as the pace at which assets are delivered to field units picks up. Recent assessments by Coast Guard performance monitors show this to be an area of concern.Coast Guard officials have expressed concern about whether the system integrator is appropriately considering human capital in systems engineering decisions. The system integrator is required to develop a workforce management plan for Deepwater, as well as “human factors engineering” plans for each Deepwater asset and for the overall system of systems. The Coast Guard rejected the contractor’s workforce management plan and several of the proposed human factors engineering plans as being inadequate. The rejections were due, in part, to the lack of an established and integrated system-level engineering approach that shows how issues relating to human capabilities and limitations of actually performing with the system will be approached. One performance monitor noted that, as of late 2004, requirements for staffing and training of maintenance facilities and organizations had yet to be determined. According to the Coast Guard, emphasis on a contractor’s approach to addressing human capital considerations is necessary to ensure that Deepwater goals are met, especially as they pertain to operational effectiveness and total ownership cost. The Coast Guard has recently undertaken efforts to update the original 2002 Deepwater acquisition schedule—an action that we suggested in our June 2004 report. The original schedule had milestone dates showing when work on an asset would begin and when delivery would be expected, as well as the integrated schedules of critical linkages between assets, but we found that the Coast Guard was not maintaining an updated and integrated version of the schedule. As a result, the Coast Guard could not demonstrate whether individual components and assets were being integrated and delivered on schedule and in critical sequence. As recently as October 2004, Deepwater performance monitors likewise expressed concern that the Coast Guard lacked adequate visibility into the program’s status and that lack of visibility into the schedules for component-level items prevented reliable forecasting and risk analysis. The Coast Guard has since taken steps to update the outdated schedule and has indicated that it plans to continue to update the schedule each month for internal management purposes and semiannually to support its budget planning efforts. We think this is an important step toward improving the Coast Guard’s management of the program because it provides a more tangible picture of progress as well as a baseline for holding contractors accountable. We will continue to work closely with the Coast Guard to ensure progress is made and to monitor how risks are mitigated. We have seen progress in terms of the rigor with which the Coast Guard is periodically assessing the system integrator’s performance, but concerns remain about the broader issues of accountability for achieving the overarching goals of minimizing total ownership costs and maximizing operational effectiveness. Improvements continue to be made to the criteria for assessing the system integrator’s performance. In March 2004, we reported that the process for assessing performance against specific contract tasks lacked rigor. The criteria for doing so have since been revised to more clearly reflect those that are objective, (that is, measured through automated tools against established metrics), and those that are subjective, meaning the narrative comments by Coast Guard performance monitors. Weights have been assigned to each set of evaluation factors, and the Coast Guard continues to refine the distribution of the weights to reach an appropriate balance between automated results and the eyewitness observations of the performance monitors. Coast Guard officials told us that they have also provided additional guidance and training to performance monitors. We found that efforts have been made to improve the consistency of the format used for their input in assessments of the system integrator’s performance. Coast Guard officials said that they are continuing to make improvements to ensure that performance monitors’ relevant observations are appropriately considered in making award fee determinations. It is important to note that although performance monitor comments are considered subjective, they are valuable inputs to assessing the system integrator’s performance, particularly when they are tied to measurable outcomes. It will be necessary for the Coast Guard to continue refining the award fee factors as the program progresses. In some cases, we noted that the performance monitors’ assessments differed vastly from the results of automated, data-driven assessments. For example, while schedule management is discussed in the Coast Guard’s most recent assessment of the system integrator’s performance as a major area of challenge and risk, the objective measure showed 100 percent compliance in this area. Another metric assesses the extent to which integrated product teams consider the impact of their decisions on the overall cost and effectiveness of the Deepwater program. Performance monitors reported that because system-level guidance had not been provided to the teams responsible for specific assets, they had a limited ability to see the whole picture and understand the impact of decisions on total ownership costs and operational effectiveness. However, the automated measure was again 100 percent compliance. Coast Guard officials said that, in some cases, the data-driven metrics do not accurately reflect the contractor’s performance. For the next award fee assessment, Deepwater officials plan to revise the metrics and place more weight on the performance monitors’ input, while ensuring that it is based on measurable outcomes. Changes have been made to the award fee metrics that place additional emphasis on the system integrator’s responsibility for making integrated project teams effective. Award fee criteria now incorporate specific aspects of how the integrator is managing the program, including administration, management commitment, collaboration, training, and empowerment of these teams. However, as discussed above, concerns remain about whether the teams are effectively accomplishing their goals. While the Coast Guard has developed models to measure the system integrator’s performance in operational effectiveness and total ownership costs, concrete results have not yet emerged. Minimizing total ownership costs and maximizing operational effectiveness are two of the overarching goals of the Deepwater program. The system integrator’s performance in these two areas will be a critical piece of information when the Coast Guard makes a decision about whether to award the contractor the first contract option period of 5 years. Initial decision making is to start next year. With regard to the operational effectiveness of the program, measuring the system integrator’s impact has yielded limited results to date because few of the new assets are operational. The Coast Guard has developed modeling capabilities to simulate the effect of the new capabilities on its ability to meet its missions. However, until additional assets become operational, progress toward this goal will be difficult to determine. With regard to total ownership costs, the Coast Guard does not plan to implement our recommendation. It has not adhered to its original plan, set forth in the Deepwater program management plan, of establishing as its baseline a cost not to exceed the dollar value of replacing the assets under a traditional approach (e.g., on an asset-by-asset basis rather than a system-of-systems approach). Although a cost baseline consistent with the program management plan’s approach was initially established, this number has not been rebaselined, as has the system integrator’s cost estimate baseline, and is not being used to evaluate the contractor’s progress in holding total ownership costs down. In practice, the baseline being used to measure total ownership cost is the system integrator’s own cost estimate. As we reported in March 2004, we believe that measuring the system integrator’s cost growth compared with its own cost proposal will tell the government nothing about whether it is gaining efficiencies by turning to the system of systems concept. Coast Guard officials stated that the contract total ownership cost and operational effectiveness baseline is adjusted based on approved decision memorandums from the Agency Acquisition Executive, the Vice Commandant of the Coast Guard. The Coast Guard reported taking steps to address our recommendations concerning cost control through competition. Our recommendations pertained to competition among second-tier suppliers and notification of “make” decisions. Competition among second-tier suppliers. Coast Guard officials told us that in making the decision about whether to award the first contract option, the government will specifically examine the system integrator’s ability to control costs by assessing the degree to which competition is fostered at the major subcontractor level. The evaluation will consider the subcontractors’ project management structure and processes to control costs, as well as how market surveys of similar assets and major subsystems are implemented. The Coast Guard is focusing its attention on those areas that were priced after the initial competition for the Deepwater contract was completed, such as the HH-65 re-engining and the C-130J missionization. For example, a new process implemented for the C-130J missionization was a requirement for competition in subcontracting and government approval of all subcontracts exceeding $2 million in order for the Coast Guard to monitor the integrator’s competition efforts. Notification of make decisions. According to the Federal Acquisition Regulation, the prime contractor is responsible for managing contract performance, including planning, placing, and administering subcontracts as necessary to ensure the lowest overall cost and technical risk to the government. When “make-or-buy programs” are required, the government may reserve the right to review and agree on the contractor’s make-or-buy program when necessary to ensure negotiation of reasonable contract prices, among other things. We recommended that the Coast Guard be notified of make decisions over $5 million in order to facilitate controlling costs through competition. We suggested the $5 million threshold because Lockheed Martin, one of the major subcontractors, considers that amount to be the threshold for considering its suppliers major. The Coast Guard has asked the system integrator, on a voluntary basis, to provide notification one week in advance of a make decision of $10 million or more based on the criteria in the Federal Acquisition Regulation.According to Coast Guard officials, to date, no make decision has exceeded $10 million since the request was made. The details implementing this recommendation have not yet been worked out, such as specifically who in the Coast Guard will monitor the subcontractors’ make decisions to ensure that the voluntary agreement is complied with. Our work to date suggests the costly and important Deepwater program will need constant monitoring and management attention to successfully accomplish its goals. In this respect, we identified three points that should be kept in mind in considering how to proceed with the program. First, the need to replace or upgrade deteriorating legacy assets is considerable. While the Coast Guard is making progress on developing (1) measures that better demonstrate how the deteriorating condition of the legacy assets impact on mission capabilities and (2) a strategy to better prioritize upgrades and maximize capabilities, it is clear that the deepwater legacy assets are insufficient for meeting all of the Coast Guard’s missions. Second, although the need to replace and upgrade assets is strong, there still are major risks in the Coast Guard’s acquisition approach. The cost increases and schedule slippages that have already occurred are warning signs. We will continue to work with the Coast Guard to determine how best to manage these risks so that the Deepwater missions can be accomplished in the most cost-effective way. Third, there are signs that as the Deepwater program moves ahead, the Coast Guard will continue to report more problems with sustaining existing assets, together with the attendant need for additional infusions of funding to deal with them. Some of these problems, such as those on the 378-foot cutters, are included in the compendium the Coast Guard uses to set sustainment priorities and plan budgets, but the Coast Guard has not allocated funds because the problems pertain to assets that are among the first to be replaced. However, projects to address these problems are nevertheless likely to be needed. We will continue to work with the Coast Guard to determine if there is a more systematic and comprehensive approach to keeping the Congress abreast of the potential bill for sustaining these assets. Mr. Chairman and Members of the Subcommittee, this completes my prepared statement. I would be happy to respond to any questions that you or other Members of the Subcommittee may have at this time. For information about this testimony, please contact Margaret Wrightson, Director, Homeland Security and Justice Issues, at (415) 904-2200, or [email protected]. Other individuals making key contributions to this testimony include Steven Calvo, Jerry Clark, Christopher Conrad, Adam Couvillion, Michele Fejfar, Geoffrey Hamilton, Julie Leetch, Michele Mackin, Christopher Miller, Stan Stenersen, and Linda Kay Willard. This is a work of the U.S. government and is not subject to copyright protection in the United States. It may be reproduced and distributed in its entirety without further permission from GAO. However, because this work may contain copyrighted images or other material, permission from the copyright holder may be necessary if you wish to reproduce this material separately. | In 2002, the Coast Guard began a multiyear, $19 billion to $24 billion acquisition program to replace or modernize its fleet of deepwater aircraft and cutters, so called because they are capable of operating many miles off the coast. For several years now, the Coast Guard has been warning that the existing fleet--especially cutters--was failing at an unsustainable rate, and it began studying options for replacing or modernizing the fleet more rapidly. Faster replacement is designed to avoid some of the costs that might be involved in keeping aging assets running for longer periods. This testimony, which is based both on current and past GAO work, addresses several issues related to these considerations: (1) changes in the condition of deepwater legacy assets during fiscal years 2000 through 2004; (2) actions the Coast Guard has taken to maintain and upgrade deepwater legacy assets; and (3) management challenges the Coast Guard faces in acquiring new assets, especially if a more aggressive schedule is adopted. Available Coast Guard condition measures indicate that the Coast Guard's deepwater legacy aircraft and cutters are generally declining, but these measures are inadequate to capture the full extent of the decline in the condition of deepwater assets with any degree of precision. GAO's field visits and interviews with Coast Guard staff, as well as reviews of other evidence, showed significant problems in a variety of the assets' systems and equipment. The Coast Guard has acknowledged that it needs to develop condition measures that more clearly demonstrate the extent to which asset conditions affect mission capabilities, but such measures have not yet been finalized or implemented. The Coast Guard has taken several types of actions to help keep the deepwater legacy assets operational, but these actions, while helpful, may not fully address mission capability issues and may require additional funding. For example, to help meet mission requirements, Coast Guard staff are performing more extensive maintenance between deployments, but even so, aircraft and cutters continue to lose mission capabilities. One Coast Guard command is using a new approach to help sustain the oldest class of cutters, but this approach will likely require additional funds--something not included thus far in Coast Guard budget plans or requests. If the Coast Guard adopts a more aggressive acquisition schedule, it will likely continue to face a number of challenges that have already affected its ability to effectively manage the Deepwater program. GAO has warned that the Coast Guard's acquisition strategy, which relies on a prime contractor ("system integrator") to identify and deliver the assets needed, carries substantial risks. In 2004, well into the contract's second year, key components for managing the program and overseeing the system integrator's performance had not been effectively implemented. While the Coast Guard has been addressing these problems--for example, putting more emphasis on competition as a means to control costs--many areas have not been fully addressed. A more aggressive acquisition schedule would only heighten the risks. |
Annually, nearly 1 million people buy a home using a mortgage that HUD’s Federal Housing Administration (FHA) insures. Private lenders, not FHA, make the loans to borrowers. FHA insures the lender against losses it may incur when a borrower defaults on his or her mortgage and the lender has to foreclose on the home. FHA provides this insurance through programs supported by its Mutual Mortgage Insurance Fund (the fund). It deposits into the fund the mortgage insurance premiums it collects from borrowers (when they initially get their loans and then as part of each monthly mortgage payment), as well as proceeds from the sale of foreclosed properties. FHA draws on the fund to reimburse lenders for their losses on foreclosed properties. FHA provides this insurance so that lenders will make mortgage loans with more lenient underwriting standards than “conventional” financing. FHA does this to open homeownership opportunities to households unable to meet the requirements of the private market for mortgages and mortgage insurance. For example, FHA insurance allows borrowers to make low down payments and finance closing costs as part of their loan rather than pay cash for those expenses. As a result, FHA plays a particularly important role among certain groups of potential homeowners, particularly first time buyers, minorities, and lower-income households. In fiscal year 2002, for instance, 72 percent of FHA-insured purchase mortgages went to first-time buyers. FHA relies on lenders to underwrite the loans it insures. This means lenders accept mortgage applications, obtain borrowers’ employment verifications and credit histories, and perform other tasks in the loan underwriting process, including ordering an appraisal on the property the borrower wants to purchase. FHA appraisals estimate the fair market value of the home to (1) protect the lender from loaning more than the home is probably worth (for FHA’s mortgage insurance purposes) and (2) minimize FHA’s losses when it has to sell foreclosed properties. According to FHA, the bulk of an appraiser’s time is spent estimating the property value. However, the appraiser must also spend some time performing and documenting a limited review of the property’s condition to ensure it meets the agency’s minimum property requirements. For example, the appraisal might address the condition of the roof and the operation of certain mechanical systems, such as the furnace. Consumers are responsible for protecting their own interests in the homebuying process. FHA and lenders expect buyers will gather the information they need to make informed decisions about home purchases. FHA encourages buyers to protect their interests by getting a home inspection before finalizing a contract to purchase a house, but does not require them to do so. Homebuyers, particularly those purchasing their first homes, can face a daunting array of steps, requirements, and new terminology as they navigate the homebuying process—many of which they encounter before they might apply for a FHA-insured mortgage. For example, prior to searching for a home, a buyer may choose to work with a lender to obtain pre-approval for a mortgage, which would involve verifying employment history and checking credit, similar to what lenders require during underwriting. During their search, buyers may begin working with a real estate agent, looking at numerous homes for sale, and acquainting themselves with important information they may need to make a purchase offer, such as the need for an inspection of a particular home they may want to buy. After offering to purchase a specific home, a buyer may have to consider counteroffers from the seller, get a home inspection if they have insisted on one, and consider the results of the inspection before finalizing the purchase contract. In figure 1, we illustrate some of the more common steps in the homebuying process. As we illustrate, buyers can be well on the road to homeownership before they encounter the FHA requirements affecting them. FHA requires lenders to provide a disclosure statement to all FHA-insured mortgage applicants, which we also show in figure 1. This statement emphasizes it is the borrower’s responsibility to protect his or her interest, and one way of doing that is by getting a home inspection. As FHA’s advisory describes, a home inspection provides detailed information about the overall condition of the home. Inspections generally consist of a visual examination of a home’s readily accessible systems and components, such as the electrical system and the plumbing, and result in a report to the buyer describing what the inspector observed. However, because some states regulate various aspects of home inspections and others do not, the actual content of any given buyer’s home inspection may vary depending on the state in which the buyer lives and the extent to which individual inspectors may be able to do more (or less) than the state prescribes. FHA requires that lenders provide this advisory because it has contractual relationships with them and can insist that they do so. FHA does not, however, have contractual relationships with or oversight authority over various other parties who deal with potential buyers earlier in the homebuying process, such as real estate agents. Consequently, while borrowers may have seen and read the advisory prior to applying for their mortgage (e.g., because a realtor provided it), the point at which FHA requires they see it is no later than the point at which they apply for their mortgage. Because getting a home inspection usually requires that a purchase offer is contingent on the seller allowing the inspection, buyers have chosen to get (or to forgo) a home inspection before FHA requires that they read and sign a document explaining the importance of the inspection and how it differs from the FHA appraisal. Home inspections and the limited property condition review FHA appraisers conduct can address or speak about the condition of many of the same parts in the home. Table 1 shows a side-by-side comparison of the various components that may be part of a typical home inspection and where an FHA appraiser would perform a limited property condition review in those same areas. Despite their apparent overlap in addressing many of the same parts of a house, home inspections and FHA appraisals differ substantially in terms of their purpose and timing, the type and focus of each, the depth of examination of the home, and the recourse available to the buyer. Table 2 elaborates on the differences in these characteristics of inspections and appraisals. A substantial majority of the homebuyers using FHA-insured financing in 2002 report getting home inspections and benefiting from them primarily by being able to renegotiate their purchases. Typically, buyers chose to get home inspections to make sure there were no serious problems with the homes they were purchasing and most say the inspection was a positive experience. Buyers reported that they benefited from the home inspections because they identified problems that buyers were often able to get sellers to address before closing. Buyers did occasionally report drawbacks to getting home inspections. These included the cost of the inspections and problems buyers believe home inspectors missed. Figure 2 summarizes the benefits and drawbacks homebuyers reported. A large majority of homebuyers using FHA-insured financing in 2002 report getting home inspections (see figure 3), almost always using a referral from a real estate agent, lender, friend, or relative to find an inspector. Our estimates are similar to the findings from a 2001 joint home inspectors’ and realtors’ industry association survey. Most inspections cost buyers less than $400. Buyers of existing homes get home inspections substantially more often than do those who buy newly constructed homes. We estimate that 93 percent of buyers of existing homes get inspections, while more than one-third fewer (58 percent) of those buying newly constructed homes do so. The likelihood that buyers expect they will have to budget for costly repairs on their homes or want to make sure such repairs will not be necessary may explain why buyers of existing homes more often get them inspected. Almost none of the buyers who bought newly constructed homes cited this as a reason for getting a home inspection, but 18 percent of those purchasing existing homes did. Overall, whether buyers purchased new or existing homes, the most common reason they cite for getting home inspections is to ensure nothing serious is wrong with the homes they are purchasing—nearly 8 in 10 cite this as one factor in their decision to get an inspection. Even though home inspections are optional, over 60 percent of all buyers (existing homes and new construction) believed FHA required them. Most buyers who got home inspections said they were satisfied with the service in a variety of ways and that they would almost always get an inspection for any future home purchase (see table 3). Nearly half of homebuyers say one reason they liked their inspections is because sellers made needed repairs before the buyers moved in. As we show in figure 4, inspections often identified problems that the buyers required the sellers fix. Major(>$500 to fix) Minor(<$500 to fix) When the inspections identified either minor or major problems, 30 percent of the time buyers were able to renegotiate one or more terms of their purchases. Most often they did so by convincing sellers to fix problems. In addition, about one in five buyers report that they benefited from their home inspection because it allowed them to learn about home maintenance. For buyers of existing homes, the inspections also provided benefits associated with uncertainties about the condition of the home and the operation of major systems—questions typically of greater concern with a property likely to have seen more wear and tear than a new home. Specifically, 11 percent said it identified for them a need to set aside money for repairs the house would need. Even though most homebuyers who got inspections were generally satisfied with them, some cited concerns with the cost and quality of the inspections. Of the buyers who got home inspections, 19 percent disliked them because of the cost. In addition, 16 percent of those getting inspections report that in the first year of owning their homes, they experienced problems they believe the home inspectors should have observed. As we show in figure 5, the areas where buyers most often report these experiences are the plumbing, appliances, and air conditioning and electrical systems. While our survey results do not allow us to judge whether the conditions buyers cited are, in fact, ones that an inspector should have observed, they may be indications of a communications gap between the buyers and the inspectors. For example, two major home inspectors’ industry associations exclude appliances from their standards of practice. This means inspectors who follow only these standards are not required to observe or report on the condition of appliances. In these instances, this may represent buyers’ or inspectors’ failure to clearly establish in advance what buyers should and should not expect the inspection to provide. Where we could make a conclusive judgment, we determined that about 36 percent of all homebuyers using FHA-insured financing in 2002 understand the differences between home inspections and appraisals. This estimate changes very little (rising to 42 percent) when we consider only those buyers who got home inspections. For the most part, it is unclear to us whether a substantial number of buyers understand the differences between inspections and appraisals. Among those who did not get home inspections this is most pronounced—we cannot conclusively judge understanding for any of these buyers. These results should not necessarily be interpreted to mean that a substantial number of the buyers were actually unclear about these differences. The results may point as much or more to the difficulty of judging an individual’s understanding with an instrument such as a survey. About 36 percent of all homebuyers appeared to understand the differences between appraisals and home inspections, according to our analysis of the answers they gave to certain questions in our survey of recent buyers. When we consider just those buyers who report they got home inspections, this figure rises to 42 percent. To make these judgments about the buyers responding to our survey, we consulted with a variety of real estate industry experts to develop and build into our homebuyer survey questions that would collectively address unique characteristics of each of the two assessments (appraisals and inspections). For example, when a respondent said that he or she had gotten a home inspection, we asked them who arranged for the inspection (fig. 6). Industry experts told us that in most instances, borrowers and/or real estate agents typically arrange for the home inspection, and it is virtually always the lender who arranges for the appraisal. Consequently, the answers to this question (and others) allowed us to judge whether buyers who reported they had gotten a home inspection might actually be referring to the appraisal. In such a case, for a respondent who said the lender or loan officer had arranged the inspection, we judged this answer indicative that the respondent likely did not understand the differences. While we would not consider that such an answer by itself is sufficient to make such a judgment, the sum of a respondent’s answers to multiple questions about the unique characteristics of appraisals and inspections does allow such a judgment. We present in appendix II the complete set of survey questions and decision rules we used to make these judgments about buyers. Figure 7 presents examples of the answer choices we used to make judgments that buyers did or did not understand the differences between appraisals and inspections. For 60 percent of all homebuyers, we found there was insufficient information to make a conclusive judgment about their understanding, making it unclear to us whether or to what extent they understand the differences between appraisals and home inspections. For the subset of buyers who reported they got home inspections, we could not make a judgment about 53 percent of them. For buyers who reported they did not get home inspections, we could not conclusively judge understanding for any of them. These results may be a reflection of the difficulty of using a survey to measure understanding or knowledge and, as a result, cannot necessarily be interpreted to mean that most buyers are themselves unclear about the differences between inspections and appraisals. Because there were relatively few survey respondents whom we initially judged clearly do not understand the differences, we cannot use these results to estimate with a reasonable confidence interval the percentage of all homebuyers who do not understand the differences. Consequently, for analysis purposes, we combined this group of respondents with those whose understanding we are unclear about and compared just two sets of homebuyers—those we judge to understand and all others. Those buyers whom we judge understand the differences were more likely to have discussed these differences with someone else during their homebuying process. Specifically, comparing the homebuyers who understand to all others, 77 percent of those who understand the differences report having such a discussion; for all other buyers, 47 percent report having this discussion. Buyers typically learned about home inspections from several different sources, usually doing so before applying for their mortgages (the point at which they would get FHA’s home inspection advisory). Most often, buyers cited real estate agents as a source for information about home inspections (see fig. 8). About 57 percent indicated real estate agents, with lenders (38 percent), friends or relatives (28 percent), and their own research (25 percent) also figuring prominently. Just under 19 percent reported they learned about home inspections by reading FHA materials. However, our survey results do not allow us to discern differences in buyers’ understanding between those who rely on one source of information (e.g., real estate agents) compared to another or, for example, when they learn about inspections early in the buying process as opposed to later. This is because the confidence interval for any estimate we might make from such an analysis would be too wide to say definitively that there is some difference between two sets of homebuyers. Many homebuyers reported they learned about the purpose of home inspections before they applied for their FHA-insured mortgage—the point when FHA requires lenders give them information about the importance of home inspections. Specifically, nearly 40 percent of buyers reported they learned about inspections before they began looking for a home and 43 percent said they learned during the search process. Our survey did not define “search process” for the buyers, so we cannot rule out that some considered applying for a mortgage to be part of that process. Nonetheless, substantial numbers of buyers learn about inspections and make their choices to get or forgo them before that time, meaning FHA cannot be sure many buyers have the benefit of its advisory in time to factor it into their decisions. The differences in loan performance between buyers who did and did not get home inspections are not significant when we consider the full range of factors known to predict or have some association with loan performance. A side-by-side comparison of foreclosure rates between those who did and did not get inspections initially shows fewer foreclosures among those who got inspections, but this comparison can be misleading. A large body of research evidence and past GAO work has shown some factors, such as credit scores and loan-to-value ratios, are highly predictive of loan performance. The net effect, when we considered home inspections and the fuller range of other factors predictive of loan performance, is that these other factors appear to explain the apparent differences in foreclosure rates in our sample. While foreclosures are costly to FHA’s insurance fund, increasing the number of buyers who get home inspections by itself may not have a material effect on this fund. A large body of research evidence from GAO and others has long shown factors associated with borrowers, their loans, and/or the properties they buy are highly predictive of loan performance. For example, recent research has shown the importance of borrowers’ credit scores in assessing the likelihood of loans going to foreclosure, noting that those with higher scores tend to have better loan performance. Certain features of the loan, such as the loan-to-value ratio, interest rate (fixed or adjustable) and term (15 or 30 years) can also help predict loan performance. For example, lower loan-to-value ratios are often associated with better loan performance because the borrowers have more equity in their properties than those with higher ratios. Greater equity in the home gives a borrower more incentive to sell rather than fall behind on mortgage payments and face foreclosure. Similarly, house price appreciation is predictive of loan performance because it gives borrowers more equity in their homes and greater incentives to sell rather than default. To consider home inspections in conjunction with the factors known to be predictive of loan performance, we reviewed a stratified random sample of 260 FHA paper loan files for evidence the borrower got a home inspection. We also collected borrower credit scores where they were present. This file review was necessary because FHA does not collect home inspection or credit score data for all the loans it insures. We selected loans FHA insured in fiscal years 1996 through 1999 because prior work by GAO and others has shown the peak foreclosure period for mortgages is 3 to 8 years after origination. We then added the home inspection and credit score data as well as current information on the performance of these loans (as of June 2003) to an existing model that predicts prepayments and foreclosures (see app. IV). Because other factors have been shown to strongly predict loan performance, simply comparing the foreclosure rates of borrowers who got inspections with those who did not could be misleading. At first glance, borrowers who get home inspections go to foreclosure about 10 percent less often (2.6 percent vs. 2.9 percent for those not getting inspections). However, this comparison can be misleading in important ways. First, at conventional levels of significance, this difference is not statistically significant. That is, the difference between the two is too small to rule out that it occurs by chance rather than because of some difference that we might otherwise link to the home inspections. Furthermore, when we performed a regression analysis, we found borrowers who got inspections have a higher foreclosure rate. Again, however, the significance of this difference makes relying on such an analysis misleading—the effect when we singled out home inspections was not statistically significantly different from no effect. Consistent with our past work and the research of others into loan performance, we found that borrower, loan, and property characteristics explain the differences in loan performance between borrowers who did and did not get home inspections. For example, borrowers who got inspections were less likely to get adjustable rate mortgages, which could also explain why they have a lower foreclosure rate. Also, borrowers who got home inspections had average credit scores 9 points higher than those who did not get inspections. Specifically, we estimate that the difference in mean credit scores explains about half of the difference in foreclosure rates between those who did and did not get home inspections. However, in our sample, borrowers who got inspections had higher mean loan-to-value ratios, which could increase their foreclosure rate or counteract the benefits of higher credit scores (see table 4). To determine the net effect of differences in a broad range of risk characteristics, we analyzed a fuller range of factors that may affect loan performance. These include measures encompassing the ages and amounts of loans, the initial loan-to-value ratios, changes in equity over time due to changes in house prices or interest rates, and the type of loan (in terms of interest rate—fixed or adjustable—and term—30 or 15 years). We created a risk measure to encompass these characteristics and then considered borrowers’ credit scores (where they were present in the FHA file) and the home inspection data we collected for each loan. We used the risk measure we created, the two credit score variables, and the home inspection data as independent variables in a regression analysis. The dependent variable was an indicator for whether the loan went to foreclosure in a given time period. Doing so allows us to isolate the effect getting a home inspection has apart from the borrower, loan, and property characteristics in the dependent variables. This analysis showed that the risk measure (loan and property characteristics) and borrower characteristics appear to explain the difference in foreclosure rates between loans in our sample with and without home inspections (see app. IV for the details of this analysis). Consequently, based on our analysis, increasing the number of buyers who get home inspections is not likely to have a material effect on FHA’s insurance fund. The implications for FHA of mandatory home inspections mainly have to do with the need to set national standards for inspections and the resources FHA would need to enforce compliance with them. FHA believes it does not have the resources to effectively enforce a requirement for home inspections meeting an appropriate standard. Also, FHA expects that more often, capable buyers might choose to pursue other lending options rather than bear the cost of home inspections, potentially exacerbating a trend of FHA serving increasing numbers of riskier borrowers. For homebuyers, such a requirement would likely bring benefits to those who would otherwise forgo home inspections, such as having sellers make repairs on the homes. However, buyers might also find the requirement negatively affects their competitiveness in certain real estate markets or increases the costs of obtaining mortgage loans. Lastly, home inspectors might face added costs from meeting or demonstrating their compliance with new FHA requirements. FHA officials believe the first step in implementing a requirement for home inspections would be to establish national standards. These standards would spell out inspectors’ qualifications and list all the required components of an FHA-sanctioned inspection. FHA officials believe if it requires homebuyers to get inspections, the agency has an obligation to ensure a minimum level of quality of the service. FHA officials say national standards are the way to accomplish this, because they would address variations among home inspections from state to state. Officials from FHA, the National Association of Realtors, the Mortgage Bankers Association, and two home inspectors’ industry associations agree that differences exist in the quality of home inspections as well as the qualifications of the inspectors from one location to the next. For the most part, they attribute these differences to the presence (or absence) of state regulation of home inspections and, to a certain extent, some variation in the manner in which states that regulate do so. As we show in figure 9, 27 states currently regulate home inspections in some way, but the remaining states and the District of Columbia do not. We found FHA officials and others are likely correct in asserting that there can be variations in the manner in which different states regulate home inspections. For example, most of the states that regulate home inspections have standards for inspectors in areas such as experience, continuing education, and codes of ethics. However, the states’ requirements in these areas can vary. For example, in states that require continuing education, the number of hours required each year ranges from 5 to 20 hours. In states with a home inspection experience requirement, the number of inspections each inspector must conduct as an apprentice in order to meet state requirements varies from 20 to 250 inspections. Also, states vary in terms of the extent to which they spell out the contents of home inspections. For example, 21 of the 27 states that regulate the home inspection industry have or plan to develop standards of practice for the various parts of a home that inspectors must address. However, 6 states have no such standards defining the content of home inspections. Based on FHA’s stated preference for national standards, past GAO work has suggested that FHA’s choices would likely come down to standards that are either fixed or minimum. These choices differ primarily in the way they preempt existing state regulations (see figure 10). FHA officials indicated they would likely set minimum federal standards for home inspections rather than establish a fixed standard. The flexibility of minimum standards offers certain attractive features over fixed standards. Minimum standards would not prevent states from setting specific regional requirements, such as wind-resistance standards in hurricane-prone areas. Also, inspectors prefer an approach like this because it would allow them to distinguish their services by offering more than what FHA might require, and, in doing so, better compete for homebuyers’ business. FHA officials would expect to develop the national standards for home inspections themselves. However, they stated that another option would be to contract with a qualified organization to develop standards of practice. However, FHA would continue to have an oversight role as contract administrator and would have to assure itself that any standards developed under contract are sufficient for its purposes. FHA could then establish a requirement that inspections meet these standards or any that are substantively equivalent to them. FHA officials said creating and maintaining an effective enforcement system would be the most important and resource-intensive part of any effort to mandate home inspections, but currently the agency has neither the capacity nor resources to effectively carry out this task. According to FHA, past experiences with mandatory appraisals and a lack of sufficient human capital and other resources are its main concerns with effectively enforcing such a requirement. FHA cites the difficulty of regulating the home appraisal industry as the basis for its concerns about home inspections. Recent GAO work has demonstrated various problems FHA and its partners have experienced in regulating appraisals. For example, FHA officials acknowledge that they have lacked sufficient resources to evaluate the quality of many FHA appraisals and that its procedures for monitoring appraisals were inadequate and inefficient. Consequently, according to FHA, its sanctioning of appraisers was inconsistent. To address these problems, FHA restructured its enforcement efforts to focus more on individual appraisers rather than the content or quality of the appraisals themselves. According to FHA, it did so in order to adopt a risk-based, more manageable approach to its oversight responsibilities that allows it to target only those appraisers whom various indicators show may have a pattern of poor performance. For example, FHA now tracks foreclosure rates by appraiser—that is, it links individual loans for which it has paid claims to the person who did the appraisal in support of the loan when it was originated. FHA does this in order to identify those who may be performing fraudulent, inflated appraisals, which can increase the likelihood of foreclosure. FHA officials told us they doubt FHA’s ability to effectively ensure the quality of home inspections given the agency’s history of struggling to do this with appraisals (prior to turning its focus to the appraisers). Because it has no experience regulating home inspections and inspectors, FHA officials expect they would have to spend some time evaluating the quality of home inspections before they could consider turning FHA’s focus to individual inspectors by adopting the kind of risk-based approach it adopted for appraisals. FHA officials said the agency currently does not have the human capital or other resources it needs to enforce a home inspection requirement. For example, FHA officials told us that they do not have enough people with the right skills to conduct basic enforcement activities, such as quality control reviews of home inspections or investigating complaints. They also indicated an effective enforcement system would require an infrastructure for approving inspectors to perform FHA-sanctioned inspections and tracking inspectors’ compliance with standards. Being able to track performance is particularly important to FHA officials because lessons learned from the appraisal industry taught them the necessity of having in place at the outset an effective system to monitor performance so FHA can act quickly against poorly performing or fraudulent inspectors. FHA might be able to reduce the resource demands of a home inspection requirement by relying on those states that have existing regulatory efforts. FHA officials indicated that they would likely defer to state standards in those states that regulate the home inspection industry. However, FHA officials say they would need to evaluate each state’s standards and enforcement efforts to ensure they meet any minimum standard FHA sets. The extent to which relying on existing state regulatory structures would help FHA is unclear. GAO has reported that in situations where the federal and state governments have overlapping regulatory programs, states might curtail their efforts in response to new federal regulations. This phenomenon, which some term “programmatic displacement,” could make it necessary for FHA to provide resources to these states to induce or require them to maintain the level of effort they had been putting into oversight of the home inspection industry. In those states currently without home inspection regulations, the resource implications for FHA would almost certainly be greater. FHA officials expect that in these states the agency would face a choice between finding a way to conduct the enforcement itself or, possibly, paying the states to do so. Ultimately, the extent of programmatic displacement and the resources FHA might need to deal with it would depend on the nature of a federal home inspection requirement. FHA agrees that concerns remain about its appraisal oversight system that could carry over to any system it develops for home inspections in which it relies on the states to enforce its requirements. For example, as part of its oversight process, FHA requires appraisers to hold state licenses and relies on the states to report disciplinary actions against appraisers to the Appraisal Subcommittee. GAO has reported that this kind of reliance on the states, particularly for investigating complaints, can prove problematic. Officials of some appraisal industry associations have also said that state enforcement efforts can be inconsistent, particularly where enforcement must compete with other state priorities for resources. FHA and real estate industry professionals indicated to us that adding a home inspection requirement might make FHA-insured loans less attractive to homebuyers. The demand for FHA-insured loans sometimes depends, in part, on what alternatives are available to homebuyers. In the past, buyers who did not meet conventional loan underwriting standards had few financing options other than FHA-insured loans. However, recently Fannie Mae and Freddie Mac have started offering loan products that compete with FHA’s. Similarly, private mortgage insurers also are attracting homebuyers who might have used FHA-insured financing by relaxing underwriting standards for certain lower income borrowers, allowing more of them to obtain conventional financing. None of FHA’s competitors, such as the Department of Veterans Affairs, Fannie Mae, Freddie Mac, or private mortgage insurers, require a home inspection as a condition of (the lenders) making loans. FHA officials, agreeing that private mortgage insurance often costs less than FHA’s, indicated that a home inspection requirement could drive away those borrowers who can choose between FHA and the affordable products offered by others. In doing so, this requirement would, FHA argues, exacerbate a trend GAO has identified toward increased risk level in the FHA-insured loan pool. Mandatory home inspections would likely bring to some homebuyers the benefits identified by survey respondents, but they would also likely affect the buyers’ costs, their competitiveness in certain markets, or their ability to become homeowners. Similar to survey respondents, homebuyers might also find that an inspection requirement has drawbacks because the inspections provide them different assurances than they expected or because inspectors may fail to observe some problems. For example, 31 percent of buyers who got inspections reported they had problems with appliances in the first year of homeownership. Because some inspectors adhere to standards that do not require them to report on the condition of appliances, the buyers who reported these problems may be getting fewer or different assurances than they expected. Also, buyers reported inspectors failed to observe certain conditions that buyers believe the inspectors should have noticed. Most often, buyers reported that such problems had to do with plumbing. Real estate industry professionals indicated to us that buyers who must insist on home inspections would be at a disadvantage in highly competitive real estate markets, particularly when other buyers can make offers not contingent on an inspection. The industry professionals and FHA officials also said that a home inspection requirement could lengthen search times for buyers who qualify only for FHA-insured financing, restrict some to looking for homes in certain parts of the market, or delay the homebuying process. Home inspectors would likely see some increase in business because buyers who might otherwise forgo inspections would have to get them. The amount of the increase would depend on the number of homes purchased each year. According to our survey, in 2002, 14 percent of homebuyers using FHA-insured financing did not get home inspections. Consequently, the annual increase in inspectors’ business if such a requirement had begun in 2002 could have been more than 100,000 inspections (assuming that no buyers opted for conventional financing or delayed their purchases). Home inspectors might also incur additional costs from an FHA requirement, but the extent to which this might be the case would depend on the standards and various related requirements that FHA might set. At a minimum, officials of one inspectors’ association expect that their membership would find it costly to adapt to a standardized reporting format for home inspection reports. FHA officials confirmed that a standardized format would be necessary in order for it to manage the workload associated with requiring and enforcing standards for hundreds of thousands of home inspections each year. To a lesser extent, inspectors might also face new costs from the requirements FHA sets for the inspections. Specifically, home inspectors, particularly those in states that regulate their industry, may already be paying for licenses, continuing education, insurance, or membership in a professional association. To the extent that FHA adopts requirements more stringent than those of the states or professional associations, inspectors would face additional costs to comply with FHA’s standards. For the most part, mandating home inspections for buyers using FHA-insured mortgages would have little added value for FHA or the buyers. The most compelling case for making home inspections mandatory would be a substantial, material effect on FHA’s insurance fund, but demonstrating such an effect has proven illusory. While most buyers already get inspections and say they reap a number of benefits from them, those benefits apparently have little to do with nor do they extend to FHA’s insurance fund. The resources necessary to enforce the requirement could easily more than offset the small marginal benefits of such a requirement, while causing unintended consequences, such as placing a burden on homebuyers in some housing markets. FHA’s reliance on lenders to provide buyers with information about the importance of home inspections is understandable. FHA has authority to hold lenders accountable for doing so but has no such influence over most others involved in the homebuying process. However, buyers often turn to sources other than lenders to learn about home inspections, and many do so before they apply for their FHA-insured mortgages. Consequently, relying solely on lenders means FHA cannot be sure that all buyers have the benefit of its advice to get home inspections at the point when buyers typically would choose to get them. Nonetheless, the response rate to our survey precludes us from concluding that FHA's advisory has an effect on the frequency of home inspections or that providing the FHA advisory sooner would have a measurable effect on buyers’ choices about inspections. We provided HUD with a draft of this report for review and comment. In a letter from the Assistant Secretary for Housing (see app. I), HUD agreed with our findings and observations. HUD also suggested several technical clarifications, which we have incorporated as appropriate. To determine how many homebuyers got home inspections, what they report as benefits and drawbacks of the inspections, and the extent to which they understand the differences between appraisals and inspections, we surveyed a representative sample of buyers who purchased homes in 2002. To assess the association home inspections may have with loan performance, we reviewed a representative sample of FHA loan files from loans insured in fiscal years 1996 through 1999 to determine whether the homebuyer had sought a home inspection. We used this information, combined with data on loan performance and borrower characteristics, such as credit scores, to determine the association home inspections may have with loan performance. In appendixes II and III we present in greater detail the methodologies we used for developing, administering, and analyzing the results of the homebuyer survey and the loan performance file review. To determine the implications of making home inspections mandatory, we interviewed officials at FHA, the Department of Veterans Affairs, Fannie Mae, and Freddie Mac. We also interviewed industry association officials representing home inspectors, appraisers, real estate agents, and lenders. We reviewed reports that GAO, the HUD Inspector General, and others have issued addressing various aspects of FHA’s oversight of the appraisal industry to identify implications that experience might suggest for a home inspection requirement. We also drew on work GAO has done in recent years on intergovernmental relations issues to identify and discuss with FHA and others the implications of a federal home inspection requirement in relation to the states’ inspection regulations. To determine which states regulate home inspections as of the end of calendar year 2003, we verified the results of an industry association’s analysis by visiting each state’s web site to confirm the presence or absence of state regulations, as well as confirm the details of the regulations the states have in place. We corroborated with a home inspectors association the information on the number of states that regulate inspections. We conducted our review between April 2003 and April 2004 in accordance with generally accepted government auditing standards. As arranged with your offices, unless you publicly announce its contents earlier, we plan no further distribution of this report until 30 days after the date of this letter. At that time, we will send copies to the appropriate congressional committees and to the Secretary of Housing and Urban Development; it will also be available at no charge on GAO’s Web site at http://www.gao.gov. If you or your staff have any questions about this report, please call me at (202) 512-8678. Key contributors to this report are listed in appendix VI. GAO conducted a general population survey of homeowners who closed on their home purchases in calendar year 2002 to determine: (1) how many recent homebuyers got home inspections, (2) what recent buyers report as the primary benefits and drawbacks of the inspections, (3) the extent that recent homebuyers understand the differences between appraisals and inspections, and (4) by what means buyers develop their understanding of these differences. We present the survey itself in appendix V. The population for the homebuyer survey consisted of buyers who bought their homes in 2002 using a mortgage FHA endorsed for insurance that same year. We chose 2002, as opposed to earlier or later years, for two reasons: (1) buyers would likely still remember key aspects of their homebuying experience, such as the home inspection and (2) buyers would have experienced full heating and cooling seasons and be able to report on the condition of their homes and the major systems during their first year of homeownership. The survey addressed the number of buyers who reported getting inspections and allowed them to indicate what they believe were the benefits and drawbacks of inspections. The survey also asked respondents about key aspects of inspections and appraisals so that we could use responses to individual questions or combinations of questions to determine whether the answers reflect an accurate understanding of the two processes. Examples of the key aspects of home inspections and appraisals include how and when the buyer paid for the inspection, when the inspection and appraisal took place, whether the buyer was present for the inspection, and who arranged for the inspection. To develop areas of inquiry for the survey, we reviewed previous GAO work related to appraisals, FHA materials, and literature from industry associations related to issues about the homebuying process. We used these sources and our own analysis to develop an initial set of questions. We further developed and refined the questions by holding discussion sessions with GAO employees who had recently bought homes using FHA- insured financing. In an effort to include the most relevant questions in a clear and concise manner, we consulted with a variety of real estate industry professional associations to discuss and improve the clarity of the questions. We also relied on these groups to confirm and/or identify for us the characteristics unique to inspections or appraisals around which we framed questions to allow us to make judgments about homebuyers’ understanding of the differences between home inspections and appraisals. These groups included the American Society of Home Inspectors, the National Association of Home Inspectors, the National Association of Realtors, the National Association of Hispanic Real Estate Professionals, the Appraisal Institute, and the American Society of Appraisers. In addition to an internal expert technical review by GAO’s Survey Coordination Group, we pretested the survey with individuals who used FHA-insured financing in 2002 to verify the clarity and suitability of the questions and determine how long it would take respondents to complete the survey. We identified pretest subjects through members of the National Association of Realtors as well as personal contacts with real estate agents; we also telephoned some individuals whose names we obtained from FHA’s information systems. FHA’s data indicated that 19 percent of homebuyers identified themselves as Hispanic. For this reason, we translated the survey into Spanish to improve our response rate by making it easier for those who might prefer to answer our questions in Spanish. We also pretested the survey with native Spanish speakers who used FHA-insured financing in 2002. For buyers in our sample who had indicated to FHA that they are Hispanic, as well as buyers with clearly Hispanic surnames, we sent both English and Spanish language surveys, instructing them to use the version with which they were most comfortable. We conducted the survey between October 2003 and February 2004 using a self-administered mail-out questionnaire to a random sample of 261 homebuyers. We drew the names of these buyers from a FHA database of all new 203(b) loans insured in calendar year 2002. We stratified this sample by region (using four geographic areas of the United States) and by whether or not the state in which the buyer lives regulated home inspections as of the time we drew our sample. We did this in order to control for variations in respondents’ answers that may have been related to location or state regulation. A sample size of 261 allows for estimates within plus or minus 5 percent about the population of all buyers using FHA-insured loans (at the 95 percent level of confidence). We performed basic tests to ensure the reliability and usefulness of the data FHA provided us. These included computer analyses to identify inconsistencies and other errors in the data set from which we drew our sample of homebuyers. The combination of regulatory status and geographic region created a stratified random sample with eight strata in total. We drew a stratified random sample using the licensure regulatory status/regional scheme. For purposes of inclusion in the population frame, only loans for purchases made in the fifty states and the District of Columbia were included. We excluded loans for purchases of condominiums and loans for mortgage refinancing. We mailed the survey on October 14, 2003, and, to maximize the response rate, sent three subsequent follow-up mailings of the survey in November, December, and January. After the second mailing, we also telephoned many of the nonrespondents to encourage them to complete the survey. Follow-up mailings and telephone calls went only to those who had not responded. We ended data collection on February 2, 2004. We received 150 of the 261 surveys mailed out. We deemed 9 of these to be outside of the scope of our survey and did not include them in any analysis because the respondents indicated that they either did not buy their homes in 2002 or they did not use FHA-insured financing. Disregarding these 9 surveys, our overall response rate was 56 percent. Table 5 shows the final disposition of the sample (the 261 surveys initially mailed) by strata. The estimates we make in this report are the result of weighting the survey responses to account for effective sampling rates in each stratum. These weights reflect both the initial sampling rate and the response rate for each stratum. As with many surveys, our estimation method assumes that nonrespondents would have answered like the respondents. For the estimates we present in this report, due to some survey nonresponse, we are 95 percent confident that the results we would have obtained had we studied the entire population are within +/- 10 or fewer percentage points of our estimates (unless otherwise noted). Because we surveyed a sample of recent homebuyers, our results are estimates of homebuyer characteristics and thus are subject to sampling errors. Our confidence in the precision of the results from this sample is expressed in 95 percent confidence intervals, which are expected to include the actual results for 95 percent of the samples of this type. We calculated confidence intervals for our results using methods appropriate for a stratified probability sample. We conducted in-depth pretesting of the questionnaire to minimize measurement error. However, the practical difficulties in conducting surveys of this type may introduce other types of errors, commonly known as nonsampling errors. For example, measurement errors can be introduced if (1) respondents have difficulty interpreting a particular question, (2) respondents have access to different amounts of information in answering a question, or (3) those entering raw survey data make keypunching errors. We took extensive steps to minimize such errors in developing the questionnaire, collecting the data, and editing and analyzing the information. For example, we edited all surveys for consistency before sending them for keypunching. All questionnaire responses were double key-entered into our database (that is, the entries were 100 percent verified), and a random sample of the questionnaires was further verified for completeness and accuracy. In addition, we performed computer analyses to identify inconsistencies and other indicators of errors. To make judgments about buyers’ understanding of the differences between appraisals and inspections, we built into our survey questions focusing on characteristics that are closely associated with either inspections or appraisals. We consulted with industry experts and FHA officials to identify these characteristics, which included the timing, financing (method of payment), referral source (how buyers found inspectors or appraisers), and outcome of each assessment. For example, home inspections typically occur much closer to the time sellers accept purchase offers than do appraisals (survey question 28); also, the costs of appraisals are commonly rolled into the closing costs for mortgages, whereas this is rarely the case for home inspections (survey question 39). (See app. IV for the homebuyer survey and the individual questions to which this appendix refers). Members of the audit team then reviewed the survey questions to make independent judgments about which answer choices to various survey questions were most or somewhat indicative of whether or not buyers do or do not understand the differences between inspections and appraisals. The team then developed a consensus on the answer choices we would use to make judgments about buyers. In doing so, we arrayed these answer choices according to whether or not the buyer first reported having gotten a home inspection and then divided these groups into those who likely do (or do not) understand the differences. We applied the decision rules we illustrate in figure 11 to make our judgments about buyers’ understanding, first considering the answer choices that indicate that the buyer understands the differences between appraisals and home inspections. Where no determination about the buyer’s understanding was possible, we then considered the answer choices that indicated that the buyer did not understand. For any remaining respondents about whom we could not make a determination, we concluded there was insufficient information to make a judgment about their understanding because they had given too few answers indicative of a level of understanding and/or gave too many inconsistent answers. For an earlier report, we built econometric models to capture the probabilities that a borrower might default on a loan (and result in a claim on FHA's Mutual Mortgage Insurance Fund) or prepay the loan (e.g., by refinancing). For this analysis, we assessed whether there is evidence that factors not captured in our previous model—credit scores and home inspection contingencies—may exert independent effects on the credit risk of FHA-insured single-family mortgages. In this appendix, we describe how we conducted that assessment. Our basic approach was to (1) use the results of the econometric models built for our previous report to produce a measure of the overall credit risk on a particular loan; (2) add two additional types of variables, reflecting the borrower's credit score and the presence of a home inspection contingency in the loan file; and (3) estimate a new regression to predict claim (or prepayment) as a function of our risk estimate from the previous model combined with the newly added variables. To determine the extent to which getting a home inspection might affect the performance of FHA-insured loans, we reviewed a random sample of loan files for FHA-insured mortgages originated in fiscal years 1996 through 1999 to (1) determine whether the buyer(s) got a home inspection and what credit score(s), if any, the lender considered in underwriting the loan and (2) assess the reliability of selected key data elements whose original source(s) are the documents in the loan file and which FHA provided us from its electronic databases. The first step (home inspection and credit scores) required original data collection; the second required verification of data FHA collected. We selected loans that FHA insured in these years because prior work by GAO and others has shown the peak foreclosure period for mortgages to be 3 to 8 years after origination. We focused on those in FHA’s 203(b) program (single-family, one-to-four-unit dwelling) and excluded condominiums and mortgage refinancings because (1) for condominiums, many of the major areas and systems that home inspections cover are typically the responsibility of a homeowner’s association, not the property owner and (2) refinancings are not purchases and thus would not present the owner an option to obtain an inspection as a condition of the purchase. We drew a random sample of 300 loans from the fiscal years 1996-1999 period consisting of two strata: loans with no claim and loans with a claim (i.e., the loans had gone to foreclosure). Because relatively few mortgages end in foreclosure, we over-sampled that strata (relative to its proportion in the loan database) in order to have enough observations in each strata to determine whether there is a statistically significant relationship between getting a home inspection and loan performance. FHA provided us information on the status of these loans as of June 2003. We reviewed 260 paper loan files for these loans to record whether a home inspection occurred by examining the purchase contracts for evidence of home inspection contingencies. Generally, if the contract contained a contingency requiring the seller to allow the buyer to have a professional home inspection, we concluded that this buyer got a home inspection. We also collected from these files information on borrowers’ credit scores in order to perform a secondary analysis on whether there is a relationship between credit scores and loan performance. We verified 100 percent of the data we collected from these files by having a second person compare the record we created during initial data collection to the original paper loan files. We had to modify the calculation of variables we used in the prior report before applying the results to the current model. For example, the 2001 model used annual observations by fiscal year. Because the data in the present analysis was current as of June 30, 2003, which was not the end of a fiscal year, we modified the calculations to produce quarterly data and used the results of the model to predict quarterly, instead of annual, termination probabilities. Instead of using an estimate of borrower’s equity at the end of the previous fiscal year, we used an estimate of equity from the four quarters prior to the current quarter. The logistic regressions estimated the conditional probability of a loan being foreclosed in each quarter. We combined the variables and coefficients from our 2001 report into a combined risk measurement variable, which we defined as the sum of the independent variables multiplied by their respective coefficients. This variable was used as a key independent variable for the logistic regression that predicted the probability of a loan resulting in a claim during a given quarter. Two independent variables related to the credit score were also used as explanatory variables in the claim regression. First, we created a 0-1 dummy variable from our review of the paper files, reflecting whether or not a home inspection contingency was found in the paper file review. Second, we created variables for the median credit score for the borrower, which was set to zero if the borrower did not have at least one score in the paper files. We also created a dummy variable reflecting whether the file contained at least one credit score. Other researchers have found credit scores to be predictive of credit risk. Borrowers with no score may be at higher risk than borrowers with an average score because these may be borrowers with very little experience with credit. However, in this analysis a borrower may have no credit score either because a score could not be calculated or simply because a score was not included in the paper file. In general, our results are consistent with the economic reasoning that underlies our models. Most important, the probability of foreclosure increases as our combined risk measurement increases, and the coefficient on this variable is very close to 0.25, which is what we would expect from applying an annual risk variable to quarterly claim probabilities. Additionally, the coefficient on the credit score variable implies that a 10 point increase in credit scores results in about a 5 percent (10 times -0.00469) reduction in foreclosure probability, similar to but somewhat lower than the 9 percent reduction for a 10 point increase effect found in Cotterman’s research on FHA mortgages. Additionally, a borrower who has no credit score has about the same probability of foreclosure as does a borrower with a credit score somewhat less than the typical credit score in the paper files As we show in table 6, these effects are statistically significant. The coefficient on the home inspection contingency variable indicates an impact that is the opposite of our expectation. The positive coefficient of 0.0795 implies that borrowers with inspection contingencies actually have higher credit risk, after controlling for other risk characteristics. This is the only variable in the regression that is not statistically significant at conventional levels. The standard error on this variable indicates that the effect of a home inspection could be to reduce foreclosure probabilities by as much as 28 percent or raise foreclosure probabilities by as much as 44 percent. The econometric models in our previous report used observations on loan years—that is, information on the characteristics and status of an insured loan during each year of its life—to estimate conditional foreclosure and prepayment probabilities. These probabilities were estimated using observed patterns of prepayments and foreclosures in a large set of FHA- insured loans. More specifically, our models used logistic equations to estimate the logarithm of the odds ratio, from which the probability of a loan’s payment (or a loan’s prepayment) in a given year could be calculated. These equations were expressed as a function of interest and unemployment rates, the borrower’s equity (computed using a home’s sales price and current and contract interest rates as well as a loan’s duration), the loan-to-value (LTV) ratio, the loan’s size, the geographic location of the home, and the number of years that the loan had been active. The results of the logistic regressions were used to estimate the probabilities of a loan being foreclosed or prepaid in each year. Details concerning the estimation of these regressions are contained in appendix II of our 2001 report, as are tables of coefficients for the independent variables. To ensure that data contained in FHA’s information systems were reliable, we compared seven elements of the paper loan file to the electronic file to determine if they matched. These data elements included the address of the property, the closing date, loan amount, appraised market value, sales price, interest rate, and whether the loan’s interest rate was fixed or variable. We selected these elements because of their importance in ensuring that our model (to predict loan performance) is using accurate data. Specifically, we assessed a random sample of 30 files for data reliability and found no significant or material errors; we also reviewed several years’ worth of FHA financial statements audits and found no known or suspected problems with the relevant FHA information systems. From these steps, we concluded these data are sufficiently reliable for our analyses in this review. Directions for Completing this Questionnaire 10 minutes: This survey should not take longer than 10 minutes to complete. Your answers are important: They’re what we’ll use to figure out ways to improve the home buying process for people like yourself. Your “lessons learned” will benefit future buyers, but for that to happen, we need everyone who gets this survey to fill it out and return it. Go to question 1: That’s it—please begin! There is some important information below— mainly where to send this and whom to call if you have a question—so you may want to refer back to this when you’re done. Thank you! Or, you may fax a copy of your completed survey to 202-512- survey—it helps us take your name off our mailing 2502 or 202-512-2514. list so we know you’ve helped us (and so we don’t send reminders thinking we’ve not heard from you). 95% confidence interval exceeds +10% of estimate; 95% confidence interval exceeds +30% of estimate. 6. Approximately how many homes did you 2002? look at before deciding on this one? 7. Besides the one you bought, did you make a 2. Did you use FHA financing? written offer on any others? 33% Yes 68% No (Skip to question #12) 0% Unsure/Don’t recall 8. How many? If you answered “No” to question #1 or question #2, please do not continue. Place the survey in the return envelope and mail it back to us 9. Which of the following reasons were factors so we’ll know this survey does not apply to you. in why you didn’t buy that house(s)? (Mark all that apply ) Question #3. Could not sell the home I owned at the 3. Is the address where we mailed this survey the address of the home you bought in 2002? 99% Yes 1% No (Skip to question #5) My contract was not accepted Had a home inspection done on the Other (specify): _______________ 4. Do you still live at this address? of the house(s) that you did not buy? 5. What month in 2002 did you go to closing? No (Skip to question #12) 11. Did you try to negotiate with the seller further before choosing not to purchase that house(s)? Page 2 17. Why did you choose to use FHA financing? (Mark all that apply ) 12. Have you (or your co-borrower) ever 64% Low down payment purchased a home before? 19% I could use gift funds for the down 13. What kind of home did you end up 38% Better interest rate purchasing in 2002? 4% Builder offered incentives tied to FHA 5% Recommended by builder/developer 29% Recommended by real estate agent 59% Recommended by lender/loan officer 90% Single Family detached house (the bank or mortgage company) 4% Duplex or Multiplex 20% It was the only type of loan I qualified for 2% Other, please specify: ___________ 14. Was your home newly constructed (you were the first to live there) or an existing home? 18. When you applied to your lender for a mortgage loan to buy your house, did that lender provide information on home inspections or home appraisals? (Mark all that apply ) 15. Approximately what year was your home built? 57% Information on home inspections 52% Information on appraisals 11% No information on either 27% Unsure/Don’t recall 19. At any time in the process of buying your home did anyone give to you and require you 16. When did you decide to use FHA financing? to read and sign a document about home inspections? 14% I only considered FHA financing 48% When I pre-qualified for my loan 8% Before I began looking for a home 53% Yes 10% No (Skip to question #22) 37% Unsure/Don’t recall (Skip to question 15% During the search process #22) 6% After I signed the sales contract 6% Other, please specify: __________ 20. Who? 3% (MULTIPLE ANSWERS) Lender/Loan Officer (the bank or mortgage company) 36%Real Estate Agent 4% Builder/Developer 3% Other, please specify: __________ 18% (MULTIPLE RESPONSES) Page 3 21. When did you receive this document? 24. How did you learn about the purpose of a home inspection? (Mark all that apply ) 38% Informed by lender/loan officer (the bank or mortgage company) 22. Often, purchase offers or sales contracts 2% Informed by seller require that certain conditions or 3% Other, please specify: __________ “contingencies” must be met before the purchase of the home is final. Which of the following types of contingencies, if any, were 25. Did you get a home inspection? included in your sales contract? (Mark all that apply ) 86% Yes 14% No (Skip to question #47) 26. Why did you choose to get a home inspection? (Mark all that apply ) 79% Make sure nothing serious was wrong 6% Selling another property 9% Other, please specify: ___________ 4% Previously had a good experience with a 5% The appraisal made me want an 28% Someone recommended it 23. When, if applicable, did you learn about the 61% FHA required me to get an inspection in purpose of a home inspection? order to get the loan 40% Before I began looking for my current 16% Make sure I knew to budget for costly repairs the house will need 43% During the search process for my current 4% Other, please specify: __________ 9% After I closed on my current home 27. Who arranged for the inspection? 8% I do not know the purpose of a home 25% Myself (or co-borrower) Page 4 28. From the time the seller or builder accepted 31. Did you observe the inspector checking any your offer to buy the house, how long was it of the following components? before you had the home inspection done? 21% Within 3 days 27% 4 to 6 days 32% 7 to 13 days a) Main water shut- 29. How did you find the inspector you hired? 49% A referral from the real estate agent 24% A referral from the lender/loan officer (the bank or mortgage company) 3% A referral from a friend/relative 2% Telephone book or Internet 2% Contacted a professional home inspector g) Structure of home h) Interior (e.g, walls, 1% I performed the inspection myself stairways) 1% A friend/relative performed the i) Exterior (e.g., deck, siding) 11% Other (specify): _______________ 30. Were you present for the home inspection? 54% Yes 45% No (Skip to question #32) 1% Unsure/Don’t recall (Skip to question 32. Did the inspector provide you with any of the following materials? #32) 38. Who paid for the home inspection? 73% Myself (or co-borrower) 33. Did the home inspection identify any problems with the home? 5% My lender/loan officer (the bank or 67% Yes 33% No (Skip to question #35) mortgage company) 7% Unsure/Don’t recall 2% (MULTIPLE RESPONSES) 34. Were the problems major or minor? 39. How did you pay for the home inspection? Major (total cost $500 or more) Minor (less than $500) 66% Cash/Check or credit card at or near the 4% Paid at closing separately 20% Paid at closing as part of closing costs 35. Did you renegotiate the sale as a result of the 10% Other, please specify: ____________ home inspection? 30% Yes 70% No (Skip to question #37) 40. Was your experience with a home inspection generally positive or generally negative? 36. What happened? (Mark all that apply ) Seller agreed to fix problems the Seller added a home warranty Seller added a warranty on certain items 41. When you consider the price, would you say (such as an appliance) increased or decreased your confidence in this purchase? Page 6 43. What things about getting a home inspection 45. In the future, if you ever buy another home, did you like? (Mark all that apply ) how likely will you be to get a home 3% Got a better deal on the house inspection? 48% Seller made repairs before I moved in 74% Gave me peace of mind that the house 4% As likely as unlikely 10% Knew to set aside money for repairs the 21% Learned about home maintenance and 46. How likely is it that you would choose the 4% I liked nothing about it same home inspector if you bought another 3% Other, please specify: ____________ home in this geographic area? 44. What things about getting a home inspection did you NOT like? (Mark all that apply ) 23% As likely as unlikely 15% Inspector failed to identify problems he or she should have found 6% Hard to find a good inspector 10% No problems with the house—did not need to spend the money 54% There was not anything that I disliked 3% Other, please specify: ______________ Living in the Home You Own 47. In the first 12 months after you first moved in, what problems, if any, have you had with the following items? (Mark one box in each row ) ($0) (< $100) ($100 to $500) ($500 or more) Page 7 48. Were any of the problems listed in question #47 problems that you think the home inspector should 51. Was an appraisal done on your have observed but did not? home? 16% Yes 61% No (Skip to Question #51) 10% Unsure (Skip to Question #51) 12% I did not get a home inspection 52. Were you present for the (Skip to Question #50) appraisal? with you the differences between a 50. ANSWER THIS QUESTION ONLY IF YOU DID NOT GET A appraisal? HOME INSPECTION. Why did you NOT get a home inspection? (Mark all that apply ) There was not enough time 58% Yes 32% No (Skip to Question #55) 11% Unsure (Skip to Question #55) Bought new home with warranty 54. Who? (Mark all that apply ) Didn’t think there was any risk 38% Lender/loan officer (the bank or mortgage company) I already lost out on a home to any of the items discussed in this because seller refused to allow questionnaire, please write them here. In addition to those named above, Carl S. Barden, Stefanie A. Bzdusek, Robin Eddington, Benjamin A. Federlein, Catherine M. Hurley, Austin J. Kelly, Bill MacBlane, Marc W. Molino, David M. Pittman, and Terry L. Richardson made key contributions to this report. We also acknowledge the GAO staff who provided invaluable assistance translating our homebuyer survey into Spanish: Suzanne Dove, Daniel Garcia-Diaz, Jose Martinez-Fabre, Roberto Piñero, Jonathan Rose, Josie Sigl, and Tomas Ramirez, Jr. The General Accounting Office, the audit, evaluation and investigative arm of Congress, exists to support Congress in meeting its constitutional responsibilities and to help improve the performance and accountability of the federal government for the American people. GAO examines the use of public funds; evaluates federal programs and policies; and provides analyses, recommendations, and other assistance to help Congress make informed oversight, policy, and funding decisions. GAO’s commitment to good government is reflected in its core values of accountability, integrity, and reliability. The fastest and easiest way to obtain copies of GAO documents at no cost is through the Internet. GAO’s Web site (www.gao.gov) contains abstracts and full- text files of current reports and testimony and an expanding archive of older products. The Web site features a search engine to help you locate documents using key words and phrases. You can print these documents in their entirety, including charts and other graphics. Each day, GAO issues a list of newly released reports, testimony, and correspondence. GAO posts this list, known as “Today’s Reports,” on its Web site daily. The list contains links to the full-text document files. To have GAO e-mail this list to you every afternoon, go to www.gao.gov and select “Subscribe to e-mail alerts” under the “Order GAO Products” heading. | In the 1990s, the Department of Housing and Urban Development's (HUD) Federal Housing Administration (FHA) dealt with a series of instances where buyers had not been notified of serious problems revealed by their appraisals. This led to several reforms, some of which allegedly may have caused some buyers to forgo home inspections, confusing that service with appraisals. Advocates of mandating home inspections claim that FHA will benefit from fewer foreclosures, and buyers will benefit by avoiding homes with costly problems. GAO was asked to assess (1) how many recent FHA homebuyers got home inspections and what were the perceived benefits, (2) whether homebuyers understand the differences between appraisals and home inspections, (3) whether inspections are associated with loan performance, and (4) the implications of mandating home inspections. From its survey of recent homebuyers, GAO estimates 86 percent of those using FHA-insured mortgages in 2002 got home inspections. These buyers frequently reported the inspections to be positive and beneficial, but occasionally said the inspections had drawbacks, mainly related to their cost and quality. Home inspections do not appear to be associated with loan performance; other factors, such as borrowers' credit scores, are stronger predictors of how FHA-insured loans perform. Because of this, and because mandating inspections for all homebuyers could pose serious resource challenges for FHA, the marginal benefit of requiring inspections is questionable. One of the reasons often cited for getting a home inspection was to ensure there were no serious problems with the house. Homebuyers reported that two-thirds of inspections uncovered problems with homes. As a result, they benefited by being able to renegotiate their purchases. Buyers also reported inspections were worth as much or more than they cost and increased their confidence in their decisions to buy homes. Inspections are a more in-depth review of property condition than FHA appraisals, take longer, and more often give buyers the option to back out of a purchase. GAO estimates 36 percent of FHA homebuyers understand the differences between FHA's mandatory home appraisal and its recommended home inspection. For most of the remaining buyers, GAO was not able to determine definitively the extent to which they understood the differences. Finally, FHA officials believe mandating home inspections would be difficult to enforce because the agency lacks the human capital and other resources to do so effectively. FHA also might see its pool of higher risk borrowers grow, as some buyers go elsewhere for non-FHA financing options available to lower income buyers. Benefits experienced by survey respondents might carry over to all homebuyers, but a mandatory inspection could put them at a disadvantage in highly competitive markets. |
Education administers discretionary grants both through competitions and through consideration of unsolicited proposals. In 2003, OII awarded 267 competitive grants totaling $335 million and 41 grants based on unsolicited proposals totaling $64 million. In 2004, the department approved 254 competitive grants for $826 million and 24 grants for unsolicited proposals totaling $17.5 million. Education distributed more than $42 billion in grants in fiscal year 2005, but only a small portion—12 percent—was discretionary. The rest of the funds were allocated to grantees on the basis of statutory formulas or as a result of a congressional earmarks; the department has no discretion over who receives grants from those funds. (See fig. 1). Although Education’s grant awards have increased by about a third since before the enactment of the No Child Left Behind Act, funding for discretionary grants decreased by 19 percent. Most of the increase in grant funding is allocated through formula grants, such as Title I—Improving the Academic Achievement of the Disadvantaged. Total funding for formula grants grew by about 45 percent between 2001 and 2005. In the case of competitions, selection of awardees is governed by policies and procedures designed to ensure a fair and objective evaluation of all of the applications. Education begins the competition process by publishing a notice in the Federal Register. This announcement serves as a notice that federal funds are available through a specific program and invites interested parties to prepare an application for funding. The notice provides information on the estimated number of awards that will be made and the estimated size of each award. Importantly, the notice establishes the rules by which the competition will be conducted; among other things, this notice provides information on the eligibility criteria, the issues Education expects the applicants to address in their applications, and the evaluation criteria for the competition. The notice serves as a blueprint for applicants to use in developing a successful application. In addition, program officials must develop a plan for how they will administer the competition. The competition plan, known as an Application Technical Review Plan (ATRP), is a key management control that helps promote fairness and transparency in the process. The competition plan includes such information as the schedule for the competition, the process for identifying and using external peer reviewers, the composition of the peer reviewer panels, a description of how the applications will be assigned to these panels, the process for resolving peer reviewers’ conflicts of interest, and the methodology for selecting applications for funding. Any deviation from the original plan for reviewing the applications, selecting applicants, and approving the list of prospective grantees must be justified in writing, which is designed to enhance transparency. Another key control for ensuring fairness in the award process for grants is the peer review process. Peer reviewers are typically external experts who bring an independent assessment of the merits of the applications. The number of individuals selected to serve as peer reviewers depends on the number of applications received for a specific competition. These peer reviewers are usually grouped together in panels of three or more members to review applications. Each peer reviewer independently reads and scores a group of applications randomly assigned to the panel, generally using a numerical scoring system, against program criteria based on legislative and regulatory requirements. Program officials prepare a single score for each application—usually by averaging the scores of all the peer reviewers on the panel that reviewed the application or, less frequently, using a statistical technique to equalize unusual scoring variances among reviewers. Program officials then prepare a rank-ordered list of applications based on the single scores and use this list to prepare their funding recommendations. Education’s regulations stipulate that the rank-order list is one of many factors the Secretary may use in selecting new grants. The Secretary may also use information from the application as well as information concerning the applicants’ performance and use of funds under a previous award. Ultimately, the peer reviewers’ comments are advisory, and the Secretary can determine which new grants to fund based on the program criteria outlined in the statute and the Federal Register notice. In addition to developing the ATRP, Education’s policy requires program officials to screen the applicants for eligibility, typically before applications are peer reviewed. Before making an award, program officials must conduct checks to ensure the applicants’ competence to manage federal funds. A budget analysis is also required to be conducted to ensure that no grant funds are awarded for unallowable purposes. Education’s policy is to award the vast majority of discretionary grant funds through the competitive process, however it may also fund grants based on unsolicited proposals. Although Education can fund unsolicited proposals from any program, the primary source for funding such proposals is the Fund for the Improvement of Education (FIE). This program was created in 1988 as the Secretary’s Fund for Innovation in Education. At the time, it provided the Secretary with the authority to fund proposals that showed promise of identifying and disseminating innovative educational approaches. The program has been reauthorized over the years, most recently in 2002 with enactment of the No Child Left Behind Act and maintains flexibility by providing the Secretary with the authority to fund “meritorious” programs to improve the quality of elementary and secondary education at the state and local levels and help all children meet challenging state academic content and student academic achievement standards. The FIE program is also used to fund congressional earmarks for elementary and secondary education activities. The statute does not require Education to compare the relative merits of all the proposals it receives in any given year; however, it does require that the Secretary use a peer review process for reviewing applications. Appropriations for the FIE program remained relatively steady until 1998. Since 1998 appropriations increased dramatically. (See fig. 2). Before funding unsolicited proposals, Education must also make sure that the regulatory requirements for funding such proposals are met. Education must first determine whether the unsolicited proposal could be funded under a competitive grant program; if it could be funded under a competition, the Secretary refers the proposal to the appropriate competition. If an appropriate competition does not exist, departmental regulations require the Secretary to decide if (1) there is a substantial likelihood that the application is of exceptional quality and national significance, (2) the application satisfies the requirements of all applicable statutes and codified regulations that apply to the program, and (3) selection of the project would not have an adverse impact on the funds available for other awards planned for the program. If these criteria are met, Education assembles a panel of experts to evaluate the unsolicited proposal based on the selection criteria. If the experts highly rate the application and determine that the application is of such exceptional quality and national significance that it should be funded as an unsolicited application, then the Secretary may fund the application. Education made progress since 2003 in improving its policies for awarding discretionary grants; however, prior to these improvements we found that Education made exceptions to its policies that benefited the grantees in question. For the two competitive grants, we found that Education officials reduced funding to all of the grantees to accommodate awards to lower-rated grantees and did not conduct analyses to assess the impact of these reductions on the ability of the applicants to achieve the goals of their projects. In doing so, Education broke from established practice by altering its selection methodology after it had developed a list of grantees recommended for funding. With regard to the third grant, which was an unsolicited proposal, we found that Education made the award with approval from only one of three independent reviewers and lacked a process for reconciling differences among peer reviewers’ ratings. Furthermore, Education awarded four unsolicited grants in 2001 that had not been recommended for funding by any one of the three reviewers, contrary to departmental regulations. In order to fund a grant to the Arkansas Department of Education, Education officials reduced the prospective grant awards to all other competitors in the 2002 Voluntary Public School Choice Program by nearly 50 percent. Specifically, Education’s program office recommended 10 grantees for funding, but subsequently expanded this list to 13 awardees, including 13th-ranked Arkansas. As part of its decision to fund 13 grants instead of 10, Education funded each of the top 12 grantees at just 53 percent of its request, while it funded Arkansas at 77 percent of its request. (See fig. 3). In reducing the grant awards to accommodate 13 grants, Education set aside its policy to conduct a thorough budget analysis of the programmatic impact of the reductions. The program official responsible for the competition received assurances from all of the grantees that they could still achieve the goals of their proposals with decreased funds, and according to this official, all of the grantees submitted revised budgets reflecting reduced award amounts. However, this official told us that Education did not analyze the revised budgets, and we found no evidence from our file review that a budget analysis was conducted to determine if there would be a programmatic impact resulting from the reductions. Additionally, neither the assurances nor the rescoped proposals, which given the magnitude of the reductions could be substantially different from original proposals, were vetted by any external reviewers. For example, Arkansas scaled back its proposal by eliminating foreign language instruction and summer school programs. In addition, we found that Education broke from established practice and altered its selection methodology outlined in the competition plan. The department’s original list of 13 grantees would have required cutting the requests of the applicants other than Arkansas across-the-board by 51 percent in order to fund each applicant. Arkansas received a reduction of only 23 percent. The department altered its selection methodology, which resulted in one grant request for $3.6 million being replaced by one for $749,000. Using the new methodology, funding reductions for each of the 12 grantees went from 51 percent to 47 percent. Officials told us it was not normal procedure to make changes to the selection methodology so close to the time of the award decision. We found that the process used by senior departmental officials in making an award to America’s Charter School Finance Corporation under the Credit Enhancement for Charter School Facilities program set aside departmental policy and varied from standard departmental practice. Specifically, after receiving a list of four grantees recommended for funding, the deputy secretary asked his staff—a senior political appointee—to re-review the fifth and sixth ranked competitors, as ranked by expert reviewers. Based on this re-review, the order of the fifth and sixth ranked grantees was reversed, according to the department official conducting this review, because “the application from America’s Charter was stronger and had been evaluated too harshly by its peer review panel.” Program officials said that they had never before experienced a case whereby a senior political appointee selectively re-reviewed and rescored particular applicants after the peer review process had been completed. Furthermore, the appointee recommended that “this excellent, ambitious application be awarded the fifth of five allowable grants,” expanding the initial list recommended by the program staff. To fund five grantees, program officials reduced the awards to each of the grantees by anywhere from 16 to 40 percent. We found no evidence that a budget analysis was conducted, as required by policy, to determine whether the reductions impeded the grantee’s ability to perform the proposed activities and achieve the intended outcomes on which the reviewers based their scores. In the case of the grant to NCTQ in 2001, Education awarded $5 million to the council, despite the fact that its proposal was not recommended for funding by two of three reviewers. The council’s award was based on an unsolicited proposal to create a new national accreditation program for teachers—the American Board for Certification of Teacher Excellence (ABCTE). We also found that in 2001 Education funded eight other unsolicited proposals that had been rejected by at least two of three reviewers. Four of these eight were funded despite not being recommended by any of the three reviewers, which was contrary to departmental regulations. In 2003, Education strengthened some of its policies governing the competitive grant process and in both 2003 and 2004 generally adhered to its key policies, although certain procedures were not always carried out or documented. In our review of all 25 competitions we did not find evidence that Education made funding reductions without conducting budget analyses of the potential impact on the proposals or rescored applications after they had been assessed by expert reviewers. Nor did we encounter any changes to the competition plans for 2003 and 2004 after peer reviewers had assessed the applications. However, we did find found that many of the original competition plans we examined had not been finalized—that is to say, formally approved. For this reason, we cannot be certain that all competitions had proceeded without alteration to the plans. In addition, we found many of the grant files lacked documentation documented evidence that Education had conducted three standard procedures for screening potential grantees: (1) a review of the applicant’s compliance with audit requirements; (2) a review of the applicant’s eligibility for the program; and (3) a review of requested costs and expenses to determine whether they were allowable. In 2003, Education added certain controls over the competitive grants process aimed at increasing its fairness and transparency. Among these is an explicit requirement to document any changes to a competition plan, which would include changes to how competitors are scored or how peer reviewers are selected. The new guidance provides that if there is a need to deviate from a plan during a competition, it should be formally amended and a written justification should be approved by a senior departmental official and included in the official file for the competition. Also, the department clarified the conditions under which it may reduce funding from what was applied for. In addition, the department added several checks for program staff to consider before making awards as part of their responsibility for determining that potential awardees are competent to manage federal funds. One of these checks requires that program staff submit for screening a list of the likely awardees to determine whether any have a grant history and met auditing requirements. If the audit record reveals any problem, program staff are required to withhold or delay an award until such problems are resolved. Table 1 compares certain requirements from Education’s 1997 guidance with 2003 guidance. In our review of all 25 competitions run by OII in 2003 and 2004, we found that Education generally adhered to its policies for ensuring fairness in the competitive process, and we found no evidence that Education made funding reductions without conducting budgetary analysis of the potential impact on the proposals. Nor did we find any instances in which Education officials re-reviewed peer reviewers’ initial assessments. In addition, we found that grants were generally awarded to the highest- scoring eligible applicants, as policy requires, and that exceptions to the rank order were appropriately documented and justified, as policy requires. For example, we found several instances where applicants were dropped from the slate because they were ineligible for the program. In 2003 and 2004 we found no evidence that competition plans—the procedural and scoring blueprint for each grant competition and a key management control—were changed after the expert reviews were completed. However, only 5 of the 14 plans covering the 25 competitions had been finalized as required. Specifically, the plans did not contain documentation of approval by a principal officer, nor did the plans show whether they had been amended. Without such documentation, we could not determine whether changes had, in fact, been made to the plans that would have required justification and approval under Education’s 2003 guidance. Officials acknowledged that competition plans should be signed and dated when they are developed, but officials said they at times overlooked this step. Additionally, they said that any amendments to the plans were rare and usually not substantive in nature. Further, our review of the 2003 and 2004 grants showed that the files frequently lacked documentation that Education had conducted three management controls that are designed to ensure that applicants are qualified to receive federal funds. Specifically, many of the files did not contain evidence that Education determined whether the applicant had any past audit findings, met the eligibility requirements for the program, or requested any unallowable expenses. We estimate that in 98 percent of the files, there was no evidence that program officers checked a grantee’s audit history—a key check on an applicant’s ability to manage federal grant funds. The guidance requires program staff to submit lists of potential applicants to the audit administrator to determine whether applicants submitted federally required audits and, if applicable, adhered to corrective actions required in the audits. The director of the audit division informed us, however, that this check was not universally implemented due to resource constraints. As a result, there is no pre- award assessment of an applicant’s prior performance under any previous federal grant, or that an applicant with audit findings resolved any deficiencies before a new grant was awarded. Further, we estimate that 45 percent of the grant files did not contain documentation that Education, prior to award, screened the applicants for eligibility, and 68 percent of the grant files did not contain documentation of a thorough analysis of the applicant’s requested budget to determine whether all costs were allowable. Program officials assured us that they perform both of these checks and acknowledged that documentation of the checks should be in the file. While Education has taken steps to centralize and improve its process for reviewing unsolicited proposals, it based its screening decisions on proposals that varied greatly and frequently provided extensive technical assistance. Prior to a departmental reorganization, Education officials told us there was no established process for considering unsolicited applications; instead, various offices within Education ushered select applications through a peer review process, and the Secretary decided among those which to fund. In December 2002, the Secretary notified the various offices within the department to send any unsolicited proposals relating to elementary and secondary education initiatives to OII for review. In 2003, OII developed a process for reviewing unsolicited proposals to determine which would be asked to submit an application for peer review. To select among the proposals received, senior OII officials told us they chose those proposals that aligned with the Secretary’s priorities. At the beginning of the year, these officials said they met with the Secretary to discuss his priorities and then, over the course of the year, selected some that matched the Secretary’s priorities to submit full applications. In 2004, Education’s IG reviewed OII’s process to ensure that it complied with departmental regulations and policy and found that it failed to document compliance with a number of regulatory requirements. Specifically, the IG reported that Education was not documenting whether unsolicited proposals that had been selected for peer review had been screened to ensure, among other things, that there was a substantial likelihood that the application was of exceptional quality and national significance, as required by regulations. In response to the IG’s findings, OII began to document the required screenings by including a memo in the grant file for each proposal that it planned to forward to peer review certifying, among other things, that there was a substantial likelihood that peer reviewers would deem the proposal to be of exceptional quality and national significance. While Education developed a standard process for reviewing unsolicited proposals, these proposals varied greatly in content and detail. OII officials said that the proposals could range from multipage documents from experienced grantees to less formal proposals—sometimes one-page letters or e-mails—from novice grantees. OII does not require that proposals be in a standard format before it selects which ones to forward to peer reviewers. OII officials told us it was often difficult to discern from the submitted material which proposals would ultimately gain the support of the peer reviewers. Nonetheless, OII made its determinations that proposals were likely to meet regulatory requirements of national significance and exceptional quality on the basis of these varying proposals. OII officials said that because the regulatory criteria defining significance and quality are broad many of the proposals submitted during the year met the criteria. OII officials said that they were concerned that if they had to promulgate rules governing the format or topics for unsolicited proposals, they might be overwhelmed with applicants. However, another office within Education—the Institute of Education Sciences (IES)—invites unsolicited research proposals and requires a standard submission. IES’ invitation provides guidance on standardized presentation formats—proposals are limited to six pages—and imposes deadlines on submitting the proposals to IES. We also found that OII provided extensive technical assistance to some applicants. Our file review of unsolicited proposals showed that in many cases OII staff were in regular communication with the applicants, provided them with suggestions for how to organize and structure the narrative portion of their applications, assisted them in preparing proposed budgets, and commented on drafts of their applications. In 2003, despite Education’s screening and technical assistance efforts, peer reviewers gave low scores to 14 of 42 applicants, and Education funded 13 of these low-scoring proposals. (See appendix II for a list of grants awarded in 2003 based on unsolicited proposals). In its 2004 study, the IG found that OII failed to comply with regulations that make funding for unsolicited proposals contingent on recommendations from peer reviewers. In response to the IG’s findings and to comply with the regulation, OII began, in 2004, to ask the peer reviewers to provide recommendations for or against funding, rather than just having them provide a numerical score for each proposal. However, in 2004, if peer review failed to recommend approving a proposal that OII had selected, OII provided the applicants with the reviewers’ comments and asked them to rewrite their proposals. In 2004, 10 of the 27 applicants failed to garner the reviewers’ support. Of those 10 grantees, 2 declined to resubmit their applications—citing time constraints—and were not approved. The remaining eight applicants revised their proposals and were subsequently recommended for approval by peer reviewers after the revisions were submitted. All eight were approved and funded. (See app. III for a list of grants awarded in 2004 based on unsolicited proposals). The Department of Education has the responsibility to ensure that when it makes discretionary grant awards it follows a transparent and fair process that results in awards to deserving eligible applicants. In the case of unsolicited applications, OII’s process is designed to meet statutory and regulatory requirements. However, Education based its decisions about the likely national significance and quality of proposals on information that varied greatly in detail and, as a result, sent applications forward for peer review that sometimes required extensive revisions. Without requiring a more uniform format for unsolicited proposals, OII may not have adequate information on which to base its screening decisions. Regarding its competitive awards process, the department has put in place management controls that, if followed, provide a reasonable assurance that awards are made appropriately. These controls protect the integrity and transparency of the departmental grant award process by requiring, among other things, that competition plans are finalized prior to the competition, that any changes to such plans are documented and approved, that grantees are screened for competency and eligibility, and that departmental officials determine that proposed activities are allowable under the law. When the department does not consistently follow these procedures, as we found to be the case, the integrity of its competitive grant award process may be undermined. Furthermore, in the absence of such diligence, actions taken that benefit specific grantees, such as those we found in 2001 and 2002, could happen again. We are making four recommendations to the Secretary of Education to address certain shortcomings in the department’s grant-making policies through a variety of executive actions designed to promote fairness, enhance transparency, and provide greater access to funding opportunities. Specifically, to improve the process for selecting and awarding grants based on unsolicited proposals, we are recommending that the Secretary develop a more systematic format to select unsolicited proposals for further consideration by peer reviewers. In addition, to ensure fairness and improve transparency in the competitive grants process, we recommend that the Secretary take the following steps: Ensure that all competition plans are finalized before competitions begin and if a plan needs to be amended during a competition, the Secretary should provide assurances that any such amendment is justified in writing and has been approved by a senior department official. Implement departmental policy to screen all applicants for compliance with audit requirements before the award, and ensure that outstanding audit issues—if there are any—are addressed before making an award. Take appropriate steps to ensure that program officers better document required checks such as budget analyses and eligibility screening. Education provided us with comments on a draft of this report; these comments appear in appendix III. Education also provided technical comments that we incorporated as appropriate. Education agreed with 3 of our recommendations for improving the transparency of its competitive review process and said it has already taken steps to improve its guidance and training. Specifically, it agreed to (1) finalize competition plans before the competitions begin and obtain approvals from senior department officials for any amendments to the plans, (2) ensure that program officers better document their analyses of applicants’ budgets and eligibility, and (3) implement departmental policy to screen all applicants for compliance with audit requirements before awarding any new grants. Education disagreed with our recommendation that it develop a more systematic approach—modeled after the approach used by IES—to select unsolicited proposals for further consideration by peer reviewers. Education said implementation of our recommendation would not help it to select high-quality applications because of the broad nature of the FIE program. We disagree and think that collecting some systematic information would enhance Education’s ability to more effectively screen the quality of its applicants and enhance the transparency and consistency of this process. As we reported, Education officials acknowledge that, due to the nature of the proposals, it is often difficult to make quality screening decisions. We acknowledge that FIE awards and IES’ research grants are fundamentally different, but we point out that the FIE program does not necessarily need to collect information that is as detailed or that would place unnecessary burdens on organizations seeking FIE funds. To make it clear that Education should focus on developing a systematic approach to selecting unsolicited proposals rather than duplicating the approach used by IES, we have modified our recommendation and removed reference to IES. As agreed with your staff, unless you publicly announce its contents earlier, we plan no further distribution of this report until 30 days after its issue date. At that time, we will send copies of this report to the Secretary of Education, Education’s OII, relevant congressional committees, and other interested parties. We will also make copies available to others upon request. In addition, the report will be made available at no charge on GAO’s Web site at http://www.gao.gov. If you or your staff have any questions regarding this report, please contact me at (202) 512-7215. Contact points for our Offices of Congressional Relations and Public Affairs are listed on the last page of this report. Key contributors are listed in appendix IV. This appendix discusses in detail our scope and methodology for (1) reviewing Education’s grant award decisions for the 2001 and 2002 grants in question to determine whether the department had followed its policies in place at the time, (2) assessing the department’s policies and procedures in place in 2003 and 2004 for the competitive awards process and determining whether Education followed them in making such awards in those years, and (3) assessing Education’s process for reviewing unsolicited proposals in 2003 and 2004. To review Education’s grant award decisions for the 2001 and 2002 grants, we limited our in-depth inquiry to the three grants in question. These grants were awarded before Education reorganized in 2003. In 2003, Education created OII and consolidated a number of grant programs with it. The grants in question were funded from programs that are now housed in OII. In addition, in 2003 Education published revised agency guidance on awarding. This guidance governs the policies and procedures program staff must follow in holding grant competitions and in awarding grants. Consequently, we chose 2003 and 2004 as the time period for our systematic review of both competitive grants and grants based on unsolicited proposals. We used the department’s GAPS to identify all grants awarded in 2003 and 2004. We assessed the reliability of the data in GAPS and found it to be reliable for our purposes. We reviewed the competition files from all 25 discretionary grant competitions held in 2003 and 2004. During this 2-year period, a total of 521 grants were awarded. Ten of these grants were for $15 million or more; we selected all of these grants for review. Of the remaining 511 competitive grants awarded for amounts under $15 million, we selected a random sample of 81 additional grants to review. The sample size was calculated to achieve a precision of plus or minus 10 percent for an attribute estimate with an expected proportion of 50 percent and a 95 percent confidence level. With this probability sample, each grant in the population had a known nonzero probability of being selected. Each sample grant was subsequently weighted in the analysis to account statistically for all the members of the population, including those that were not selected. All percentage estimates from this sample have margins of error of plus or minus 10 percent or less. In addition to 91 competitive awards, we examined all 65 grants based on unsolicited proposals made by OII during 2003 and 2004. In 2003, $64 million was awarded to 41 unsolicited grantees; in 2004, $17.5 million was awarded to 24 unsolicited grantees. The grantees we examined were collectively awarded $507 million, or 41 percent of the $1.24 billion total competitive and unsolicited grant funds awarded in 2003 and 2004 by OII. To review the 2001 and 2002 grants in question to determine whether the department had followed its policies, we reviewed departmental grant- making guidance in place at the time these grants were awarded and the official grant files for each of these grants. For the two competitive grants, we also examined the corresponding files for the competitions that contain information on all of the applicants’ proposals, the competition plans, and external reviewers’ rankings and comments. In addition, for the competitions, we interviewed relevant managers and program officers responsible for monitoring the grants, program attorneys, and ethics officials. For the unsolicited grant, we reviewed the official grant file, including the peer review comments. For comparison, we also reviewed the expert reviewers’ rankings and comments for all other unsolicited awards made in 2001. Further, we interviewed program officials responsible for monitoring the grant. To assess the department’s policies and procedures in place in 2003 and 2004 for the competitive awards process and determine whether Education followed them in making such awards in those years, we examined departmental guidance issued in March 2003 that governed the grants awarded in those years as well as applicable statutes authorizing competitions and regulations. Also, we reviewed competition files and individual grant files for grants awarded during this 2-year period. In reviewing the competition files, we recorded information in the Federal Register notice inviting applications, the competition plan, the funding memo and slate from the Deputy Under Secretary to the Executive Secretary and information on the funded grantees from the GAPS. We used a structured instrument to collect information about each grant. In reviewing each individual grant file, we recorded information on the (1) grantee’s funding levels, years in the program, and contact information; (2) application processing by Education, including funding checklists, application log screening forms, and budget analysis; (3) peer reviewers’ comments and rankings; and (4) single audit database reports. We also interviewed key program officials from three of OII’s six program offices to ascertain their familiarity with departmental guidance and to help us better understand how they implemented the department’s guidance. Similarly, to assess Education’s process for reviewing unsolicited proposals in 2003 and 2004, we reviewed departmental guidance and all 65 files for unsolicited grants awarded by OII in 2003 and 2004. We collected information from this review on the processes used by the department to assess each successful application for its quality and its national significance, the level of technical assistance provided to each successful application, the peer reviewers’ comments on each application, and any additional post-review support provided to the awardees. Again, we used a structured instrument to collect information about each grant. In addition, we interviewed officials responsible for administering grants based on unsolicited proposals. We conducted our work between May 2005 and February 2006 in accordance with generally accepted government auditing standards. Appendix II: Grants Awarded Based on Unsolicited Proposals (2003-2004) Colorado Children’s Campaign Black Alliance for Educational Options Hispanic Council for Reform and Educational Opportunities National Council of Negro Women, Inc. Corporation for Educational Radio and Television (CERT) Accountability Works, Inc./Education Leaders Council National Alliance of State Science and Mathematics Coalitions Research for Better Schools, Inc. University of Dayton School of Education Center for Education Innovation—Public Education Association National Football Foundation and College Hall of Fame, Inc Alpha Kappa Alpha Sorority, Inc. First & Goal, Inc. Bryon Gordon, Assistant Director, and Bill Keller, Analyst-in-Charge, managed this assignment and made significant contributions to all aspects of this report. Ellen Soltow also made significant contributions, and Jim Ashley, Joel Grossman, and Jerry Sandau aided in this assignment. In addition, Richard Burkard and Jim Rebbe assisted in the legal analysis, and Sue Bernstein assisted in the message and report development. U.S. Department of Education’s Use of Fiscal Year Appropriations to Award Multiple Year Grants. B-289801. Washington, D.C.: December 30, 2002. Financial Management: Review of Education’s Grantback Account. GAO/AIMD-00-228. Washington, D.C.: August 8, 2000. Education Discretionary Grants: Awards Process Could Benefit From Additional Improvements. GAO/HEHS-00-55. Washington, D.C.: March 30, 2000. Department of Education Grant Award. GAO/HRD-93-8R. Washington, D.C.: December 9, 1992. Grants Management: Additional Actions Needed to Streamline and Simplify Processes. GAO-05-335. Washington, D.C.: April 18, 2005. Grants Management: EPA Needs to Strengthen Efforts to Provide the Public with Complete and Accurate Information on Grant Opportunities. GAO-05-149R. Washington, D.C.: February 3, 2005. Federal Assistance: Grant System Continues to Be Highly Fragmented. GAO-03-718T. Washington, D.C.: April 29, 2003. Welfare Reform: Competitive Grant Selection Requirement for DOT’s Job Access Program Was Not Followed. GAO-02-213. Washington, D.C.: December 7, 2001. Grant Financial System Requirements: Checklist for Reviewing Systems Under the Federal Financial Management Improvement Act. GAO-01-911G. Washington, D.C.: September 3, 2001. Grant Financial System Requirements. GAO/JFMIP-SR-00-3. Washington, D.C.: June 1, 2000. | In the past 3 years, Education awarded an average of $4.8 billion annually in discretionary grants through its competitive awards process and through consideration of unsolicited proposals. GAO assessed Education's policies and procedures for both competitive awards and unsolicited proposals awarded by its Office of Innovation and Improvement in 2003 and 2004 and determined whether it followed them in awarding grants in those years. GAO also reviewed Education's grant award decisions for several 2001 and 2002 grants to determine whether the department followed its own policies. In 2003 and 2004, Education took steps to improve its procedures for awarding discretionary grants through competitions but certain procedures were not always followed. During this time, after Education introduced some new management controls to its competitive grants procedures, we found it generally adhered to these new policies. For example, GAO did not find evidence that Education reduced any applicant's request without first conducting a budget analysis, as required, or that Education rescored applications after they had been peer reviewed. However, certain procedures were not always followed; for example, Education frequently did not finalize its plans for conducting competitions before starting the competitions--a step that would help ensure transparency in making awards. In addition, many files lacked documentation that the department screened the applicants, as required, to identify incompetent applicants, ineligible grantees, or unallowable expenditures. Since 2003, Education has also taken steps to reform its process for awarding grants based on unsolicited proposals, but it based its screening decisions on proposals that vary greatly and frequently provided extensive technical assistance. Following a departmental reorganization, Education established a centralized process for reviewing unsolicited proposals. However, these proposals, which Education used as a basis to certify that there is a substantial likelihood that the application will meet regulatory requirements, varied greatly in content and detail. GAO also found that Education provided extensive technical assistance to applicants, in some instances, providing applicants with the notes of peer reviewers and allowing applicants to revise and resubmit applications. Specifically, in 2004, 10 of the 27 applicants did not get reviewers' support and were provided a chance to re-apply. Of those 10 applicants, 8 revised their proposals, received favorable recommendations, and were subsequently funded. Prior to 2003, Education made exceptions to some of its policies in awarding three grants, totaling about $12.3 million, where particular allegations were raised. Two of the grants were awarded through a competitive process, but GAO found that Education reduced funding to all of the grantees to expand the number of grantees funded and to accommodate awards to lower rated grantees. In doing so, Education altered its selection methodology after it developed and recommended a list of grantees. In one case, Education rescored and reversed the order of selected grantees after the peer reviewers had completed their assessments. Education awarded the third grant based on an unsolicited proposal and regulations require that the department seek recommendations from peer reviewers prior to funding. In this case, the peer reviewers could not agree on a recommendation. GAO found that Education lacked a process to reconcile disagreements among reviewers and awarded a grant that two of three reviewers did not recommend. Moreover, Education awarded four grants in 2001 for unsolicited proposals that had not been recommended for funding by any one of the three reviewers. |
EPA manages its environmental enforcement and compliance responsibilities primarily through its OECA. OECA monitors the compliance of regulated entities, identifies national enforcement concerns and sets priorities for addressing them, and provides overall direction on enforcement policies. OECA can take enforcement actions, such as fining entities that are in noncompliance with EPA regulations, but most of EPA’s enforcement responsibilities are carried out by its 10 regional offices. These offices carry out program activities under each of the major federal environmental statutes, such as the Clean Air Act and the Clean Water Act, have compliance related responsibilities, and also take enforcement actions. For example, among other things, a regional office can conduct inspections, provide compliance assistance and training to state enforcement programs, and take enforcement actions such as assessing fines for noncompliance with EPA regulations. The regional offices also oversee certain state enforcement programs and implement certain programs in Indian country. Many federal environmental statutes direct EPA to approve or authorize qualified states to implement and enforce environmental programs consistent with federal requirements, and most states have responsibility for multiple laws. EPA-authorized states are to monitor compliance of regulated entities, conduct inspections, take enforcement actions against entities found in noncompliance, and report their actions to EPA. EPA proposed the Next Generation Compliance initiative in fiscal year 2012 to capitalize on advanced technical capabilities and efficiencies in enforcement and compliance. In developing this new initiative, EPA stated that it wanted to go beyond its traditional enforcement approach of inspecting individual entities and make available, among other things, new and more complete enforcement and compliance information. According to agency documents, the long-term goals of the initiative are to improve compliance and obtain greater health and environmental benefits from EPA’s regulations. The proposed elements of the initiative are described in a brief overview document and some slide presentations that the agency has prepared about the initiative. In summary, according to these materials, the five components of the Next Generation Compliance initiative are the following: Rulemaking—designing and structuring rules and regulations to ensure greater compliance, such as including requirements for regulated entities to regularly assess their compliance. Technology—using advanced emissions and pollutants monitoring technology, such as infrared cameras, for compliance monitoring so that regulated entities and the public are better informed about entities’ pollution. Electronic reporting—using modern information technology to transition from paper to electronic reporting of items such as permit data, compliance information, and enforcement actions. Transparency—making both current and new entities’ enforcement and compliance information, such as information obtained from advanced emissions and pollutants monitoring and electronic reporting, more publicly available. Innovative enforcement approaches—employing new or innovative enforcement approaches, such as including tools like advanced emissions and pollutants monitoring or electronic reporting requirements in EPA enforcement settlement agreements with entities. EPA envisions that Next Generation Compliance benefits will come from (1) designing and structuring rules and regulations to ensure greater compliance by regulated entities; (2) obtaining and making public more and better compliance data so that the public can determine the extent of regulated entities’ compliance with environmental regulations, thereby exerting pressure on violators for greater compliance; and (3) improving the ability of EPA-authorized states to implement their environmental programs. EPA officials informed us that EPA has started provided training to EPA staff on how to incorporate the Next Generation components into designing rules and regulations. As part of this effort, EPA developed a training workbook for staff on how to design rules with an emphasis on increasing regulated entity compliance. With regard to making public more and better compliance data, according to EPA documents, providing information to the public, together with public accountability, can result in greater compliance by regulated entities. For example, EPA stated that reductions in regulated entities’ noncompliance with NPDES permits in certain states may be related to EPA’s increasing the public disclosure of related compliance data, along with the release of state enforcement performance information. These actions, according to EPA, created more pressure on states to enforce and on these entities to comply with NPDES permit requirements. Furthermore, EPA believes that the improved enforcement and compliance data Next Generation Compliance will provide will allow states and EPA to be more innovative in developing new approaches to improving compliance. Since introducing its Next Generation Compliance initiative in fiscal year 2012, EPA has taken four primary steps to increase transparency and accountability in enforcement and compliance. According to EPA documents and officials, these steps provide greater access to data under EPA-regulated programs and make regulated entities more accountable to the public. First, EPA formed an electronic reporting task force in December 2011 to provide recommendations for converting from existing paper-based reporting requirements to electronic reporting. This action is in support of a broader EPA effort to require regulated entities to electronically report data, such as permit data and compliance information, to EPA and state environmental agencies. According to EPA documents, electronic reporting is not simply e-mailing files to the government, but it is an electronic method that guides the entity through the reporting process. The task force is also developing agency policy to include electronic reporting requirements in all new EPA regulations. According to a senior EPA official responsible for coordinating the Next Generation Compliance initiative, in June 2012, the task force started working with the Environmental Council of the States, a national association of state and territorial environmental agency leaders, to explore how regulated entities could electronically conduct business with EPA and state environmental agencies, including providing electronic submissions of permit applications and modifications, as well as emissions and pollutants data. Second, the agency formed a work group in April 2012 to identify advanced emissions and pollutants monitoring technology and evaluate how the agency can better use such technology. Among other things, the work group is charged with preparing a national inventory of the advanced monitoring equipment EPA owns or has access to from other sources, such as contractors. The work group’s charter called for it to prepare a report by September 2012 that addresses 10 items and, among other things, provide suggestions to establish formal policies and procedures for deploying and maintaining advanced emissions and pollutants monitoring technology and training staff on its use. According to EPA officials, an interim report that contained initial findings and recommendations from the work group was provided to the OECA Deputy Assistant Administrator on September 29, 2012. Third, EPA has begun including Next Generation Compliance in its enforcement activities by incorporating elements of the initiative into selected settlement agreements. For example, under an EPA settlement agreement announced in May 2012, a petroleum company agreed to install “state-of-the-art” pollution controls at its refinery, as well as a fence- line emissions monitoring system. According to the terms of the settlement agreement, the company will post data collected from the fence-line monitoring system on a public website. In an EPA agreement announced in April 2012, another petroleum company also agreed to install “state-of-the-art” pollution controls at its refineries and in the process provided resources and assistance to EPA to acquire new scientific information for measuring certain air emissions.us that this settlement agreement, taken in its entirety, is an example of identifying and using advanced technology to both monitor and reduce emissions. In September 2012, EPA formed a work group to advance the use of Next Generation compliance tools in EPA settlement agreements. Fourth, the agency has increased the public availability of the enforcement and compliance information it currently has available. EPA officials informed us that they are observing the public’s increasing use of EPA’s Enforcement and Compliance History Online (ECHO) website and are continually looking for ways to improve and expand the information publicly available on the website. For example, in January 2012, EPA released a Clean Water Act Discharge Monitoring Report Pollutant Loading Tool on its ECHO website to provide the public with information about pollutants that are released into local waterways. According to EPA documents, the tool allows the public to compare annual pollutant discharge amounts from certain regulated entities under the Clean Water Act and includes a mapping application, toxicity data, and links to other compliance information. EPA has not developed a strategic plan to integrate Next Generation Compliance into its enforcement and compliance program. EPA has prepared a brief overview document and some slides that provide basic information on the initiative’s five components, but these documents are general in nature and provide little specificity regarding EPA’s plans, goals, or performance measures related to Next Generation Compliance. A senior EPA official responsible for coordinating the Next Generation Compliance initiative told us that EPA recognizes the need for a strategic plan for the initiative and expects to prepare one in fiscal year 2013, but he could not provide a specific time frame for either starting or completing the plan. Federal departments and agencies such as EPA must comply with GPRA requirements and are to follow associated OMB guidance in developing their departmental or agencywide strategic plans. We have previously reported that strategic planning for activities below the agencywide level— such as planning for individual divisions, programs, or initiatives— is a leading practice for successful agencies. In addition, we have previously reported on federal agencies’ strategic planning efforts and have identified additional useful practices to enhance agencies’ strategic plans. Taken together, the strategic planning elements established under GPRA and associated OMB guidance and practices we have identified provide a framework of leading practices in federal strategic planning.These include such actions as defining the missions and goals of a program or initiative and involving stakeholders and leadership in planning, among others. Table 1 lists five selected leading practices in federal strategic planning and their characteristics. We highlight these five practices because EPA’s Next Generation Compliance initiative is still being developed, and these practices are particularly relevant to the early stages of developing a strategic plan. Without a plan that incorporates leading strategic planning practices such as those included in table 1, EPA cannot be assured that it has established a framework to effectively guide and assess the success of this initiative and cannot be assured that it is effectively integrating the initiative into its overall enforcement and compliance program. For example, we have previously reported when developing a strategic plan, it is particularly important for agencies to define strategies that address management challenges that threaten their ability to meet long-term strategic goals and include a description of the resources, actions, time frames, roles, and responsibilities needed to meet established goals. Without a strategic plan to direct its Next Generation initiative, EPA could waste valuable resources, time, and effort. For example, without proper planning, EPA may pursue emissions monitoring technologies that not all regulated entities—especially the growing numbers of smaller facilities— can fully utilize, thereby requiring EPA to rely on costly individual facility inspections with its limited resources. EPA acknowledges the need for a plan for the Next Generation Compliance initiative, but it has not yet developed one that clearly articulates a strategy for integrating the initiative into the existing enforcement and compliance program and provides a comprehensive analysis of how the initiative will help to achieve the overall goals of the program. The brief overview documents and slides EPA has developed for the initiative include only general statements about the need for and benefits of the new initiative and descriptions of the initiative’s broad goals. Specifically, EPA’s overview and other documents do not, among other actions, (1) clearly define the goals of the initiative and steps needed to achieve these goals; (2) identify and develop a strategy for including milestones for significant actions to be taken, as well as a description of the resources needed to accomplish them; and (3) ensure that all key stakeholders are involved in both the planning and implementation of the initiative. Without a strategic plan incorporating selected leading practices, EPA may face challenges in helping ensure that the initiative will achieve its long-term goals of improving compliance and obtaining greater health and environmental benefits from the agency’s regulations. EPA began its Next Generation Compliance initiative in an effort to move beyond its traditional enforcement strategies to improve overall regulatory compliance. As part of the effort, the agency has undertaken several worthwhile steps to increase enforcement and compliance and encourage transparency and accountability. However, the agency has not developed a strategic plan for implementation of Next Generation Compliance and could face challenges in helping ensure that the initiative will achieve its goals of improving compliance and obtaining greater health and environmental benefits from agency regulations if it moves forward without one. Also, without such a plan to direct its Next Generation Compliance initiative, EPA could waste valuable resources, time, and effort and cannot be certain that it effectively integrates the initiative into its overall enforcement and compliance program. To better integrate Next Generation Compliance into its overall enforcement and compliance program and ensure that the initiative will achieve the goals EPA envisions for it, we recommend that the Administrator of EPA direct the Assistant Administrator of OECA to take the following two actions: Develop a schedule for completing, in a timely manner, a strategic plan for Next Generation Compliance; and Ensure that this strategic plan incorporates selected leading practices in federal strategic planning, as appropriate, and describes how Next Generation Compliance is to be integrated into the enforcement and compliance program. We provided a draft of this report to EPA for review and comment. In written comments, which are included in appendix I, EPA agreed with the report’s recommendations. Regarding the first recommendation, EPA stated it will prepare a strategic plan for Next Generation Compliance in fiscal year 2013. Regarding the second recommendation, EPA stated it will consider incorporating leading practices in federal strategic planning, where appropriate, as it develops the strategic plan. The agency also stated that it anticipates that integrating Next Generation Compliance into its enforcement and compliance program will be a primary component of the strategic plan. EPA also provided technical comments on the draft report, which we incorporated as appropriate. As agreed with your office, unless you publicly announce the contents of this report earlier, we plan no further distribution until 30 days from the report date. At that time, we will send copies to the Administrator of EPA, the appropriate congressional committees, and other interested parties. In addition, the report also will be available at no charge on the GAO website at http://www.gao.gov. If you or your staff members have any questions about this report, please contact me at (202) 512-3841 or [email protected]. Contact points for our Offices of Congressional Relations and Public Affairs may be found on the last page of this report. GAO staff who made major contributions to this report are listed in appendix II. In addition to the individual named above, Vincent P. Price, Assistant Director; Cheryl Arvidson; Elizabeth Curda; Cindy Gilbert; Richard P. Johnson; Kirk D. Menard; Carol Herrnstadt Shulman; Kiki Theodoropoulos; and Jason Trentacoste made key contributions to this report. | The Environmental Protection Agency (EPA) oversees many environmental programs that seek to protect public health and the environment. Substantial noncompliance with these regulations and increasing budget pressures, among other things, led EPA to propose a new enforcement and compliance initiative in fiscal year 2012. This new initiativeNext Generation Complianceattempts to capitalize on advances in emissions and pollutants monitoring and information technology. Among other things, EPA expects Next Generation Compliance to provide new and more complete enforcement and compliance information and promote greater public transparency and accountability. GAO was asked to review (1) actions EPA has undertaken in Next Generation Compliance to increase enforcement and compliance transparency and accountability and (2) the extent to which EPA is developing a strategic plan to integrate Next Generation Compliance into its enforcement and compliance program. To conduct this work, GAO reviewed Next Generation Compliance documents and interviewed selected EPA officials. Since introducing its Next Generation Compliance initiative in fiscal year 2012, EPA has taken four primary steps to increase transparency and accountability in enforcement and compliance. According to EPA documents and officials, these actions will provide greater access to data under EPA-regulated programs and make regulated entities more accountable to the public. In this regard, EPA formed an electronic reporting task force in December 2011 to provide recommendations for converting from existing paper-based reporting requirements to electronic reporting; established a work group in April 2012 to identify advanced emissions and pollutants monitoring technology and evaluate how the agency can better use such technology; formed a work group in September 2012 to advance the use of new compliance tools in its enforcement activities, such as in settlement agreements with entities that are found in noncompliance with regulations; and increased the public availability of the enforcement and compliance information it currently has available by, among other actions, placing a tool on its enforcement website that allows the public to obtain information about pollutants that are released into local waterways. EPA has not developed a strategic plan to integrate Next Generation Compliance into its enforcement and compliance program. EPA has prepared some documents on the initiative and its components, but these documents are general in nature and provide little specificity regarding EPA's plans related to Next Generation Compliance. GAO has previously reported that strategic planning for activities below the agencywide level is a leading practice for successful agencies. EPA acknowledges the need for an overall plan for Next Generation Compliance. Developing a plan that incorporates selected leading practices for federal strategic planning could help EPA more effectively integrate Next Generation Compliance into its enforcement and compliance program and promote greater public transparency. Without a strategic plan incorporating these leading practices, EPA may face challenges in helping to ensure that its initiative will achieve its long-term goals of improving compliance and obtaining greater health and environmental benefits from the agency's regulations. Additionally, without a strategic plan to direct its Next Generation Compliance initiative, EPA could waste valuable resources, time, and effort. For example, without proper planning, EPA may pursue emissions monitoring technologies that not all regulated entities--especially the growing numbers of smaller facilities--can fully utilize, thereby requiring EPA to rely on costly individual facility inspections with its limited resources. GAO recommends that EPA (1) develop a schedule for completing a strategic plan for its Next Generation Compliance initiative in a timely manner and (2) incorporate selected leading practices in federal strategic planning in the plan. EPA agreed with GAO's recommendations. |
Audit work we performed on FEMA’s IHP payments and DHS’s purchase card program identified widespread fraud, waste, and abuse. Findings from these audits and our related investigations show the result of ineffective preventive controls. As shown by our IHP work, ineffective preventive controls can result in hundreds of millions or potentially billions of dollars in improper and fraudulent payments. In addition, our work on DHS purchase cards showed that control weaknesses in government purchasing programs can also result in fraud, waste, and abuse. Between February and December 2006, we testified on three different occasions that potentially improper and fraudulent activities related to the IHP program are significant. Our February 2006 testimony focused on control weaknesses that resulted in FEMA making thousands of Expedited Assistance (EA) payments that were based on bogus registration data. Specifically, we found that FEMA made millions of dollars in payments on registrations containing Social Security numbers that had never been issued or belonged to deceased individuals. In addition, we also found that numerous registrations we selected for investigation contained bogus damaged address. We also successfully submitted fictitious registrations and received payments using bogus identities and addresses. Our second testimony in June 2006 discussed breakdowns in internal controls, in particular the lack of controls designed to prevent bogus registrations. These breakdowns resulted in an estimated 16 percent or $1 billion in payments made through February 2006 based on invalid registrations. The statistical sample testing used to reach this estimate found payments made on registrations that contained invalid identities, bogus addresses, addresses which the registrant did not live in at the time of the disaster, and duplicate registrations. Our data mining also found that FEMA paid millions of dollars on over 1,000 registrations containing the names and Social Security numbers of individuals incarcerated in federal or state prisons during the hurricanes, and paid millions of dollars in IHP payments to individuals who claimed a Post Office box as their damaged physical address in order to receive assistance. In our December 2006 testimony we found additional instances of IHP fraud, waste, and abuse, including duplicate housing assistance provided to thousands of individuals living in FEMA-provided housing. Specifically FEMA paid registrants rental assistance money while at the same time providing rent-free housing in apartments and FEMA trailers. We also found that FEMA provided about $20 million dollars in potentially duplicate payments to individuals who registered and received assistance twice using the same Social Security number and damaged address. These individuals registered once for Hurricane Katrina and then again for Hurricane Rita using the same Social Security number and damaged address. FEMA also paid several million more dollars worth of IHP payments to registrants who were ineligible nonqualified aliens. Based on data we received from several universities in the area, we identified that FEMA made IHP payments to more than 500 ineligible foreign students, despite receiving, in some cases, evidence clearly showing that they were not eligible for IHP benefits. The December 2006 testimony also pointed to the small amount of money that FEMA had been able to collect from improper payments as of November 2006. Specifically, in contrast to the $1 billion in potentially improper and/or fraudulent payments we estimated through February 2006, FEMA had detected, as of November 2006, about $290 million in improper payments, and had collected only $7 million. Our work on DHS purchase card controls found weak accountability over FEMA computers, printers, Global Positioning System (GPS) units, and other items bought for hurricane relief efforts using government purchase cards. Thirty-four percent of items obtained with purchase cards that we investigated could not be located and are thus presumed lost or stolen. As of October 2006, more than 40 computers, 10 printers, 20 GPS units, and 2 flat-bottom boats are missing. In addition, 18 other flat-bottom boats purchased by FEMA were in its possession, but FEMA did not own title to any of them. Based on these findings, and the findings on the IHP program, we have made recommendations to FEMA to develop effective systems and controls to minimize the opportunity for fraud, waste, and abuse in the future. FEMA has generally concurred with most of our recommendations and has reported on actions to improve prevention of fraud, waste, and abuse for the future. The results of our work serve to emphasize the overall lesson learned that fraud prevention is the most effective and efficient means to minimize fraud, waste, and abuse. It also demonstrates that the establishment of effective fraud prevention controls over the registration and payment process, fraud detection and monitoring adherence to those controls, and the aggressive pursuit and prosecution of individuals committing fraud are crucial elements of an effective fraud prevention program over any assistance programs with defined eligibility criteria, including disaster assistance programs. The very nature of the government’s need to quickly provide assistance to individuals adversely affected by disasters makes assistance payments more vulnerable to applicants attempting to obtain benefits that they are not entitled to receive. However, it is because of these known vulnerabilities that federal and state governments need to have effective controls in place to minimize the opportunities for individuals to defraud the government. Figure 1 provides an overview of how preventive controls help to screen out the majority of fraud, waste, and abuse, and how detection controls and prosecution can help to further minimize the extent to which a program is vulnerable to fraud. Preventive controls are a key element on an effective fraud prevention program and are also described in the Standards for Internal Control in the Federal Government. The most crucial element of effective fraud prevention controls is a focus on substantially diminishing the opportunity for fraudulent access into the system through front-end controls. Preventive controls should be designed to include, at a minimum, a requirement for data validation, system edit controls, and fraud awareness training. Finally, prior to implementing any new preventive controls, and well in advance of any disaster, agencies must adequately field test the new controls to ensure that controls are operating as intended and that legitimate victims are not denied benefits. Fraud prevention can be achieved by requiring that registrants provide information in a uniform format, and validating these data against other government or third-party sources to determine whether registrants provided accurate information on their identity and place of residence. Effective fraud prevention controls require that agencies enter into data- sharing arrangements with organizations to perform validation. In the current environment, agencies have at their disposal a large number of data sources that they can use to validate the identity and address of registrants. However, our work related to FEMA’s management of the IHP program for hurricanes Katrina and Rita found that its limited—or sometimes nonexistent—use of a third-party validation process left disaster assistance programs vulnerable to substantial fraud. For example, FEMA’s failure to implement preventive controls to validate the identity of individuals who applied using the telephone resulted in FEMA making millions of dollars in payments to individuals who used Social Security numbers that had never been issued or belonged to deceased individuals. Another method of data validation is through physical inspection of the disaster damage prior to payment. While physical inspections in a timely manner may not be possible to prevent all fraudulent and improper payments, our work found that FEMA continued to make payments without a valid physical inspection of our undercover registration’s bogus addresses, months after the hurricanes had occurred. System edit checks designed to identify problem registrants and claims (e.g., duplicates) before payments are made are also a crucial lesson learned with respect to ensuring that obviously false or duplicate information is not used to receive disaster relief payments. System edit checks are most effective if performed before distribution of a payment. Edit checks should include ensuring that (1) the same Social Security number was not used on multiple registrations and (2) the registrant provides a verifiable physical address on which the disaster damage is based. In the case of FEMA’s IHP program, ineffective edit checks resulted in millions paid to registrants who claimed the same damages twice, once for Hurricane Katrina and once for Hurricane Rita, and registrants who submitted multiple registrations using the same name, Social Security number, or address. Ineffective edit checks also resulted in payments being made based on obviously false data, including payments of millions of dollars to individuals who used a Post Office box as their damaged physical address in order to receive assistance. Beyond validation and edits, lessons learned show that other controls, including a well-trained work force that is aware of the potential for fraud, can help prevent fraud. Fraud awareness training with frontline personnel—specifically on the potential for fraud within the program and the likely types of fraud they could encounter—is crucial to stopping fraud before it gains access into the program. In addition, when implementing any new controls, it is important to field test all systems prior to putting them in place. On top of reducing the risk of untested controls allowing substantial fraud, field testing also helps to ensure that new controls do not improperly deny benefits to valid registrants. A safety net for those registrants who are wrongly denied disaster relief due to preventive controls should always be in place to ensure they receive assistance. Even with effective preventive controls, there is substantial residual risk that fraudulent and improper disaster relief payments can occur. Our work has shown that agencies must continue their efforts to monitor fraud and improper payment vulnerabilities in the execution of disaster relief programs, even if these efforts are more costly and less effective than preventive controls. Detection and monitoring efforts are addressed in the Standards for Internal Control in the Federal Government and include data-mining for fraudulent and suspicious transactions and reviews to establish the accountability of funds. Also, control weaknesses identified through detection and monitoring should be used to make improvements to preventive controls to reduce the risk for fraud, waste, and abuse in the future. The data-mining we performed to search for anomalies in registrant data and purchase card transactions show how important constant monitoring and detection can be. Through data-mining, we found rental assistance payments to individuals who were residing in FEMA-provided hotel rooms, trailers, and apartments and payments to ineligible, nonqualified aliens. We found examples of multiple registrations citing the same address or bank accounts, and numerous residents in a damaged apartment building all relocating to the same location, which may also suggest fraud. By comparing applicant data in FEMA’s own databases, we identified duplicate applications submitted for both Katrina and Rita, but intended to cover the same damage to the same residence. By comparing recipient data against federal and state prisoners’ databases, we identified instances where prisoners had fraudulently registered for and received disaster relief payments while incarcerated. Our examples illustrate that data-mining efforts should be done in a manner that uses creative solutions to search for potential fraud using all available data sources. To the extent that data-mining identifies systematic fraud, intelligence should be fed back into the fraud prevention process so that for future disasters the fraud is detected and prevented before money is disbursed. Depending on the type of assistance provided and the means in which the assistance was distributed, it can be important for an agency to monitor the use of disaster relief funds. Our review of FEMA’s IHP program found that while the vast majority of debit card transactions that were not withdrawn as cash appeared to have been used for disaster-related needs, we did find a number of purchases for nondisaster items such as football tickets, alcohol, massage parlor services, and adult videos. In addition, our review of items bought with DHS purchase cards found that many items bought for use in disaster relief were lost or stolen. By monitoring these types of uses, agencies may be able to ensure that disaster funds are used to help mitigate losses and not used for inappropriate items or services. Another element of a fraud prevention program is the collection of improper payments and the aggressive investigation and prosecution of individuals who committed fraud against the government. These back-end controls are often the most costly and less effective means of reducing losses to fraud, waste, and abuse. However, the deterrent value of prosecuting those who commit fraud sends the message that the government will not tolerate individuals stealing assistance money, and thus serving as a preventive measure for future disasters. Our experience is that investigations and prosecutions are a necessary part of an overall fraud prevention and deterrence program, but should be a last resort when all other controls have failed. For hurricanes Katrina and Rita, the Justice Department has set up the Katrina Fraud Task Force, which has successfully investigated and prosecuted numerous individuals who received assistance fraudulently from FEMA. In December 2006, we testified to the difficulty of collecting on improper payments after they have been disbursed. Specifically, in contrast to the $1 billion we estimated to be improper and potentially fraudulent payments— an estimate derived from statistical sampling—FEMA determined that it had overpaid nearly 60,000 registrants about $290 million as of November 2006. These overpayments, which FEMA refers to as recoupments, represent the improper payments that FEMA reported it had detected and for which it had issued collection letters. Although FEMA had identified about $290 million in overpayments, as of late 2006, FEMA stated that it had only collected nearly $7 million. The small amount of money that FEMA had collected on overpayments related to hurricanes Katrina and Rita further emphasizes the need for preventing fraud, waste, and abuse prior to payments going out the door. Lessons learned from our prior work show that, while investigations and prosecutions can be the most visible means to deal with individuals intent on perpetrating fraud schemes, they are also the most costly and should not be used in place of other more effective preventive controls. Still, by successfully prosecuting such individuals, agencies can deter others who are thinking of taking advantage of the inherent vulnerabilities in disaster relief programs. We have already referred thousands of cases we have identified as potentially improper and fraudulent to the Katrina Fraud Task force for further investigation and expect to refer others for additional investigation and possible prosecution. Our Katrina and Rita work to date has shown that there are at least tens of thousands of individuals that took advantage of the opportunity to commit fraud against the federal government. Our work shows that for one FEMA individual assistance program alone it is likely that over $1 billion has been lost to fraudulent and improper payments. With potentially billions of dollars of additional spending likely for Katrina and Rita recovery, state and federal agencies should implement lessons learned with respect to the importance of effective fraud, waste, and abuse prevention programs. With effective planning, relief agencies should not have to make a choice between speedy delivery of assistance and effective fraud prevention. Going forward, FEMA and other agencies involved in disaster recovery efforts must work hard to develop and institute effective controls that will ensure victims are provided assistance as quickly as possible while also minimizing fraud, waste, and abuse. Chairman and Members of the Committee, this concludes my statement. I would be pleased to answer any questions that you or other Members of the Committee have at this time. For further information about this testimony, please contact Gregory Kutz at (202) 512- 7455 or [email protected]. Contact points for our Offices of Congressional Relations and Public Affairs may be found on the last page of this testimony. This is a work of the U.S. government and is not subject to copyright protection in the United States. It may be reproduced and distributed in its entirety without further permission from GAO. However, because this work may contain copyrighted images or other material, permission from the copyright holder may be necessary if you wish to reproduce this material separately. | Hurricanes Katrina and Rita destroyed homes and displaced millions of individuals. While federal and state governments continue to respond to this disaster, GAO has identified significant control weaknesses--specifically in the Federal Emergency Management Agency (FEMA)'s Individuals and Households Program (IHP) and in Department of Homeland Security (DHS)'s purchase card program--resulting in significant fraud, waste, and abuse. In response to the numerous recommendations GAO made, DHS and FEMA have reported on numerous actions taken to address our recommendations. Lessons learned from GAO's prior work can serve as a framework for an effective fraud prevention system for federal and state governments as they consider spending billions more on disaster recovery. These lessons are particularly important because funding that is lost to fraud, waste, and abuse reduces the amount of money that could be delivered to victims in need. Today's testimony will (1) describe key findings from past GAO work and (2) use the results from that work and GAO's other experiences to discuss the importance of an effective fraud, waste and abuse prevention program. Prior GAO audit and investigative work on FEMA's controls over IHP payments and DHS's controls over purchase cards emphasizes one fundamental concept--that fraud prevention is the most effective and efficient means of minimizing fraud, waste, and abuse. GAO estimates that FEMA made about 16 percent or almost $1 billion dollars in improper and potentially fraudulent IHP payments to registrants who applied using invalid information, illustrating what can happen when fraud prevention controls are ineffective. For example, GAO found that FEMA made payments based on bogus damaged addresses, false identities, and identities belonging to federal and state prisoners. These findings highlight the need for effective controls over all types of recovery disbursements. With effective planning, relief agencies should not have to make a choice between speedy delivery of disaster recovery assistance and effective fraud prevention. Finally, GAO's findings of significant control weaknesses in DHS's purchase card program leading to fraud, waste, and abuse further underline the need for an effective framework for fraud prevention, monitoring, and detection. Our work on disaster assistance programs in particular show that preventive controls should be designed to include, at a minimum, a requirement that data used in decision making is validated against other government or third-party sources to determine accuracy. Inspections and physical validation should also be conducted whenever possible to confirm information prior to payment. System edit checks should also be used to identify problems before payments are made. Finally, providing training on fraud awareness is important in stopping fraud before it gets into any type of recovery program. Fraud detection and monitoring is also critical, although more costly and less effective than preventive controls. Key elements of detection include data mining for fraudulent information and performing reviews to establish the accountability of property and funds. The final element of a fraud prevention program is the collection of identified improper payments and the aggressive investigation and prosecution of individuals who commit fraud as a preventive measure for future disasters. These elements are most costly, and collecting money after it has been disbursed is far less effective than up front prevention--FEMA has collected only $7 million of the estimated $1 billion in potential improper and fraudulent IHP payments. |
For several years after the fall of the South Vietnamese government in 1975, countries in Southeast Asia agreed to grant temporary asylum to the thousands of people who fled Vietnam. By the late 1980s, however, the rate of resettlement was far less than the huge and growing influx of asylum seekers from Vietnam. In response, the CPA was developed and adopted by 75 countries in June 1989 to address the Vietnamese boat people problem. It required anyone who arrived in first asylum countriesafter March 1989 to undergo a formal refugee status determination and demonstrate they had a well-founded fear of persecution for reasons of race, religion, nationality, membership of a particular social group, or political opinion according to internationally recognized refugee standards and criteria. The agreement called for the establishment of a consistent regionwide refugee status determination process and reaffirmed that the first asylum countries were responsible for determining who qualified as a refugee. UNHCR’s role under the CPA was to help the first asylum countries develop screening procedures that were consistent with international norms and to monitor the implementation of the program. It was responsible for training first asylum country officials involved in the screening process, coordinating the timely resettlement of those determined to be refugees, and administering a safe repatriation program for nonrefugees. In addition, UNHCR was required to review and assess the CPA’s implementation and consider additional measures to improve the effectiveness of the program. UNHCR also has independent authority under its charter to formally recognize or “mandate” cases it believes deserve refugee status and, within the context of the CPA program, to reconsider the claims of rejected asylum seekers. This authority provided a third layer of review in many situations. Since the adoption of the CPA, more than 120,000 Vietnamese asylum seekers have been screened for refugee status. Of those asylum seekers screened, close to 33,000 were determined to be refugees and resettled in third countries, including some 12,900 individuals who came to the United States. The screening of cases generally concluded in the region in 1994, and many of those who were determined not to be refugees (“screened out”) returned voluntarily to Vietnam. However, in early 1995, close to 40,000 screened-out asylum seekers remained in the camps. From early on in the screening process, outside advocacy groups and representatives from the U.S. Congress and other interested countries raised concerns about the integrity and fairness of the screening process and possible corruption that may have occurred in certain circumstances. These concerns intensified as the screening process came to a close and attention was focused on the screened-out asylum seekers who remained in the first asylum country camps. Some of the issues raised by refugee advocates included asylum seekers not knowing how to present their cases; information being distorted because of poor translation by interpreters; screening officials conducting incomplete interviews; reasons for denial not being provided to asylum seekers, thereby preventing them from preparing adequate appeals; and screening officials not having access to accurate information about country conditions in Vietnam. Refugee advocates also alleged that corruption in some countries resulted in asylum seekers with strong cases being screened out for failing to pay bribes or consenting to sexual demands by screening officials. The pressure from outside sources led UNHCR to further review some selected cases and investigate the allegations of corruption in the screening process. UNHCR acknowledged that problems existed in the screening process, particularly in the early stages of screening with the use of unqualified interpreters, delays in the processing of refugee status decisions, and the lack of legal assistance on appeals in some cases. It also concluded that corruption cannot be ruled out and that, at least in Indonesia and the Philippines, the impact of corruption was likely to have resulted in some weaker cases being screened in by the first asylum government officials. A specific tenet of the CPA was the “need to respect the family unit.” According to the UNHCR Handbook, if the head of a family is granted refugee status, then his or her spouse and members of the immediate family are also normally granted refugee status to maintain the family unit.Children who are minors are generally considered to be part of the immediate family; others, such as aged parents, may be included if they are living in the same household and dependency can be established. Under the principle of family unity, family members do not have to establish an independent well-founded fear of persecution; rather, refugee status is based on their family connection to a refugee. Adult children who are not dependent on their parents are not eligible for family unity consideration and would undergo separate screening under the CPA. Throughout the implementation of the CPA, UNHCR received numerous requests to consider cases under the principle of family unity. These involved individuals who claimed to have been separated from family members by the refugee screening process. Several included marriages that were not known or accepted as legitimate marriages by the first asylum countries or UNHCR; others involved children, siblings, or other relatives who claimed to have family linkages to individuals who had already resettled in a third country. Recognizing that some families may have been inadvertently split by the screening process, UNHCR undertook a broad regionwide review of screened-out cases in late 1994. By using its mandate authority, UNHCR could provide a means for screened-out family members to join immediate family members currently resettled elsewhere. UNHCR used the following criteria to review cases that might not have been assessed fairly on the basis of family unity during the regular refugee status determination process: Minors and dependant children were to be reunited with parents. Minors were defined as being younger than 18 at the time of the UNHCR review and dependency was based on the “totality of needs and relations.” Nonminor children and siblings who were not dependents were not considered for family reunification. Marriages predating the determination of refugee status were recognized regardless of whether couples had any children. Marriages postdating the refugee status decision would generally not be accepted unless they were proven to be “bona fide” and there was evidence of a “long-standing, pre-existing” relationship (the existence of children was proof). Obstacles to marriage were to be considered, such as difficulties in obtaining divorce papers from Vietnam, the asylum country not allowing formal marriages to take place (as was the case in Indonesia, for example), or a couple being underage. A key objective of the family unity initiative was to recognize legitimate marriages and relationships. UNHCR rejected marriages of convenience and other relationships that did not involve immediate family members or dependents. Many of the cases were relatively straightforward; however, several involved complicated family relationships that were difficult to resolve. Relationships that were not split as a result of the status determination process were also excluded from consideration, such as those involving family members who were resettled from a first asylum country prior to the CPA or from Vietnam directly through the Orderly Departure Program (ODP). UNHCR encouraged family relatives who did not qualify for reunification to return to Vietnam and use alternative migration opportunities, such as ODP. UNHCR’s family unity review began in Malaysia and was adopted shortly afterwards by other UNHCR field offices in the region. According to UNHCR officials, the resettlement countries and other CPA member countries initially criticized the initiative. The first asylum countries believed that family unity considerations had already been addressed during the regular refugee status determination process and that further review of cases would jeopardize an orderly conclusion to the CPA program. Resettlement countries believed that family unity considerations were more properly effected through their own established migration programs, such as ODP. In Malaysia, Indonesia, and the Philippines, UNHCR reviewed hundreds of cases under its family reunification initiative. Most were rejected for failing to meet UNHCR’s established criteria, but UNHCR believed a small number had valid claims and forwarded them to various resettlement countries for consideration. UNHCR initially forwarded cases without a declaration of mandate because it wanted some assurance that cases would be accepted for resettlement. UNHCR wanted to avoid having screened-in individuals who might have no resettlement option and, because of their mandate status, no means to be repatriated either. This was a concern because individual resettlement countries’ criteria for family reunification could differ from UNHCR’s criteria. In Malaysia, there was strong support from the Malaysian government and the U.S. embassy to resolve family unity cases. UNHCR officials identified and forwarded 36 cases in early 1995 to the U.S. embassy for consideration. The U.S. embassy in Kuala Lumpur agreed to review the cases informally and provide UNHCR with an indication of whether the cases might qualify for resettlement. As a result of this, the United States accepted 23 cases involving 35 persons. The cases were subsequently mandated by UNHCR and resettled in the United States. In Indonesia and the Philippines, UNHCR also identified several cases that met its family unity criteria and submitted these cases to the resettlement countries for informal review. With respect to U.S.-related cases, UNHCR forwarded 13 cases from Indonesia and 23 cases from the Philippines to the respective U.S. embassies in late 1995. In contrast to the situation in Malaysia, however, there was no progress in resolving these cases for resettlement because the U.S. embassies took no action on the cases. U.S. embassy officials did not informally review cases and took the position that there could be no review or implied guarantee of resettlement without a UNHCR mandate. However, UNHCR officials did not want to issue a mandate without a clear indication that the cases would be accepted for resettlement. The impasse over the family unity cases in Indonesia and the Philippines continued from late 1995 through April 1996, when the U.S. Department of State issued written guidance to the embassies. The guidelines indicated that cases should not be reviewed unless they were mandated by UNHCR. Even then, there would be no guarantee of resettlement until U.S. Immigration and Naturalization Service officials conducted an interview and then determined a case met U.S. immigration criteria. U.S. family unity criteria in some respects are more stringent than UNHCR criteria. According to Department of State guidelines, for example, spouses would only be considered eligible if “the marriage was legally established before release of the refugee screening result, the marriage is legally recognized in the country in which it took place, and there is clear evidence that the marriage is genuine.” These criteria effectively excluded marriages that occurred after a refugee status determination, even if there was evidence of a long-standing, preexisting relationship or common law marriage that occurred in countries such as Indonesia that did not recognize a marriage between asylum seekers. In Malaysia, cases similar to those that were submitted and approved by the U.S. embassy in early 1995 were rejected under the April 1996 guidelines. UNHCR officials in Indonesia and the Philippines effectively stopped submitting cases for consideration to the U.S. embassies due to the lack of response from the United States to review cases informally prior to a declaration of mandate status. As efforts to close the camps increased after the March 1996 announcement by the CPA countries, UNHCR encouraged all individuals, including those considered for family reunification, to voluntarily return to Vietnam. According to Department of State officials, the April 1996 guidelines did not change U.S. policy but clarified the U.S. position on UNHCR mandates and the application of U.S. family unity criteria. The officials noted that this guidance had not previously been communicated formally to the embassies and that the embassies’ refugee officers had some discretion to work independently on CPA family unity issues. We reviewed 86 family unity cases in Indonesia, Malaysia, and the Philippines. UNHCR had generally assessed the cases in accordance with its established criteria and procedures, although there appeared to be discrepancies in the way some cases were resolved. UNHCR relied heavily on the biographical information collected from asylum seekers prior to the screening interviews. This information provided the names, relationships, dates of birth, and places of residence of the family members of each asylum seeker. Asylum seekers were also encouraged to inform UNHCR of any changes or updates to this information over time. In assessing requests for family reunification, UNHCR often interviewed asylum seekers and contacted the resettlement countries to obtain supporting information. While this information was for the most part comprehensive, we found that in some cases it was incomplete or was not updated when a marriage or birth of a child occurred. Almost all of the asylum seekers whose cases we reviewed had ties to relatives in the United States, but most did not meet UNHCR criteria. The main reasons included (1) post-refugee status determination marriages lacked evidence of a long-standing relationship or of any obstacles that prevented a marriage from occurring prior to the refugee screening, (2) children who were nonminors sought reunification with parents or siblings, and (3) family members were linked to ODP cases that were not split as a result of the refugee status determination process. While most post-refugee status determination relationships were rejected, UNHCR did deviate from its fairly consistent application of the criteria to support a few cases. In one case in Indonesia, UNHCR approved a family unity claim after examining numerous correspondence between the asylum seekers and their respective families, which indicated that the marriage was recognized by the families in Vietnam through a formal ceremony prior to the refugee status determination. In another case in the Philippines, UNHCR supported a couple seeking family reunification because written affidavits from third parties attested to the long-term relationship of the couple as well as long explanations by both spouses about their delay in getting married. As a rule, UNHCR rejected petitions to reunite either adult children with their resettled parents or individuals with family members who resettled through ODP, but it made some exceptions for compelling humanitarian reasons. One case in Indonesia, for example, involved an adult daughter seeking reunification with parents who were critically ill. UNHCR approved the case based on humanitarian concerns. UNHCR rejected reunification claims involving family members who left Vietnam under ODP because such cases, according to UNHCR, were not split as a result of the CPA refugee screening process. However, UNHCR in Malaysia did support several ODP-linked cases in which no more family members were in Vietnam. Similar cases in Indonesia and the Philippines, though, were generally not recognized by UNHCR. A case in the Philippines, for example, involved a 16-year-old unaccompanied minor who was assessed under UNHCR’s special procedures process. UNHCR determined that the best support structure for the child existed in Vietnam where the mother resided. Subsequently, however, the mother, who was the only immediate family to the applicant, migrated to the United States under ODP. When the case was reviewed again under UNHCR’s family unity exercise, the situation with the applicant’s mother was not an overriding factor and the applicant was considered to have “aged-out” as a minor and was rejected as an adult. In situations involving siblings, a few cases were screened differently. In one case in Indonesia, four siblings (including a minor) arrived together at the first asylum camp. Each sibling was screened separately and all except one was recognized as a refugee. Upon appeal, the review committee used the principle of family unity to reverse the first instance decision and grant refugee status to the remaining sibling. In another case involving a minor and two siblings, each was screened separately. While the minor was granted refugee status under the special procedures process, the two adult siblings who accompanied him were rejected. In a few cases, we had information (provided by your office) supporting a claim for family unity that UNHCR did not have in its files. In the Philippines, for example, UNHCR rejected a post-refugee status determination marriage where no evidence of a genuine relationship was presented. After we presented a copy of a birth certificate of a child born to the couple, UNHCR officials indicated that based upon this new information, the case probably would have been forwarded to the U.S. embassy for consideration as part of the family unity exercise. The case, however, would probably not have been resettled since the U.S. embassy did not respond to the other cases forwarded for review by UNHCR. In several other cases, UNHCR had information that was not in the case file information we had received through your office. We reviewed several cases where one of the parties to a family unity claim had a preexisting marriage or had established his or her refugee status through a marriage to a different spouse. Some of the cases were extremely difficult to sort out due to the multiple relationships that were involved, linking partners in Vietnam, the first asylum camp, and the United States. It was not unusual to have a situation, for example, of a couple forming a relationship in a first asylum camp while each still had a prior spouse in Vietnam. Subsequently, one partner would be screened in to resettle with his or her spouse who immigrated to the United States through ODP. The partner then divorced the first spouse and sought reunification with the other partner still in the first asylum camp. Victims of violence is a broad term used to describe cases of individuals who asserted they had experienced traumatic or violent incidents en route to or in first asylum countries. Though the full scope is unknown, many Vietnamese boat people came under attack from pirates who were in most cases opportunistic fishermen who viewed the fleeing Vietnamese with their life possessions as easy targets of opportunity. Many individuals reportedly perished during these attacks. Women and young girls were especially vulnerable to sexual assault and rape. Other reported incidents of violence occurred at islands in the South China Sea, such as Terempa and Kuku. Some asylum seekers who landed on the islands in search of temporary refuge experienced rape, robbery, and beatings at the hands of soldiers and gangs of fishermen who sometimes congregated there. In other cases, boats were reportedly towed to the islands for the express purpose of victimizing the asylum seekers. Some asylum seekers endured multiple attacks and rapes during their escape attempt. UNHCR first developed guidelines for handling survivors of violence cases as an internal memorandum in June 1990 and formalized them in its November 1992 “Guidelines on Special Procedures under the Comprehensive Plan of Action.” These two documents outlined the criteria and rationale for including victim of violence cases in a process known as “Special Procedures.” Special Procedures was designed as a separate process to deal with unaccompanied minors and other vulnerable persons such as victims of violence. The standard for determining whether asylum seekers who had experienced violence should have been handled under Special Procedures was “the effect on their ability to understand persecution or articulate a well-founded fear of persecution more than the disability per se . . . .” It was recognized that individuals who were victims of violence may have been severely traumatized and unable to comprehend the screening process or articulate their claim to refugee status. In such cases, it would have been inappropriate, if not impractical, to subject individuals to the rigors of the screening process. An important principle underlying the establishment and implementation of Special Procedures is the assessment of “best interest” of persons who are vulnerable and of humanitarian concern. The best interest determination was to be made on the basis of information derived from circumstances or conditions generally beyond what would necessarily be considered in determining refugee status. In determining a durable solution in the best interest of a vulnerable person, all circumstances, including events occurring en route to or in a first asylum country, particularly piracy attacks, were to be considered relevant and taken into consideration. When asylum seekers arrived at a first asylum camp and identified themselves as victims of violence, or in cases where UNHCR initiated the identification of the victim, a UNHCR social service counselor would first examine the individuals to determine whether they could articulate their claim to refugee status. If they could, they would go through the usual refugee status determination procedure. If they could not, due to the traumatizing nature of the experience, the Special Procedures process would be used. Under Special Procedures, the question of a person’s possible refugee status was dealt with first. According to UNHCR, refugee status under Special Procedures was evaluated in a supportive environment that specifically considered a person’s difficulty in articulating his or her case. A person determined to be a refugee would be resettled. If a person was determined not to be a refugee, the best interest test was applied. The Special Procedures process was implemented by a Special Procedures Committee whose membership varied from country to country, but usually involved individuals from UNHCR’s implementing partners who possessed either a social service or status determination background. In Malaysia, for example, the Special Procedures Committee was variously composed of officials from the Red Cross and Red Crescent Societies, social counselors on loan from the Jesuit Refugee Service, UNHCR, and a private practice Malaysian psychiatrist. The role of the Special Procedures Committee was to determine where the best support structure resided to help individuals recover from their traumatic experience. In some instances, resettlement with family members in third countries was the best solution. However, according to UNHCR officials, the generally preferred solution, in keeping with social welfare principles, was to reunite the individual with family members in Vietnam. If asylum seekers did not disclose the violent experience either when they arrived at the refugee camp or during the refugee status determination process, UNHCR assessed each situation on a case-by-case basis. UNHCR officials told us it was not uncommon for individuals to initially keep their experience of violence secret due to shame or fear of retribution from country-of-asylum officials. They said many individuals began coming forward with claims of violence after receiving negative screening decisions and learning that other individuals with similar experiences were being resettled after proceeding through the Special Procedures process. Others, though, may have come forward because they experienced difficulties in coping with the effects of the earlier incident of violence. When evaluating these types of cases, UNHCR’s social service counselors were expected to look for symptoms of trauma, such as visits to the camp hospital or counselors or an inability to forge relationships with other camp residents. If trauma was evident, counselors would refer the case to the Special Procedures Committee for a best interest solution. We examined the case files of 5 Malaysian and 77 Indonesian victims of violence. The majority of the Indonesian cases were at Kuku Island, the northern island army camp. Because we did not interview the asylum seekers, social service counselors, or members of the Special Procedures Committees, who had disbanded at the conclusion of the screening process, our review was limited to determining whether the documentation in UNHCR files indicated that the procedures had been followed, not the quality of the assessments per se. UNHCR documents indicated UNHCR’s social service counselors interviewed and assessed the victim of violence cases and then assigned the case to proceed either through normal refugee status determination processing or to the Special Procedures Committee process. The assessments discussed the individual’s current mental state, situation in camp, and ability to understand and articulate a claim of a well-founded fear of persecution. Of the five Malaysia cases we reviewed, four were referred to the Special Procedures Committee for a best interest decision and the fifth was referred to the regular refugee status determination process. It was decided in two of the cases that the best support structure for the individuals lay with family members who resided in Vietnam. In the other two cases, the best support structure was determined to be with family members who lived in the United States and Australia, respectively. In Indonesia, the 77 cases we reviewed were processed through the normal refugee status determination process at the recommendation of the social service counselor. Although we did not track the final disposition for all cases, several were granted refugee status and were subsequently resettled in third countries. We noted a few cases in Indonesia where the social service counselor described emotional difficulties by the asylum seeker but nonetheless recommended that the normal refugee status determination process be followed. For example, in one case, the social service counselor wrote that “. . . appears very depressed and complains having suffered from a variety of psychosomatic illnesses . . . . experienced a horrific experience during her journey to Galang. However, there is evidence that she is on her way a full recovery. It’s recommended that she should go through the normal refugee status determination process.” Although this kind of recommendation appeared consistent with the standard for determining whether someone should go through Special Procedures, we still had some difficulty understanding it in view of the counselor’s observations about the emotional condition of the individual involved. “A husband and wife reported they were victims of violence as they traveled from Vietnam to asylum in Malaysia. The husband died in camp (due to causes unrelated to the violence incident). The woman was assessed by the social service counselor to be unable to understand or articulate a claim and her case was assigned to the Special Committee for a durable solution. The Special Committee decided that the woman’s best support structure lay with her husband’s family in Vietnam. However, after reaching this decision and before the woman returned to Vietnam the family had resettled in the United States under ODP. The Special Committee then decided that the woman’s ’best interest’ still lay with the husband’s family in the United States. Thereafter, the women was eventually accepted for resettlement in the United States and reunified with her husband’s family.” A majority of the victim of violence cases we examined from Indonesia occurred at Kuku Island. Information in the case files we reviewed indicated that a number of women and girls were sexually assaulted and raped by government soldiers. Men who attempted to intervene to protect their wives, children, or siblings were beaten. Some of the individuals who experienced violence at Kuku Island were processed through Special Procedures, where it was determined that resettlement in third countries was in their best interest. The majority, including the cases we reviewed, were assessed through the normal refugee status determination process. Some Vietnamese advocacy groups and others have criticized UNHCR’s handling of the Kuku Island cases. They have argued that (1) an agreement existed between the Indonesian government and UNHCR to resettle all the victim of violence cases and (2) all similarly situated cases should be treated alike. According to UNHCR officials we interviewed, there was no agreement with Indonesia to resettle all victim of violence cases. UNHCR initially resettled a number of these cases because of humanitarian concerns that may have left an impression of precedent for other cases. We found UNHCR handled these cases consistent with the “Guidelines on Special Procedures Under the Comprehensive Plan of Action.” To qualify for refugee status, asylum seekers had to demonstrate a well-founded fear of persecution. We reviewed 74 refugee status determination cases and discussed them with UNHCR officials and others involved in the CPA program. Procedures in each of the countries we visited were designed to help ensure that those with strong refugee claims would be recognized as refugees. Most of the screened-out cases we reviewed did not appear to have strong claims based on the case file evidence we examined. However, in some cases we identified issues that pointed to possible differences and inconsistencies in the way screening procedures may have been implemented. The limitations on our access to documents and our inability to interview asylum seekers preclude us from concluding with certainty whether these issues may have contributed to unfavorable screening decision outcomes in these cases. (See apps. I through III for our review of merit cases in the Philippines, Indonesia, and Hong Kong, respectively.) In reading the UNHCR case files, we noted considerable variation in the quality of the information presented regarding refugee claims and screening officials decisions. Although many of the case files were well-documented and contained detailed case histories with clear and logical explanations for the refugee status decisions, others were less complete and decisions did not appear to be well-supported by the recorded facts. Some case files had inconsistent or contradictory remarks by the screening interviewers. Such inconsistencies in the case file documentation often prevented us from concluding whether a screened-out decision was the result of poor record-keeping or it properly reflected the facts of the case. Case file documentation was particularly important because adjudicators at the appeals and mandate review stages relied on the case file record for their deliberations. According to Hong Kong officials, 25 percent of the appeals cases were reinterviewed, but we were told that few, if any, reinterviews occurred during appeals in Indonesia and the Philippines. A few of the most difficult case files to assess involved screening decisions that focused on the credibility of the applicant’s claim for refugee status. In these cases, screening officials seemed to place great emphasis on inconsistencies that appeared in the applicant’s claim and/or appeal. Their attention seemed to focus on relatively small details regarding a claim, such as the dates of noncrucial events and statements of when and where something may have happened many years ago, rather than on the major factors addressing the claim of persecution. In other cases where credibility issues were the principal reason to screen out an asylum seeker, the screening official presented convincing evidence that challenged key aspects of a case. For example, in one case in the Philippines, the asylum seeker claimed to have served several years in a Vietnamese prison under harsh conditions and away from his family. However, information in the case also indicated that the individual had fathered two children with his wife during the same period and the prison release documents appeared to have been tampered with. Other issues that surfaced during our review dealt with potential difficulties asylum seekers may have had in presenting their cases. A few of the appeal petitions submitted by asylum seekers in the Philippines and Hong Kong, for example, raised concerns about the relatively small amount of time spent by screening officials in conducting the first instance interviews. Communication difficulties may have occurred. Several appeal petitions in the Philippines and legal briefs presented by attorneys in Hong Kong criticized the quality of the translations conducted by interpreters. In a few cases in Hong Kong, interpreters may not have been able to translate the Nung ethnic dialect spoken by the asylum seeker. A further issue that was reported to us was a practice used in the early stages of screening in the Philippines where asylum seekers were asked to sign a blank record of their interview before it was written up. As a result of this practice, asylum seekers had no assurance that the information they had presented in the interview was accurately recorded. According to UNHCR officials, this practice occurred in some cases during the first year or so of screening; however, it was subsequently changed and asylum seekers signed only completed write-ups. Refugee status determinations inherently involve judgment on the part of the screening official. As a result, some differences in screening decisions are to be expected. Some cases we reviewed appeared to have similar facts and elements of a claim but were assessed differently by screening officials. In the Philippines, screening rates among first instance screening officials varied widely, according to UNHCR data. The overall screened-in rate at the first instance stage was 43 percent—the highest screened-in rate among all the first asylum countries. However, some officials were very lenient and consistently screened in a very high percentage of cases (75 percent and higher), and others were quite stringent and screened in far fewer cases (25 percent or less). UNHCR officials said that a number of weak cases probably were screened in, but they maintained that the appeals process and UNHCR’s own mandate authority helped ensure that individuals with strong refugee claims would be recognized and accepted for resettlement. In providing oral comments on a draft of this report, UNHCR and Department of State officials generally concurred with the report’s content. They provided technical and clarifying comments that we have incorporated in the report where appropriate. As agreed with your office, the focus of our work was on selected family unity, victim of violence, and general refugee merit cases of individuals who were screened out under the CPA program. Our approach was to conduct case file reviews to assess the strength or weakness of the claims that were made and determine how the screening process worked in these cases. We concentrated on cases from Indonesia, Hong Kong, Malaysia, and the Philippines, and selected them from among the approximately 500 cases provided through your office. Our review was mainly limited to an examination of UNHCR case files in the first asylum countries. The government in each country we visited denied our requests to visit the camps and interview asylum seekers and would not grant us access to their own case files. Officials from these countries expressed concerns that our presence in the camps might raise false expectations among the asylum seekers that the U.S. government was pursuing a rescreening of cases. We did not have the authority to require other governments to provide us access for interviews or review case files under their jurisdiction, and we had to rely on the willingness of host governments to grant us access. The lack of access to host government case files was a significant limitation on our work because the government of the first asylum countries were responsible under the CPA for the refugee status determination process that involved both the initial interview and the appeals process. Information contained in these files was often not available in the UNHCR files we were permitted to examine. However, to supplement our review of cases, we did meet and discuss the CPA screening process with officials from UNHCR, the first asylum governments, and the U.S. embassies. In addition, we interviewed representatives from nongovernmental organizations such as legal assistance groups who were involved with the CPA. To learn more about the CPA screening criteria and procedures, we reviewed available UNHCR documents, met with UNHCR officials in Geneva, and participated in a 2-day briefing with the UNHCR regional coordinator of the CPA program and other staff in Malaysia. The amount and focus of our fieldwork differed in each country, given the number and type of cases we had to work with and the existing time frame established to conclude the CPA program in each country. We reviewed 242 cases in the 4 countries we visited during a 3-week period from late June to early July 1996. (See table 1.) The cases covered individuals who were still in the camps at the time of our visits as well as those who had already returned to Vietnam. We prioritized the workload by first reviewing family unity and victim of violence cases and then the general merit-type cases. We assessed cases from the perspective of the CPA criteria, reviewed factual information in the case files, and sought to examine how the screening process was implemented. We read each case file, took appropriate notes on information in the files, and discussed cases with available UNHCR staff and among ourselves. The type and quality of information included in the UNHCR case files varied both across and within the countries we visited. In Hong Kong, for example, we only had access to that portion of the case files belonging to UNHCR. We were permitted to read UNHCR mandate review documents that pertained to a case but generally not other documents produced by and belonging to the Hong Kong government, such as the first instance and review board interviews and decisions. While the mandate review documents usually included summaries of what occurred at earlier stages of the screening process, they lacked many important details about how asylum seekers presented their cases or the assessments by Hong Kong officials. However, in Hong Kong, because of the extensive legal assistance available to asylum seekers, we were also able to collect from these sources quite detailed information about some individual cases. In Malaysia and the Philippines, we had access to all the documents contained within the UNHCR files, regardless of whether they were produced by UNHCR or the first asylum government. However, these files usually did not include appeal decision assessments. Also in Indonesia, the case files did not include documents generated by the Indonesian screening officials and belonging to the Indonesian government. Indonesia did not permit nongovernmental organizations to participate in applicant counseling, as the Hong Kong government did; consequently, this source of information was not available in Indonesia. The written material in UNHCR case files also limited the conclusions we could draw about individual cases. While many of the case files were quite detailed, some had insufficient information to allow us to determine the appropriateness of an applicant’s claim for refugee status or to understand what rationale or reasons an interviewer used in making a decision. This does not mean that the process was deficient in these cases or that an inappropriate decision was reached; it only means that the files we were permitted to examine may have been incomplete. Nonetheless, as a result, it was difficult to differentiate whether the strength or weakness of a particular case reflected the write-up of the case or the actual facts and presentation of the case during the refugee status determination. Due to the variance in the number and type of cases presented for our review in the countries we visited, our detailed discussion of cases in appendixes I, II, and III vary as to form and content. For example, due to our familiarity with the screening process in Hong Kong (based upon our prior work), the relatively smaller number of cases to review, and the larger volume of case file data, we are able to present a fuller discussion of the asylum seekers’ claim and the basis for their decisions. Since we did not visit the Philippines during our previous work on the CPA, our discussion focuses on both the screening process and case examinations. Indonesia had the largest number of cases we reviewed, the majority of which were victim of violence and family unity cases. We focused primarily on whether these cases appeared to be adjudicated properly based upon family unity and Special Procedures criteria. Subsequently, we also reviewed the cases based upon general refugee merit criteria, which is the basis of our case presentations. In a letter dated December 10, 1996, you raised some concern about the findings of this report and the reasonableness of its conclusions. We have attempted to clarify the information in this report where appropriate, and to further describe the scope limitations placed on our work. Because our office could not make independent findings of fact, we could not draw conclusions about individual cases. In addition, because we reviewed only a limited number of cases, our findings cannot be generalized to other cases or be used to judge the overall reasonableness of the CPA screening process. We conducted our review from April to September 1996 in accordance with generally accepted government auditing standards. We are sending copies of this report to the Chairmen and Ranking Minority Members of the House and Senate Committees on Appropriations, the House Committee on Government Reform and Oversight, the Senate Committee on Governmental Affairs, and other interested committees; the Secretary of State; the Attorney General; the U.N. High Commissioner for Refugees; Congressmen Tom Davis and Benjamin A. Gilman, and Congresswoman Zoe Lofgren of the House of Representatives because of their expressed interest; and others upon request. If you or your staff have any further questions concerning this report, please contact me at (202) 512-4128. Major contributors to this report were Patrick Dickriede, Le Xuan Hy, John Oppenheim, Audrey Solis, and Thai Tuyet Quan. Of the 66 cases we reviewed in the Philippines, 44 were merit cases. Among these were 11 cases of individuals who had been screened in as refugees. This provided us a limited opportunity to compare the relative strengths of screened-in and screened-out cases. Because these cases represent only a fraction of the thousands of adjudicated cases, we cannot draw any conclusions based on our review. Rather, our review demonstrates how judgments varied during the screening process. Before presenting our review of cases, we describe how the refugee status determination process was structured and note some general issues about its implementation. Beginning in March 1989, all asylum seekers arriving in the Philippines by boat were required to undergo screening in the Palawan refugee camp operated by the Philippine army and supported by the U.N. High Commissioner for Refugees (UNHCR). The Philippine government’s Task Force on International Refugee Assistance and Administration was charged with coordinating refugee activities with UNHCR and other international organizations. The initial refugee status determination screening at Palawan was conducted by nongovernmental legal consultants contracted by UNHCR. Using standard interview forms approved by the Task Force, the predetermination interviewer was to collect relevant information and any documents that were in the asylum seeker’s possession. The asylum seeker was to sign the finished interview forms and questionnaires. UNHCR then presented these forms and any documents provided by the asylum seeker to the Philippine government’s Commission on Immigration and Deportation for refugee status determination. A Philippine immigration official was to use the predetermination information to decide refugee status. The immigration official was to conduct his or her own interview to fully assess and evaluate the asylum seeker’s claim for refugee status, in accordance with UNHCR criteria. UNHCR provided an interpreter to translate for the asylum seeker. A UNHCR representative was to be present during the interview, although he or she did not participate in the proceedings. However, the immigration official and the UNHCR representative could confer with each other after the interview. Decisions were made in Manila, not in Palawan, and were to be based on CPA criteria for refugee status. When a member of a family was recognized as a refugee, immediate members of the family—spouses, minor children, and other dependents—were also to be recognized as refugees. Decisions were to be provided in writing no later than 2 months from the time the status determination interview was conducted. If refugee status was denied, the basis for the denial was to be documented in writing. A UNHCR representative was to present the decision to the asylum seeker for his or her signature and date. All decisions and pertinent records were forwarded to the Task Force. Asylum seekers could appeal a denial for refugee status by filing a notice of appeal with the Appeals Board, through the Task Force, within 15 days after receiving the decision. The appeal could also include a request to submit an extended written statement and supporting documents within an additional 15 days from the filing of the notice of appeal. If an asylum seeker did not file an appeal within 15 days of receiving the first instance decision, he or she was deemed to have chosen voluntary repatriation. The three-member Appeals Board was to resolve the appeal within 2 months after receiving the appeal or, when appropriate, the extended written statement. Appeals Board decisions were final. Beyond the appeal stage, UNHCR could exercise its mandate authority for granting refugee status to cases not screened in during the first instance or appeal phases. The Philippine government screened a total of 4,810 cases, which equated to 7,272 individual asylum seekers. Of this number, 2,087 cases (3,392 persons) were screened in as refugees at the first instance stage; and 2,723 cases (3,880 persons) were denied refugee status or “screened out,” for a screened-in case rate of 43.4 percent. An additional 351 cases (471 persons) were screened in when the Appeals Board overturned negative decisions. UNHCR exercised its mandate authority for an additional 13 cases, or 19 people, for an overall screened-in case rate of 50.9 percent. The Philippines’ overall and first instance screened-in rates were the highest of all countries of first asylum. The two-tiered screening process by the Philippine government and UNHCR’s mandate authority was intended to ensure that those with strong refugee claims would be screened in and recommended for third country resettlement. However, despite the relative generosity reflected in the screened-in rates, we noted in our reading of case files that some first instance decisions by immigration officials contained inconsistent or contradictory remarks, widely varying interpretations of country of origin information, or incomplete information. UNHCR reported that the criteria for determining refugee status was often inconsistently applied at the first screening decision level, and some Philippine government and nongovernmental officials also voiced these concerns. UNHCR statistics also revealed some wide variances of screened-in rates among immigration officers. (See table I.1.) (continued) Nonetheless, UNHCR and government officials stated that the appeals process and UNHCR’s mandate authority helped ensure that those with strong claims to refugee status would be screened in. UNHCR reported that it reviewed all cases screened out by immigration officials to ensure that no person with a well-founded fear of persecution would be denied refugee status. Our review of the appeals process was limited because the Appeals Board did not explain its decisions in writing. It was not entirely clear how the Appeals Board fully resolved discrepancies or credibility issues because it did not reinterview the appellants, although new or clarifying information was presented as part of some asylum seekers’ appeal petitions. According to a former member of the Appeals Board, members received the case files and any new documentation about a week before a board meeting. This official said that the Board would often delay a decision while awaiting additional relevant documentation. Since written explanations were not in the files, we could not determine whether or how the Board considered the material clarifications contained in the appeal submissions. According to a UNHCR report, rumors of corruption persisted during the first instance screening by immigration officials. UNHCR reported that its field office repeatedly encouraged asylum seekers to provide specific information about these charges, offering protection against reprisals, but no one came forward. Other officials also said that they had heard rumors of corruption, but these allegations had not been substantiated. In July 1995, an advocacy group published a report criticizing the screening process and citing 12 cases in which money or sexual favors were allegedly sought or given in exchange for positive refugee status decisions. The charges were directed against eight immigration officers and two UNHCR legal consultants. UNHCR reviewed the cases handled by these individuals and did not find any evidence of corruption. We did not evaluate UNHCR’s methodology for investigating the corruption allegations. UNHCR acknowledged that a number of weak cases had been screened in, creating an impression of unfairness for those with stronger claims who were unable to establish a well-founded fear of persecution due to a convention-related reason. UNHCR maintains that the appeals process identified those cases with a strong claim to refugee status and that the remaining deserving cases were accepted or identified for refugees status under its mandate protection. We were unable to validate these assertions. As discussed below, we identified some cases that appeared to have some strong or cumulative elements of persecution, but we could not conclude that they were adjudicated fairly or unfairly given the limitations of the information in the files and our lack of access to asylum seekers. Of the 33 screened-out cases we reviewed, most did not appear to have strong claims based on the evidence contained in the files. Our review indicated that six cases appeared to have some strong or cumulative elements of persecution, but we could not conclude that they were adjudicated unfairly given the limitations of the information in the files and our lack of access to the asylum seekers themselves. A more lenient officer might have screened in these cases. While we cannot conclude that strong cases were screened out, we believe that human judgment is an unavoidable variable in any refugee screening process in which the individual’s story is difficult to substantiate. Moreover, according to UNHCR guidance, the screening decision should consider the duration and the recency of the persecution as well as the cumulative nature of persecution. For example, a person could be subjected to many forms of persecution or harassment that are minor by themselves, but the cumulative nature over time may constitute convention-related persecution. Because there is no universally accepted definition of persecution, refugee status decisions depend greatly on the individual circumstances of each case and the likelihood of persecution if an individual returns. We noted some inconsistencies among immigration screeners and widely varying interpretations of country of origin information. For some interviewers, potentially persecutory actions taken by the Vietnamese government were simply “national policy.” For example, UNHCR guidance states that the duration and hardship incurred as a result of being sent to a New Economic Zone (NEZ) should be considered if the person was sent to a zone for convention-related reasons. Several case files of screened-out individuals described serious hardship in the zones, such as lack of medical care resulting in the death of a family member, that did not appear to influence the interviewer. In one screened-out case, the interviewer wrote, “They were not the only family which was sent to the NEZ but all the families who were once upon a time associated with the past regime.” This seems to indicate a decision to send families to the zones that went beyond the national policy of returning farmers to the countryside for food production. However, past persecution was normally not enough by itself to substantiate a well-founded fear of persecution upon return to Vietnam, and this individual’s claim for refugee status was denied due to lack of merit and credibility problems. UNHCR guidance also notes that, although it is a general legal principle that the burden of proof lies with the person submitting a claim, an applicant may not be able to support statements by documentation or other physical evidence in refugee status determination situations. In such cases, UNHCR recommends that “if the applicant’s account appears credible, he should, unless there are good reasons to the contrary, be given the benefit of the doubt.” In about half of the cases we reviewed, immigration interviewers and UNHCR legal consultants noted credibility problems, but we could not ascertain from the information provided whether the accounts were credible. Several immigration officers rejected claims partly because an individual or his or her family was able to obtain a family registration card (ho khau) issued by the Vietnamese government. Such registration is the first step for many basic rights, such as obtaining education, legal employment, business licenses, medical care, and ration cards for price-controlled food. Several asylum seekers asserted, however, that such registration was simply a means of controlling citizens and did not, by itself, guarantee ration cards or medical care, which they said they had been denied. In one case, an applicant claimed that, due to past political troubles with the Vietnamese government, the only way his family could get a family registration card was by paying a bribe. According to the interviewer’s written decision, that ability to bribe meant that the individual’s family must be well-off and not subject to persecution. His appeal was subsequently denied. Assessing the screening process for Vietnamese veterans was particularly difficult because it appears that almost everyone who was associated with the South Vietnamese or U.S. governments was subject to some form of punishment, such as “reeducation.” In most of the veterans’ cases we reviewed, the punishment occurred immediately after the communist victory in 1975 and tended to taper off during the 1980s. Also, the punishment often appeared light, such as reeducation for several days. However, there appeared to be some exceptions to this. For example, in one case, a husband had served in the South Vietnamese Army from 1967 until 1974. From 1967 until 1972, he was an interpreter assigned to the U.S. Army 517th Intelligence Unit, where he helped interrogate captured North Vietnamese. In the appeals documents he and his wife submitted, they noted that, among other things, a new police chief in their district had been interrogated by the husband during the war and severely beaten by U.S. intelligence officers. In denying his claim to refugee status, the interviewer recorded that the police chief had been assigned in 1980, and that nothing had happened to the couple in the intervening years prior to their escape. According to their appeal submissions, the police chief was assigned in 1988, not 1980, and consequently the husband fled, fearing persecution. The wife stated that she was detained and raped by the new police chief (“a mere abuse of police power,” granting that it was true at all, according to the interviewing officer). In addition, the husband claimed that he was involved in an anticommunist organization in 1987 and was shot while escaping from his mother’s house in Saigon. The Appeals Board upheld the first instance decision to deny him refugee status. He requested a mandate review by UNHCR, but the file did not indicate a response. Prior to our fieldwork, we obtained first instance screening decisions prepared by Philippine immigration officials for 177 asylum seekers and then blacked out all the decisions to conduct a test. A team of five GAO evaluators each reviewed a set of decisions and assessed whether the applicant had been screened in or out based on the information in the decision paper. In general, the team found that many of the screening decisions presented limited information about the asylum seeker’s claim for refugee status. The write-ups often lacked important details about the applicant’s background, situation in Vietnam, and reasons for leaving the country. Without such information, it was difficult to determine the relative strength or weakness of individual cases. In addition, many of the write-ups contained weak support or no explanation for the screening decisions made by the immigration officials. In reviewing cases, different members of the team often chose a decision different from the decision rendered, indicating that a good deal of subjective judgment may be involved in the adjudicator’s decisions. In the 177 screening decision papers, there were 7 in which the screening officer laid out clear and logical reasons for granting or denying refugee status. In a majority of the other cases, however, it was less clear from the write-ups why a particular decision had been reached. At least 24 cases appeared to be identical or very similar, yet received different decisions from different screening officers. It should be noted, however, that these decision papers were only one part of an applicant’s file and cannot be used to assess the credibility and reliability of the screening process, or compliance with international norms for refugee status determination. In Indonesia, of the 121 cases we reviewed, 11 were asylum seeker cases that underwent the regular status determination process. We also examined the 77 victim of violence cases (which after assessment for trauma by a social service counselor underwent normal refugee status determination processing) and 2 of the family unity cases to assess the strength of their claims for refugee status. Our review indicated that the large majority of the cases decided on merit seemed to have been adjudicated fairly and the decisions appeared reasonable based on the available case file information. A common element that ran through the case presentations by the asylum seekers was the harsh conditions and difficult economic situation present in Vietnam, especially in the late 1970s and early 1980s. Those asylum seekers who spent time in a NEZ seemed to have particularly difficult living situations. However, despite the difficult living conditions, the case file documentation appeared to lack persecutorial elements and did not present facts to support a well-founded fear of persecution based on race, religion, nationality, membership of a particular social group or political opinion. Of the 11 merit cases we examined, 2 were screened in while 9 were screened out. Eight of the nine screened-out cases appeared to have been properly adjudicated based on information available in the case files. These cases failed to present convention-related claims, and the individuals appeared able to live tolerable lives. The case files for the two screened-in cases also indicated weak claims for refugee status and may have benefited from a generous application of the refugee criteria. The following six screened-out cases presented facts or issues reported by the asylum seekers that we believe may have merited further consideration or clarification. This case, involving an ethnic Khmer, included cumulative factors that may have supported a claim for refugee status based upon ethnicity and political beliefs. The asylum seeker’s father was arrested in 1982 and sentenced to 7 years in prison (where he died) for his affiliation with an antigovernment political party. While the father was in prison, the asylee’s family lost their family registration card and the children could not attend school. The individual was arrested in 1986 for antigovernment activities and imprisoned for 18 months. These cases involved a brother and sister who, as adults, were screened separately, in accordance with established procedures. Their father spent 5 years in a reeducation camp, and the brother spent 7 years in a NEZ. After returning from the NEZ, the brother was then arrested for printing Catholic religious materials and was imprisoned from 1986 to 1990. The sister was arrested for teaching the catechism and sentenced to 22 months of labor and was repeatedly summoned for questioning due to her brother’s activities. Upon release from prison, the brother and sister fled Vietnam. The legal consultant who reviewed the case noted in the file that the persecution for religious involvement was “remote in time” and recommended against granting refugee status. While conditions in Vietnam may have changed in terms of religious tolerance, we believe the length of incarceration for the applicants could be considered excessive and therefore warranted a more generous treatment. When we discussed these cases with a UNHCR official, he told us that, in hindsight, the decision might have been erroneous for this reason. However, the individuals were not eligible for mandate because the mandate exercise weighs factors and events at the time of review, not when the individuals initially fled Vietnam, and according to the UNHCR official, Catholicism is no longer persecuted in Vietnam. In this case, the asylum seeker’s father-in-law was detained in a reeducation camp for 9 years. The asylum seeker was jailed for 26 months, according to the legal consultant’s notes, for illegal peddling. However, in her appeal, the asylum seeker linked her imprisonment to her husband’s political activities and the family’s adverse background. The claim was discounted during the first instance interview because she could not document her imprisonment. The Appeals Board rejected her appeal citing lack of new information. The length of the imprisonment raises the question whether the asylum seeker’s political background may have been a factor in the sentencing. These two cases involve the credibility of the applicants’ claims for refugee status. Based upon biographical data and the interview instruments, both applicants appeared to present strong claims. However, in one case, the reviewing legal consultant doubted the credibility of the asylum seeker’s claim that he spent 3 years hiding in the compounds of two churches after the presiding priest of the church where he taught the catechism was arrested. According to the case file, the interviewer reasoned that no church in Vietnam would harbor possible criminals. In the other case, the legal consultant questioned the asylum seeker’s claimed link to an antigovernment group (FULRO) based on the applicant’s ethnicity. Although FULRO usually consisted of members from minority tribes in central Vietnam who sought to establish an autonomous region, it was not clear that the group denied membership to those from other ethnic groups, such as the asylum seeker in this case. We examined 18 refugee merit cases in Hong Kong from among those provided through your office. The UNHCR case files we had access to did not include the interview and appeal information compiled by Hong Kong authorities. They did, however, contain detailed UNHCR mandate review assessments and other information, including submissions by the asylum seekers and/or their lawyers. We also obtained additional documents from attorneys who represented many of the cases we reviewed. In addition, we held lengthy discussions with UNHCR staff and some asylum seekers’ attorneys. Due to the smaller number of cases, the greater amount of case file information, and the type of cases we examined, we were able to spend more time and learn more about each of the cases in Hong Kong than in Indonesia and the Philippines. After reviewing available information, we had a number of questions about the application of the screening criteria in the cases we reviewed. However, because we lacked access to the asylum seekers and to all the components of each case (and we did not seek to adjudicate cases), we could not conclude whether Hong Kong and UNHCR officials had assessed the cases appropriately. In the remainder of this appendix, we present 12 cases that highlight issues involving (1) the manner in which interviews were conducted; (2) different interpretations of the screening criteria, such as the use of country of origin information; (3) communication difficulties resulting from poor translations by interpreters; and (4) judgments made about the credibility of cases. Unless otherwise indicated, the sources of the factual information are representations of the asylum seekers or their lawyers. The asylum seeker in this case reported that he was persecuted for his commitment to the Catholic Church. In Vietnam, he studied to become a priest but claimed he was denied admission to a university because of his family’s religious background. The asylum seeker was arrested and charged with sabotage for harboring a Catholic seminarian who was trying to escape the country. He was imprisoned and subsequently escaped. Hong Kong screening officials challenged his credibility regarding how he escaped from jail but did not question his involvement with the Catholic Church. According to a report from a Catholic chaplain working in the Hong Kong camp, the asylum seeker had been active in religious organizations in the camp. His lawyer reported that the Catholic Diocese of San Francisco sponsored him for a special religious immigrant visa to work in a church in the United States. The asylum seeker also expressed concern that he would be rearrested for sabotage if he returned to Vietnam. We discussed this case with UNHCR officials who thought that the case could qualify on humanitarian grounds, and they subsequently informed us the asylum seeker was screened in under UNHCR mandate in November 1996 based upon new information submitted on the case. The asylum seeker reported that his father was a high ranking civilian in Da Nang and an official in an anticommunist party during the war. When Saigon fell, his father was sent to a reeducation camp for nearly 5 years, and then to a NEZ with his family. Although the asylum seeker completed high school in 1975, he claimed he was not permitted to take the university entrance exam. He was required to do forced labor in the NEZ but was allowed to stop after being injured in an accident. Because he did not have a registration card, he supported himself in a variety of odd jobs. According to the appeal petition filed by his lawyer, the asylum seeker joined an anticommunist group in 1976. When the group was discovered, he attempted to leave Vietnam but was caught and imprisoned. After 2 years, he escaped and subsequently joined another anticommunist group in 1982. When this group was discovered a few years later and some members were imprisoned, the asylum seeker went underground. He joined a third anticommunist group in 1987 that sold illegal music in the black market, some of which contained antigovernment themes. After authorities reportedly began cracking down on such groups in 1988, the asylum seeker and his wife escaped to Hong Kong to avoid arrest. The asylum seeker continued to be politically active in Hong Kong, opposing conditions in the camp and the forced repatriation of asylum seekers to Vietnam. In reviewing the case for possible mandate, the UNHCR reviewer determined that the claim lacked convention-related persecution and had credibility problems. In this regard, UNHCR found that the asylum seeker’s family had obtained legal registration by 1988, thereby demonstrating that the family had reintegrated into Vietnamese society. Furthermore, the UNHCR reviewer found it implausible that the asylum seeker would join another political group so soon after escaping prison, and considered selling antigovernment materials in the black market to be a criminal offense that was not convention-related. Finally, the reviewer found that the asylum seeker’s political activities in Hong Kong were directed against the screening process and were not convention-related activities. Notwithstanding the UNHCR’s initial determination, because of the complexity of the case, UNHCR informed us that it would fully review the case again. In November 1996, the asylum seeker was screened in under UNHCR mandate. According to the asylum seeker, his father was a counterintelligence officer in the South Vietnam Army (ARVN) from 1954 to 1975 and his mother worked at a large American base in Da Nang. His father was in a reeducation camp for 3 years, then sent to a NEZ with his family after their home was confiscated. In 1981, the family fled the NEZ and the children were denied the right to attend school. The family was also subjected to weekly public humiliation sessions that were intended to force them back to the NEZ. The following year, when the asylum seeker was 17 years old, he and another individual were implicated in an event in which a policeman was killed. He tried to escape from Vietnam but was caught and sentenced to 3 years in prison on charges of aiding an anticommunist group and participating in the death of the police officer. He failed in an attempted prison escape and spent more than 7 years in prison. The Hong Kong review board, which interviewed the asylum seeker, found that neither he nor his family suffered convention-related persecution despite facing discrimination for convention reasons. It did not find the asylum seeker’s account of his arrest for the death of the policeman to be credible and concluded that if he had been responsible for the policeman’s death, he would have been charged with murder or at least manslaughter. The board also concluded that the asylum seeker had embellished and fabricated this aspect of his claim. The UNHCR review of the case essentially agreed with the review board decision, finding serious credibility concerns. The UNHCR reviewer thought it credible that the asylum seeker spent considerable time in prison and possibly suffered mistreatment, but the imprisonment resulted from a common crime and was not convention-related. We questioned the completeness of the first interview with the asylum seeker that was conducted only 1 day after he arrived in Hong Kong, but UNHCR said that the first interview was part of the material and evidence offered by the asylum seeker and was properly considered. UNHCR also noted that the asylum seeker gave totally different accounts to the interviewing officer concerning the reason for his imprisonment and omitted or changed circumstances in his life story. UNHCR concluded that the benefit of the doubt principal did not apply since the asylum seeker’s account lacked coherence and plausibility, and ran counter to generally known country of origin information. UNHCR said that the asylum seeker might return to prison if repatriated, but the evidence suggested the imprisonment would not be for a convention-related issue. The asylum seeker claimed that her father, a lieutenant in the ARVN, died after being captured by the communists in 1975. Her family’s property was confiscated, and she was resettled in a NEZ with her grandmother and mother. Her grandmother contracted malaria and died, and the asylum seeker also became ill with malaria so her mother took her out of the zone illegally. The asylum seeker reported that her mother could not provide for her, so she was sent to live with a family friend and former military comrade of her father’s, and her mother disappeared. Because of her illegal residence, the asylum seeker was not allowed to attend school. She helped the new family with an illegal vending business, but was caught and sent to a youth detention center due to her age (15) at the time of her arrest. She escaped to Hong Kong in January 1991 when she had just turned 16. Her lawyer provided us with a copy of the review board’s 1991 decision, which challenged her credibility because of several contradictions in the record. The board decision noted that “there is no country of origin information that the Review Board is aware of which supports the proposition that children of ex-ARVN soldiers are systematically discriminated against or persecuted in present day Vietnam.” The asylum seeker’s lawyer, however, submitted to UNHCR the following excerpt from the Country Reports on Human Rights Practices for 1992 issued by the U.S. State Department: “Family members of former South Vietnamese Government and military officials . . . have been systematically discriminated against.” UNHCR also reviewed the case and, while noting that the asylum seeker “led a miserable existence,” concluded that her life had improved after she was sent to live with her father’s friend. In the UNHCR assessment for mandate review, the reviewer also used country of origin considerations to decide that the asylum seeker had been treated like any other homeless child. The reviewer “ not find any discrimination suffered amounts to persecution” even if benefit of the doubt were given to claims. According to the case file, the asylum seeker served with the U.S. Army from 1963 to 1975. He was sent to a reeducation camp for 3 days after the war and then to a NEZ with his family. His wife and children contracted malaria and were allowed to leave the NEZ for treatment. Two years later he joined his family without government approval and the family lost their ho khau. As a result, his children were denied public education for 10 years and had to perform forced labor at regular intervals. In 1988, the asylum seeker received a ho khau but also lost his job when the factory where he worked became state-run. After his ho khau was reinstated, the asylum seeker’s children were allowed to pursue their education again. Because he had helped protest the factory takeover, he was detained for 2 months and required to report regularly to the authorities until 1991. In 1989, while serving on the board of directors of a school, he protested a policy change and was subjected to more forced labor. In 1991, he was arrested for illegal residency and although he was released after he presented his ho khau, he was required to report every week to the authorities. UNHCR reviewed this case and concluded that the asylum seeker’s military background was remote in time and that the difficulties he had encountered did not amount to persecution. UNHCR indicated that the asylum seeker’s illegal residency made it difficult for him to obtain a ho khau. UNHCR also noted that the issue of ho khau is no longer a problem as the implementation of the CPA ensures reinstatement of a ho khau to all returnees. Furthermore, the factory protest was viewed as a public disturbance and not convention-related persecution. The asylum seeker served in the South Vietnam Army from 1960 to 1969 and left because of injury. He was the district security leader in Da Nang from 1970 to 1975, a nonmilitary governmental position. The asylum seeker was in a reeducation camp from 1975 to 1976 and 1978 to 1981, and his home was confiscated. He belonged to an antigovernment religious group from 1981 until he left Vietnam in 1990 due to fear of arrest. In conducting a mandate review of this case, the UNHCR legal counselor concluded that the asylum seeker “should be recognized on account of political opinion,” but another UNHCR eligibility counselor disagreed as he found the case too doubtful to apply the benefit of the doubt principle. As a result, the legal counselor reinterviewed the asylum seeker and determined again that a favorable decision should be made. Due to the difference of opinion, UNHCR’s Assistant Chief of Mission reviewed the case and decided that “the asylum seeker could not be granted the benefit of the doubt due to irreconcilable credibility problems which were material to the claim.” This case was unusual in that a month after the asylum seeker’s interview with the review board, he was recognized as a refugee and moved to a refugee transit camp. According to his lawyer’s submission, the asylum seeker was informed 17 days later that he was not a refugee and had to return to the asylum camp. We did not see any record in the UNHCR file explaining why this situation occurred. UNHCR informed us that “it was an administrative error” and was “amended as soon as possible.” The asylum seeker was a member of a prohibited religious sect in Vietnam and claimed to have been a victim of religious persecution. He met a publisher of religious books in the summer of 1990 in Vietnam and was introduced to a book published by the Ching Hai group in Taiwan. The asylum seeker introduced the book to his father, who had become a Buddhist monk a few years earlier. His father also liked the book and distributed 100 copies to his followers and introduced them to the Ching Hai philosophy. The Ching Hai group has been described as religious but also critical of the Vietnamese government. The asylum seeker reported that he assisted in the printing of the book and in September 1990, he and his father and several others were arrested for “propagating anti-government material.” The asylum seeker subsequently was able to escape and flee to Hong Kong while his father remained in prison. The Hong Kong Review Board’s decision stated that “there was no information that Buddhism followers were being suppressed by the Vietnamese authorities at the moment or would be suppressed upon their return.” UNHCR, however, provided us information that “the Ching Hai religious sect is prohibited in Vietnam and can only be practiced by its followers in private. There can be repercussions if the faith is practiced in public which may involve questioning by police, confiscation of material, or threats of further problems.” UNHCR indicated though that it was not aware of any person who had been sentenced or arrested for following Ching Hai. The asylum seeker reported that he went to a high school military academy, then entered the South Vietnamese army. In 1975, he was imprisoned for not having a military identification card and was sent to a reeducation camp for 10 months, and then sent to a NEZ. In 1985, he claimed he went to Cambodia and joined an antigovernment group Ancien Enfants de Troup (AET). Subsequently, two other members of the group were arrested for distributing antigovernment leaflets. Fearing arrest, the asylum seeker fled to Hong Kong. A complicating issue in this case was determining when and on what basis statements by the asylum seeker were considered noncredible. According to UNHCR, the asylum seeker’s claim in this case was rejected because of inconsistencies in statements given by the asylum seeker about his activities with the AET, how he made contact with his wife, and statements provided by himself and his wife. According to information about the mandate review assessment, the asylum seeker did not mention his involvement in the antigovernment group during a preinterview counseling session but did so later during the status determination interview. When we asked whether it was appropriate to question credibility based upon what was not said in a counseling session, UNHCR responded that credibility is weighed based on all statements made by the asylum seeker. No distinction is made as to when or in which forum statements are made. UNHCR also noted that their case file records indicated the asylum seeker had stated in the prescreening interview that he was never involved in any antigovernment organization. However, the part of the case file we were able to review did not confirm this assertion. The asylum seeker’s father was a soldier in the ARVN and a driver for the U.S. military until 1974. In 1975, the father was sent to a reeducation camp but escaped after 1 year. He remained underground and informed his family that he was a member of an anticommunist group known as FULRO. He was recaptured in 1982 and imprisoned until being released in 1988. The asylum seeker was 13 years old in 1975, was not allowed to attend school, and, with other members of the family, was sent to a NEZ. The family left the NEZ after 10 days, and although they had no registration card, they worked in various farming and factory jobs. In 1985, the asylum seeker was arrested with his Kung Fu teacher, because the latter was supposedly involved in an antigovernment organization. He was imprisoned for almost 2 years for “intention to go against the government.” In 1989, he was arrested again because he was associated with another individual who belonged to an antigovernment group. According to his claim, the asylum seeker cut his wrist while in solitary confinement and was taken to the hospital, where he escaped the following day and then eventually fled to Hong Kong. In reviewing this case, we noted two issues: (1) language difficulties that appeared to complicate the case and (2) the manner in which the various screening interviews were conducted. The petition filed by the asylum seeker’s lawyer reported several language difficulties encountered by the asylum seeker, who is ethnic Nung and did not speak Vietnamese fluently. His case was rejected in large part because of inconsistencies presented in different interviews. He, however, complained even before his rejection notice that his request for the interviewing official to read back the interview had been denied. According to the lawyer’s petition, the interviewing official had not accurately recorded the asylum seeker’s claim. Notes taken by the UNHCR monitor at the Hong Kong Review Board interview indicated that the way the interview was conducted may have resulted in an inaccurate presentation of the asylum seeker’s claim. The UNHCR official noted that the interviewer “badgers, is hostile, imperious and almost deliberately misinterprets the . [The interviewer] had the irritating habit of repeating everything the [asylum seeker] said, but in a tone of disbelief.” UNHCR also conducted an interview for a mandate review. It was noted that “the language difficulties are still a problem as noted by the interpreter and may have led to some material components of the claim being missed at the interview.” UNHCR maintained that in the mandate review, the legal consultant clearly understood and recorded all facts. Even though discrepancies due to communication difficulties were discounted, the asylum seeker’s claim for refugee status still had major inconsistencies that raised credibility doubts. The asylum seeker said that he served in the ARVN from 1970 until he was discharged due to battle wounds in 1973. In 1975, he went to a reeducation camp for 2 months and then was sent to a NEZ with his wife and three daughters. According to the asylum seeker, the family faced severe difficulties in the NEZ and all three of his daughters became ill and died. Although a health clinic was available, the asylum seeker reported that his family was denied access to it because of the family’s unfavorable background. The asylum seeker helped his brother, who belonged to an anticommunism group, deliver some documents and was arrested. He was released from prison in 1980 after a year after agreeing to serve as an informer. The asylum seeker and his wife then left the NEZ and attempted to escape from Vietnam rather than inform on his friends. The escape attempt failed and he was arrested and beaten so severely that his right leg became paralyzed. After a year in solitary confinement, he was sentenced to 7 years of reeducation for the political crime of “counter-revolution,” but was released in 1987 after 5 years with the condition that he could not leave his village for 3 years without permission. He was also forced to do unpaid labor and was not able to obtain a family registration card. The asylum seeker was detained by the authorities supposedly for antigovernment activities two more times during 1988 and 1989 but was not tried. In 1990, he helped four others write an anonymous letter complaining about corrupt local officials. Fearing that the authorities had learned of his involvement, he escaped with his family to Hong Kong, while the other four people were imprisoned from 2-1/2 to 4 years. Because he evaded arrest, he is afraid that he would be imprisoned if returned to Vietnam. The case appears to have been rejected because of inconsistencies and credibility issues raised in the screening interviews. The Hong Kong Review Board did not find the asylum seeker was persecuted in the NEZ; rather his experience was in line with national policy in Vietnam to redistribute population. The officials also apparently did not believe the asylum seeker’s accounts about the death of his children and about the various arrests and imprisonment he endured. The UNHCR reviewer found the events that occurred in the distant past to be believable but the more recent events were less credible and may not have been convention-related. As a result, the reviewer recommended that the claim be rejected. Regarding the possible imprisonment of the asylum seeker if returned to Vietnam, UNHCR considers the evasion of arrest by itself not to be convention-based persecution. This asylum seeker arrived in Hong Kong in 1991 at the age of 26. The year before, other members of his family, including both parents and three siblings, also arrived in Hong Kong. The other members of the family were granted refugee status, but the asylum seeker was rejected. We asked UNHCR whether the circumstances of the other family members should have influenced the asylum seeker’s case. The principal applicant in the other case was the asylum seeker’s brother who was 2 years younger. Since the brothers were close in age and relatively young such that it was unlikely that their personal histories differed too much, it was not clear why a different decision was reached in each case. UNHCR indicated that under the Handbook criteria, “the situation of each person must be assessed on its own merits.” We also found a letter from the asylum seeker to UNHCR in such poor English that the meaning was uncertain, and there were no notes attached regarding any attempt to clarify the meaning. UNHCR assured us, however, that “there were no language problems which affected the assessment of the case.” The asylum seeker is a member of a Nung ethnic tribe that was well-known for its anticommunist activities before and after 1975. He became interested in Christianity, completed a course at a missionary school, and became a pastor’s assistant. When the communists took control in 1975, the pastor fled and the asylum seeker conducted services for about 6 months. On hearing that a former classmate was arrested for conducting illegal religious services, the asylum seeker went into hiding and subsequently joined FULRO, an armed anticommunism group. He participated in many battles against communist military forces and was wounded in 1977. Afterwards, he was imprisoned and treated inhumanely, according to his claim. The following year he escaped from prison with a friend, assumed a fake identity, and worked on a farm for several years. In 1987, the asylum seeker became involved in a land dispute and was questioned by the local authorities. The following year, his fellow-escapee was arrested. Fearing arrest himself, he went into hiding and learned that his true identity had been exposed. As a result, he escaped to Hong Kong. In the camp, even before being interviewed, he “expressed concerns repeatedly about his ability to communicate in Vietnamese,” according to a UNHCR record. His case was screened out due to lack of credibility. We noted many contradictions in his file and three different versions of the same story. The asylum seeker’s lawyer told us that it was difficult for the asylum seeker to communicate with anyone, including his own lawyer. However, UNHCR officials reported that they had taken a number of measures to enable the asylum seeker to communicate clearly during the screening interviews, including counseling the asylum seeker on preparing his presentation and informing the Hong Kong screening officials about the asylum seeker’s language difficulties prior to his being interviewed. UNHCR officials said they would reassess the case and ask the asylum seeker about the different versions of his claim. However, the asylum seeker repatriated before the reinterview could occur. 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A recorded menu will provide information on how to obtain these lists. | Pursuant to a congressional request, GAO reviewed the implementation and outcomes of the Comprehensive Plan of Action (CPA) for Vietnamese asylum seekers in Southeast Asia, focusing on how the refugee status determination process worked for family unit, victim of violence, and general merit cases by: (1) reviewing factual information about such cases from the perspective of international refugee criteria used under the CPA; and (2) examining how the screening process was implemented. GAO found that: (1) family unity has been an important principle throughout CPA implementation, yet advocacy groups, asylum seekers, and others have raised concerns that some families were unfairly separated during the refugee screening process; (2) the United Nations High Commissioner for Refugees (UNHCR) reviewed hundreds of screened-out cases to determine whether asylum seekers would qualify for resettlement according to established family unity criteria, but found most failed to meet the program criteria; (3) however, UNHCR identified a small number of cases in Indonesia, Malaysia, and the Philippines that met the criteria prior to UNHCR mandating the asylum seekers as refugees and forwarded 72 of these cases to U.S. embassies for resettlement consideration; (4) the United States initially accepted 23 of 36 cases for resettlement in Malaysia, but embassies in Indonesia and the Philippines refused to review 36 similar cases, since they were not first mandated by UNHCR; (5) victim of violence cases involved individuals who were physically assaulted on the way to, or upon arriving in, one of the first asylum countries, and according to UNHCR officials, many victims were unable to articulate their claim for refugee status, and UNHCR established special procedures to determine a durable solution in their best interest; (6) GAO's review of cases in Indonesia and Malaysia indicated that UNHCR and these governments followed established procedures for processing victim of violence cases; (7) GAO could not evaluate the quality of social service counselors' assessments of victims' ability to articulate a claim for refugee status, although the assessments described in some detail the individuals' mental condition, situation in camp, and ability to understand and present their claim for refugee status; (8) of the 74 merit cases GAO reviewed, it appears that most did not present strong refugee claims based on evidence contained in the files; (9) many case files were well-documented and presented detailed facts and logical explanations for decisions that were made, while others contained documents that pointed to differences and inconsistencies in the way claims may have been handled, such as incomplete documentation, poorly translated information, different interpretations of screening criteria, lack of legal assistance, and what appeared to be an overemphasis on nonessential points in assessing the credibility of an asylum seeker's claim; and (10) as a result, in some cases, GAO could not determine how well the case files reflected the presentation of the asylum seekers' claims. |
Since the Social Security Act became law in 1935, workers have had the right to review their earnings records on file at SSA to ensure that they are correct. In 1988, SSA introduced the PEBES to better enable workers who requested such information to review their earnings records and obtain benefit estimates. According to SSA, fewer than 2 percent of the workers who pay Social Security taxes request these statements each year. The PEBES legislation requires SSA to begin sending the PEBES to eligible workers who have not requested a statement according to the schedule that appears in table 1. SSA plans to mail some statements even sooner than required and, by fiscal year 2000, will have mailed statements automatically to over 70 million workers. By providing these statements, SSA’s goals are to (1) better inform the public of benefits available under SSA’s programs, (2) assist workers in planning for their financial future, and (3) better ensure that Social Security earnings records are complete and accurate. Accurate earnings records are important because a worker’s eligibility for Social Security benefits and the size of the benefit itself depend on the worker’s earnings record. Early identification and correction of errors in earnings records can benefit both SSA and the public by reducing the time and cost required to correct earnings records years later when an individual files for retirement benefits. Issuing the PEBES is a significant initiative for SSA. The projected cost of $80 million in fiscal year 2000 includes $56 million for production costs, such as printing and mailing the statement, and $24 million for personnel costs. SSA estimates that 608 staff-years will be required to handle the PEBES workload in fiscal year 2000: SSA staff are needed to prepare the statements, investigate discrepancies in workers’ earnings records, and respond to public inquiries (when individuals receive a PEBES, they are instructed to call SSA if they have questions or find errors in the earnings record contained in the statement). The benefit estimates provided in the PEBES are intended to help workers plan for their financial future. To estimate retirement benefits, SSA makes certain assumptions about an individual’s future employment and earnings. SSA assumes, for example, that individuals will continue to work until they retire and that individuals’ future earnings will remain about the same as their most recent earnings. SSA chose this overall approach to calculating benefit estimates because it is consistent with approaches used by private and public pension plan sponsors to prepare benefit estimates, according to SSA officials. The experts we talked with generally agreed that SSA’s approach for estimating future retirement benefits is reasonable. In estimating retirement benefits, SSA does not, however, vary its methodology to take into consideration certain special circumstances that could affect a worker’s actual retirement benefit. As a result, while the PEBES estimates are reasonable for most workers, they may over- or understate benefits for certain individuals. For example, the PEBES estimate is overstated for federal workers who are eligible for both Civil Service Retirement System and Social Security benefits. For these workers, the law requires a reduction in their Social Security retirement or disability benefits according to a specific formula. In 1996, this reduction may be as much as $219 per month; however, the PEBES benefit estimates do not reflect this reduction. SSA officials told us that it would be too difficult and costly to take such special circumstances into consideration when estimating benefits. Rather, SSA has included in the statements descriptions of certain circumstances that may result in workers’ receiving Social Security benefits that are greater or less than the estimated amount. Our work shows that it would be very difficult for SSA to modify its PEBES benefit estimates to reflect these circumstances. Since the PEBES was first developed, SSA has conducted several small-scale and national surveys to assess the general public’s reaction to receiving an unsolicited PEBES. In addition, SSA has conducted a series of focus groups with the public and SSA employees to elicit their opinions of the statement and to determine what parts of it they did and did not understand. In response to this feedback, SSA revised the statement. For example, early statements routinely provided benefit estimates for age 65, the earliest age at which workers could retire and receive their full Social Security retirement benefit, and for delayed retirement at age 70. When SSA learned that many people were interested in the effect of early retirement on their benefits, SSA added an estimate for retirement at age 62. In addition, as it revised the statement, SSA applied a computerized readability formula to it and concluded that the PEBES could be understood by those who read at a seventh grade level, which is consistent with SSA’s standard for agency notices. Overall public reaction to receiving an unsolicited PEBES has been consistently favorable. In a nationally representative survey conducted during a 1994 pilot test, the majority of the respondents indicated they were glad to receive their statements. In addition, 95 percent of the respondents said the information provided was helpful to their families. Overall, older individuals reacted more favorably to receiving a PEBES than did younger individuals. In addition, SSA representatives who answer the toll-free telephone calls from the public have stated that most callers say they are pleased that they received a PEBES and that the information is useful to them for financial planning. Although SSA has taken steps to improve the PEBES, we found that the current statement still provides too much information, which may overwhelm the reader, and it presents the information in a way that undermines its usefulness. These weaknesses are attributable, in part, to the process SSA used to develop the PEBES. Additional information and expanded explanations have made the statement longer, but some explanations still confuse readers. Moreover, SSA has not collected detailed information from its front-line workers on the public’s response to the PEBES. Research suggests that, in general, people find forms, notices, and statements difficult to use and understand. For this reason, many people may approach a PEBES-like statement “with fear, frustration, insecurity, and hesitation.” To overcome this challenge, the design expert we consulted suggested that such statements include the following: An obvious purpose: Readers need to know immediately why they received the statement, what information it contains, and what they are expected to do with the information. An attractive and functional design and organization: The statement should look easy to read, the sections should be clearly labeled, and the organization should be evident at a glance. When readers need explanations to understand complex information, the explanations should appear with the information. Easy-to-understand explanations: Readers need explanations of complex programs and benefits in the simplest and most straightforward language possible. In the 1996 PEBES, the message from the Commissioner of Social Security does not clearly explain why SSA is providing the statement. Although the message does include information on the statement’s contents and the need for individuals to review the earnings recorded by SSA, its presentation is uninviting, according to the design expert we consulted. More specifically, the type is too dense; the lines are too long; white space is lacking; and the key points are not highlighted. On the basis of these findings, SSA officials told us they have revised the Commissioner’s message for the 1997 PEBES to make it shorter and less complex. “The Social Security Board of Trustees projects that the system will continue to have adequate resources to pay benefits in full for more than 30 years. This means that there is time for the Congress to make changes needed to safeguard the program’s financial future. I am confident these actions will result in the continuation of the American public’s widespread support for Social Security.” Some participants in SSA focus groups, however, thought the message suggested that the resources would not necessarily be there after 30 years. For example, one participant in a 1994 focus group who reviewed a similar Commissioner’s message said, “... first thing I think about when I read the message is, is not going to be there for me.” The focus group results suggest that the future solvency of the Social Security system may be too complex a topic to address adequately in the PEBES. Comments from SSA’s public focus groups, SSA employees, and benefit experts indicate that the statement contains too much information and is too complex. In a 1994 focus group summary, for example, SSA reported that younger workers aged 25 to 35 wanted “a much simplified form—a single page—with estimated benefits and how much in taxes they paid into the system with the remainder of the information put in a pamphlet for future reference.” Moreover, given the length and complexity of the current statement, some focus group participants and benefit experts suggested that SSA add an index or a table of contents to help readers navigate the statement. SSA has not used the best layout and design to help the reader identify the most important points and move easily from one section to the next. The structure of the statement is not clear at a glance. Readers cannot immediately grasp what the sections of the statement are and in which order they should read them, according to the design expert with whom we consulted. The statement lacks effective use of features such as bulleting and highlighting, which would make it more user friendly. In addition, the PEBES is disorganized: information does not appear where needed. The statement has a patchwork of explanations scattered throughout, requiring readers to flip from one page to another to find needed information. For example, page two begins by referring the reader to page four, and page three contains six references to information on other pages. Furthermore, to understand how the benefit estimates were developed and any limitations to these estimates, a PEBES recipient must read explanations spread over five pages. SSA representatives who answer the PEBES toll-free telephone number told us that callers frequently fail to realize that the answers to their questions can be found within the document. In fact, we observed the representatives telling callers to turn to a certain page in the statement to answer their questions. With benefit estimate explanations spread over several pages, individuals may miss important information. For example, the PEBES benefit estimate appears on page three; the explanation that the benefit estimate may be overstated for certain federal workers is not found until the bottom of page five. Without fully reviewing this additional information, a reader may not realize that the PEBES benefit estimate could be overstated. In addition, some of the explanations needed to fully understand information in the PEBES are located within the answer to a question that the PEBES recipient may not read. For example, the statement explains that the retirement benefit is reflected in today’s dollars. This explanation, however, is located in the answer to the following question: “When I requested a statement like this several years ago, my retirement benefit was higher. What happened?” Readers skipping the answer to this question would not know key information about the value of their estimate in today’s economy. Because the PEBES addresses complex programs and issues, explaining these points in simple, straightforward language is challenging. Although SSA made changes to improve the explanation of work credits, for example, many people still do not understand what these credits are, the relevance of the credits to their benefits, and how the credits are accumulated. The public also frequently asks questions about the PEBES’ explanation of family benefits. Family benefits are difficult to calculate and explain because their amounts are dependent on a number of factors, such as the age of the spouse and the spouse’s eligibility for benefits on his or her own work record. Informing the public about family benefits, however, is especially important: a 1995 survey revealed that as much as 40 percent of the public is unaware of these benefits. A team of representatives from a cross section of SSA offices governs SSA’s decisions on the PEBES’ development, testing, and implementation. The team has revised and expanded the statement in response to feedback on individual problems. The design expert we consulted observed that the current statement “appears to have been the result of too many authors, without a designated person to review the entire piece from the eyes of the readers. It seems to have developed over time, piecemeal . . ..” Although SSA officials have obtained the public’s feedback, they have missed some key opportunities along the way to improve the statement. While SSA conducted tests to ensure that the PEBES could be read at a seventh grade level, it has not conducted formal comprehension tests.For example, SSA could have administered either oral or written tests to a sample of readers to determine whether they actually understood SSA’s explanations of certain complex issues. These tests would have provided SSA with quantifiable, objective information to use in revising the statement. SSA has also failed to take advantage of information from its workers who answer the public’s questions about the PEBES every day. SSA currently has front-line workers record the reason people call, but the information collected does not provide sufficient detail for SSA to understand the problems people are having with the PEBES. Although the public and benefit experts agree that the current statement contains too much information, a standard benefit statement model does not exist within the public or private sector, and there is no clear consensus on how best to present benefit information. The Canadian government chose to use a two-part document when it began sending out benefit statements in 1985. The Canada Pension Plan’s one-page statement provides specific individual information, including the earnings record and benefit estimates. A separate brochure details the program explanations. The first time the Plan mails the statement, it sends both the one-page individual information and the detailed brochure; subsequent mailings contain only the single page with the individual information. Although some focus group participants and benefit experts prefer a two-part format, others believe that all the information should remain in a single document, fearing that statement recipients will lose or might not read the separate explanations. SSA has twice tested the public’s reaction to receiving two separate documents. On the basis of a 1987 focus group test, SSA concluded that it needed to either redesign the explanatory brochure or incorporate the information into one document. SSA chose the latter approach. In a 1994 test, people indicated that they preferred receiving one document; however, the single document SSA used in the test contained less information and had a more readable format than the current PEBES. SSA, through the Government Printing Office, has awarded a 2-year contract for printing the statements for fiscal years 1997 and 1998. These statements will have the same format as the current PEBES with only a few wording changes. SSA is considering a more extensive redesign of the PEBES for the fiscal year 1999 mailings, which it will implement only if it will save money on printing costs. By focusing on reduced printing costs as the main reason for redesigning the PEBES, SSA is overlooking the hidden costs of the statement’s existing weaknesses. For example, if people do not understand why they got the statement or have questions about information provided in the statement, they may call or visit SSA, creating more work for SSA staff. Furthermore, if the PEBES frustrates or confuses people, it could undermine public confidence in SSA and its programs. Our work suggests, and experts agree, that the PEBES’ value could be enhanced by several changes. Yet SSA’s redesign team is focusing on reducing printing costs without considering all of the factors that would ensure that the PEBES is a cost-effective document. The PEBES initiative is an important step toward better informing the public about SSA’s programs and benefits. However, extensive revisions to the PEBES are needed to ensure that the statement communicates effectively. To best convey information to the public about SSA’s programs and benefits, the PEBES needs an improved layout and design, as well as simplified explanations. SSA will need to start now to complete these changes before its 1999 redesign target date, because revising the PEBES will involve time to collect data and to develop and test alternatives. SSA can help ensure that the changes target the most significant weaknesses by systematically obtaining more detailed feedback from front-line workers. SSA can also ensure that the changes clarify the statement by conducting formal comprehension tests with a sample of future PEBES recipients. In addition, SSA could evaluate alternative formats for communicating the information presented in PEBES. For example, SSA could present the Commissioner’s message in a separate cover letter accompanying the statement; alternatively, SSA could consider a two-part option, similar to the approach of the Canada Pension Plan. To select the most cost-effective option, SSA needs to collect and assess additional cost information on available options and test different PEBES formats. Our work suggests that improving the PEBES will require attention from SSA’s senior leadership. For example, how best to balance the public’s need for information with the problems resulting from providing too much information warrants senior management involvement. In order for the PEBES to better convey information to the public about SSA’s programs and benefits, we recommend that SSA revise the current statement to improve its layout and design and to simplify explanations. We also recommend that SSA evaluate and test alternative formats for communicating the information presented in the PEBES and the accompanying Commissioner’s message. We obtained comments on a draft of this report from SSA. SSA officials agreed with our conclusions and recommendations and provided specific information on the steps they plan to take to improve the PEBES (see app. II). We are sending copies of this report to the Commissioner of Social Security and other interested parties. Copies will also be made available to others on request. If you or your staff have any questions concerning this report, please call me on (202) 512-7215 or Cynthia Fagnoni, Assistant Director, on (202) 512-7202. Other major contributors to this report include Kay Brown, Evaluator-in-Charge; Hans Bredfeldt, Senior Evaluator; and Nora Landgraf and Elizabeth Jones, Evaluators. The first copy of each GAO report and testimony is free. Additional copies are $2 each. Orders should be sent to the following address, accompanied by a check or money order made out to the Superintendent of Documents, when necessary. VISA and MasterCard credit cards are accepted, also. Orders for 100 or more copies to be mailed to a single address are discounted 25 percent. U.S. General Accounting Office P.O. Box 6015 Gaithersburg, MD 20884-6015 Room 1100 700 4th St. NW (corner of 4th and G Sts. NW) U.S. General Accounting Office Washington, DC Orders may also be placed by calling (202) 512-6000 or by using fax number (301) 258-4066, or TDD (301) 413-0006. Each day, GAO issues a list of newly available reports and testimony. To receive facsimile copies of the daily list or any list from the past 30 days, please call (202) 512-6000 using a touchtone phone. A recorded menu will provide information on how to obtain these lists. | Pursuant to a congressional request, GAO reviewed the Social Security Administration's (SSA) overall progress in issuing the Personal Earnings and Benefits Estimate Statement (PEBES), focusing on: (1) whether the PEBES benefit estimates are reasonable; (2) what SSA has done to improve the statement; (3) the extent to which the statement communicates its goals and information clearly; (4) SSA plans to revise the statement further; and (5) actions that GAO believes will improve the statement. GAO found that: (1) the methods and assumptions used by SSA for estimating future retirement benefits are consistent with those used by private and public pension plan sponsors; (2) the public feels that the PEBES can be a valuable tool for retirement planning; (3) although SSA has taken steps to improve PEBES, it fails to communicate clearly the complex information readers need to understand SSA programs and benefits, partly because the design and organization of the statement make it difficult for the reader to locate and understand important information; (4) readers are confused by several important explanations, such as who in their family is eligible for benefits; (5) SSA is considering redesigning PEBES, but only if the redesign results in reduced printing costs; (6) this approach overlooks hidden costs, such as the workload generated by public inquiries when people do not understand the statement, and the possibility that a poorly designed statement will undermine, rather than improve, public confidence; and (7) active leadership from SSA senior managers will be needed to ensure the success of this important initiative. |
The Department of Labor’s mission is to promote the welfare of job seekers, wage earners, and retirees of the United States by improving their working conditions, enhancing opportunities for profitable employment, and protecting their retirement investments. Established as a department in 1913, Labor is responsible for the administration and enforcement of over 180 federal statutes covering nearly 10 million employers and over 100 million workers. Labor administers and enforces a variety of federal laws guaranteeing workers’ rights to a workplace free from safety and health hazards; a minimum hourly wage and overtime pay; family and medical leave; freedom from employment discrimination; unemployment insurance; and other income support, such as workers’ compensation benefits. Labor also protects workers’ pension rights; provides job training programs; helps workers find jobs; works to strengthen free collective bargaining; and keeps track of changes in employment, prices, and other national economic measures. For fiscal year 1998, Labor had an estimated budget of $34.6 billion and is authorized 16,700 staff. About three quarters of Labor’s budget is composed of mandatory spending on income maintenance programs. The department’s diverse functions are carried out by different offices in a decentralized structure: 24 component units, with over 1,000 field offices, to support its various functional responsibilities. Labor’s five major areas of statutory responsibility include employment and training, employment health and safety, pension and welfare benefits, employment standards, and labor statistics. It has six major program agencies to carry out these responsibilities: the Employment and Training Administration, the Employment Standards Administration, the Bureau of Labor Statistics, the Occupational Safety and Health Administration, the Mine Safety and Health Administration, and the Pension and Welfare Benefits Administration. The Pension Benefit Guaranty Corporation is a government corporation that administers the guaranteed retirement pension system. Labor’s program activities fall into two major categories: enhancing workers’ skills through job training and ensuring worker protection. In addition, it develops economic statistics, such as the consumer price index, used by business, labor, and government in forming fiscal and monetary policy and in making cost-of-living adjustments. Labor also provides temporary income support for laid-off workers seeking jobs and serves to assist workers in finding new jobs under federal-state partnerships. To perform its mission, Labor makes extensive use of complex information technology to support programmatic requirements, departmentwide communications, administrative functions, and office automation. It has identified 61 mission-critical systems for which it must ensure Year 2000 compliance. Without these systems, Labor has determined, it cannot effectively carry out numerous mission-critical functions, including (1) providing income security to millions of workers through a variety of benefits programs, (2) administering nationwide employment and training programs and services, (3) generating vital statistics on the U.S. economy, such as unemployment rates and the consumer price index, and (4) providing vital information to the public on a variety of employment issues, such as the security of pension plans, occupational injuries and illnesses, and employment rights. If Labor’s systems are not Year 2000 compliant on or before January 1, 2000, the potential impact could be significant. For example, according to Labor officials, billions of dollars in benefits payments to Americans, such as unemployment insurance and workers’ compensation, would be at significant risk of disruption, and accurate labor statistics on the economy used by both public and private organizations may not be produced. Further, the ability to manage the billions of dollars in assets for pension benefit guarantees for over 40 million workers could be hampered. The Year 2000 program is likely the largest and most complex project management and systems conversion activity ever to be undertaken by many federal agencies. It requires the disciplined, coordinated application of scarce resources to an agencywide system conversion that must be completed by a fixed date, and an understanding of the wide range of dependencies among information systems. To succeed, Labor must manage the Year 2000 program as a large systems development activity. An organization can mitigate its risk of Year 2000 complications through a structured approach and rigorous program management. One generally accepted approach, outlined in our Year 2000 Computing Crisis: An Assessment Guide (GAO/AIMD-10.1.14), includes five phases: awareness — defining the problem and gaining executive-level support; assessment — inventorying and analyzing systems, and prioritizing their renovation — converting, replacing, or eliminating selected systems; validation — ensuring that all converted or replaced systems and interfaces will work in an operational environment; and implementation — deploying Year 2000-compliant systems and components, and implementing contingency plans, if necessary. Labor recognized several years ago that the upcoming change of century posed significant challenges to the agency, and in May 1996 reported to Congress that it had initiated Year 2000 activities. By late 1996, Labor’s Year 2000 activities had increased, and it reported to the Office of Management and Budget (OMB) that it completed the Year 2000 awareness phase in December 1996. During this time period, the Chief Information Officer (CIO) designated a Labor project manager for the Year 2000 effort, and together the CIO and the project manager held a series of briefings with executive staff, administrative officers, and information technology managers to ensure that Labor’s executive and senior management levels were fully aware of the importance of the Year 2000 issue. In May 1997, Labor reported to OMB that its CIO had directed that each Labor component agency designate a Year 2000 project manager. The CIO and departmental Year 2000 manager instituted two levels of monthly meetings, one with Year 2000 project managers and one with the department’s information technology managers, to track progress and share information on Year 2000 project activities. To keep senior management informed on an ongoing basis, Year 2000 status reports were provided to the Capital Planning Investment Board, chaired by the CIO and including the heads of major Labor program agencies and the department’s Chief Financial Officer. In August 1997, the department reported to OMB that it had completed the Year 2000 assessment phase using a three-tiered structure to evaluate and rank its systems to prioritize its Year 2000 compliance efforts. For example, it assigned the highest priority to the mission-critical systems that would have a direct impact on the public; enforcement activities; or financial systems, such as its benefits payment systems. In a memorandum dated December 31, 1997, the Secretary of Labor made Year 2000 compliance a top departmental priority, and directed steps to accelerate progress in reaching the department’s target goals. The Deputy Secretary has also made the agency’s Year 2000 progress a priority item in monthly meetings with each agency head. In February of this year, Labor established a monthly exception reporting system, requiring its component agencies to report any deviations from their Year 2000 plans. Labor uses this report as an early warning of potential issues needing attention. In August, Labor reported to OMB that 24 of its 61 mission-critical systems were compliant; table 1 shows the reported Year 2000 status of Labor’s mission-critical systems as of August 1998. The public relies on the Department of Labor and its components for assistance when unemployed, for protection and compensation in the workplace, for statistics on which many of the nation’s critical economic indicators are based, and for ensuring the security of private pension plans. The department, its agencies, and the states, in turn, rely on automated systems to ensure that the expected operations are carried out. In each of these areas, the Year 2000 compliance status of all systems cannot yet be ensured. Several of the systems are at risk of failure, including some state systems that could fail as early as January 1999 because they involve calculations a year into the future. Labor’s programs to help unemployed workers and assist them in locating employment are carried out by two Employment Training Administration (ETA) organizations: the Unemployment Insurance Service (UIS) and the Employment Service (ES). Enacted over 60 years ago as part of the Social Security Act of 1935 as a federal-state partnership, the Unemployment Insurance Program has been a major source of temporary income support for laid-off workers seeking work. The Employment Services Program, which was established by the Wagner-Peyser Act of 1933, as amended, has assisted workers in finding new jobs. State Employment Security Agencies (SESA) operate the programs in accordance with their own state priorities and unemployment compensation laws; therefore, each state has substantial control over provided services, eligibility requirements, and benefits levels. SESAs provide three distinct benefits: unemployment insurance, employment services, and state administration of the Job Training Partnership Act. The department and the states share responsibility for administration of the Unemployment Insurance Program. Labor’s UIS is responsible for establishing broad guidelines (including some eligibility conditions), general oversight, and administrative funding. SESAs pay unemployment compensation benefits from the Unemployment Trust Fund to eligible workers and collect state unemployment taxes from employers. Today, 97 percent of all wage earners are covered by this program. Unemployment insurance will pay an estimated $24 billion to approximately 8 million workers in compensation benefits and allowances from the Unemployment Trust Fund in fiscal year 1999. During this same period, SESA staff will handle over 6 million employer tax accounts, 20 million initial unemployment claims, almost 137 million “weeks claimed,” and 1 million appeals. In fiscal year 1998, SESAs collected $22 billion in state unemployment insurance taxes. Because each of the 53 SESAs (one for each state and the District of Columbia, Puerto Rico, and the Virgin Islands) has its own system, Labor’s UIS reported only one mission-critical system to OMB—the UIS itself, which collects information from numerous state sources to measure and monitor state unemployment insurance performance and workload and budgeting activities. According to Labor reports, the expected implementation date for this system is February 1999. According to Labor’s contingency planning guidance issued to SESAs, if SESA benefits systems were to become inoperable, benefits payments could be jeopardized; if its tax system failed, tax collections could suffer. Successful operation of the benefits and tax functions depend heavily on complex information systems, a wide range of internal and external products and services, and the uninterrupted operation of the major information technology infrastructure. Many SESA systems are already at risk of date problems due to Year-2000 related failures occurring as early as January 1999. The SESAs’ unemployment insurance benefits systems are vulnerable to this because of benefit year date calculations used in determining claimant eligibility. These projected date calculations are relied upon throughout state benefits systems, and can cause systems failures as early as January 1999, if not corrected. For example, if a claim is filed January 4, 1999, it will have a benefit year ending date of January 3, 2000. If states’ benefits system have not been repaired, Labor expects these systems to fail as early as January 1999—3 and a half months from today—because they would not properly recognize dates beyond 2000. Because of this date vulnerability, Labor has strongly encouraged SESAs to address this problem first, and has provided each with at least $1 millon to address the Year 2000 problem in its particular state. UIS monitors the SESAs’ Year 2000 progress through status reports issued on a quarterly basis. UIS places states in one of four categories: (1) high alert—SESAs at highest risk of failure and “that appear almost certain to fail by January 4, 1999,” (2) at risk—those that are significantly behind in their renovation efforts, (3) yellow caution—SESAs that “are on the border” of not making sufficient progress toward achieving compliance, and (4) green—those making adequate progress or already having compliant systems in place. Figure 1 provides UIS’ assessment of the 53 SESAs as of July 31, 1998. As shown, UIS has placed Puerto Rico and the District of Columbia in the high alert category. According to UIS, these SESAs need to immediately focus their resources on developing contingency solutions to replace their existing systems. UIS also placed five SESAs in the at risk category: Arkansas, Delaware, Montana, New Mexico, and the Virgin Islands. Labor issued a policy directive effective yesterday, September 16, requiring that the at risk SESAs develop and submit business continuity and contingency plans for their benefits systems to the department’s regional offices by October 1 of this year—and requiring the rest of the SESAs to submit plans by November 20, 1998. Labor’s U.S. Employment Service (ES) was created by the Wagner-Peyser Act of 1933, amended in 1982 to give more authority to state governors. It provides general direction, funding, and oversight; Labor estimates that its fiscal year 1999 budget request of $797 million will result in the placement of over 3 million individuals in jobs through employment services. Under this act, grants are allocated to each state to plan and administer a labor exchange program to best respond to the needs of the state’s employers and workers. ES also assists states with programs of test development, occupational analysis, and maintenance of the Dictionary of Occupational Titles. SESAs operate almost 2,000 local employment service (job service) offices. Each year these offices assist millions of job seekers and employers and, in some areas, provide job training and related services. The public employment service is available to everyone authorized to work in the United States. In addition, it helps to implement provisions of the Immigration Reform and Control Act of 1986 and provides specialized assistance to veterans; persons with disabilities; and other groups, such as youths 16 to 22 and the economically disadvantaged. Most of the service’s appropriations come from the trust funds collected under the Federal Unemployment Tax Act, with a small portion (3 percent) coming from general revenues. Federal regulations require that the states maintain statewide labor exchanges with certain minimum capabilities, including assisting job seekers in finding employment, assisting employers in filling jobs, and meeting the work test for unemployment insurance claimants, among others. ES reports that it has no mission-critical systems. According to ES officials, the organization’s primary information system would be considered America’s Job Bank (AJB). Together with the 2,000 state-operated public employment offices, ES operates AJB, a computerized network linking state employment service offices to provide job seekers with job opportunities. AJB contains approximately 800,000 job listings and costs about $1.6 million to operate annually. ES officials also said that AJB provides rapid, national exposure for job openings and an easily accessible pool of candidates for employers. In addition to appearing on the Internet, the job openings and resumes found in AJB are available on computer systems in public libraries, colleges and universities, high schools, shopping malls, transition offices on military bases worldwide, and other places of public interest. There is no charge to either employers who list their job vacancies or to job seekers who utilize AJB to locate employment. According to the Director of Employment Services, AJB, operated by the State of New York through an agreement with Labor, has not been formally assessed for Year 2000 compliance. However, according to the ES director, the impact of AJB’s failure would be minimal because it is a compilation of all state job banks’ listings. The ES director said that if the system did not operate, states could still access their respective banks and perhaps contact other states through the Internet to obtain their listings. One of Labor’s units charged with ensuring worker protection is the Office of Workers’ Compensation Programs (OWCP), which administers three major workers’ compensation acts: the Federal Employees’ Compensation Act, the Longshore and Harbor Workers’ Compensation Act, and the Black Lung Benefits Act. The programs reported in fiscal year 1997 that these compensation programs processed about 207,000 claims and provided approximately $3 billion in compensation funds for wage replacement benefits, medical treatment, and vocational and other benefits to eligible workers. OWCP administers these three compensation acts through three separate program divisions. We recently reported on OWCP’s efforts to address the Year 2000 computing challenges facing its three workers’ compensation programs and the four supporting mission-critical systems. In assessing these systems, OWCP determined that each was in need of repair to make it Year 2000 compliant. Of the four, the one most at risk was the replacement system for the Black Lung Program, known as the Automated Support Package (ASP). The current ASP is the program’s case management system; if this mainframe system were to fail, it could disrupt the payment of benefits to sufferers of pneumoconiosis (Black Lung disease, caused by habitual inhalation of coal dust), as well as to their beneficiaries and medical providers. Until recently, as part of its Year 2000 strategy, the existing system was scheduled to be retired and replaced by a new client-server system in November 1999—dangerously close to the year 2000. However, after discussing this situation with OWCP and department officials, the agency has revised its strategy and will now also renovate its existing ASP system in the event the replacement system is not implemented in time. The renovation work is now underway, and is scheduled to meet the OMB deadlines. The Bureau of Labor Statistics (BLS) is the principal fact-finding agency in the federal government in the broad field of economics. BLS is a national statistical agency that collects, processes, analyzes, and disseminates essential statistical data to the American public, the Congress, other federal agencies, state and local governments, business, and labor. For example, BLS produces the consumer price index (CPI), the principal source of information concerning trends in consumer prices and inflation in the United States and one of the nation’s most important economic indicators. BLS also produces other principal economic indicators, such as current employment statistics, which are produced monthly and include data on employment, hours, and earnings, in detail by industry and geographic area, providing a reliable measure of economic activity. These estimates serve as components of the index of leading economic indicators. BLS has eight regional offices throughout the country, each specializing in the economies of the regions in which they are located. BLS has 23 of Labor’s 61 mission-critical systems. According to BLS officials, 11 of the 23 are Year 2000 compliant, 8 are being replaced, and 4 are being repaired. Should these systems fail, according to BLS’ systems impact statements, such failures could result in the inability to accurately calculate statistical data. For example, if the CPI system failed it could have an impact on other federal programs as it is used as the basis to adjust payments to Social Security recipients and federal and military retirees and for a number of entitlement programs, such as food stamps and school lunches. Further, again according to BLS’ systems impact statements, a reliable measure of economic activity would not be available, affecting the ability of government decisionmakers to formulate fiscal and economic policy. The CPI system, which is being repaired, is not scheduled to meet the September 1998 renovation target or the December 1998 validation target set by OMB. BLS’ plans call for renovation to be completed by January 1999, validation by February 1999, and implementation by March 1999. BLS is relying on eight replacement systems to be implemented between October 1998 and March 1999. While these systems vary in size and complexity, system replacement is often a high risk because federal agencies have a long history of difficulty in delivering planned systems on time. Further, the Year 2000 schedule for these eight is tight. Completion target dates for testing and implementation are all within a few months of each other. The Pension Benefit Guaranty Corporation (PBGC) is a federal government corporation established by title IV of the Employee Retirement Income Security Act (ERISA) of 1974. PBGC administers programs of mandatory insurance to prevent loss of pension benefits under covered private, defined-benefit pension plans if single-employer plans terminate or if multi-employer plans are unable to pay benefits. PBGC protects the retirement incomes of about 42 million American workers—one in every three—in over 45,000 defined-benefit pension plans. PBGC is financed through premiums collected from companies that sponsor insured pension plans; investment returns on PBGC assets; and recoveries from employers responsible for underfunded, terminated plans. PBGC is responsible for annual premium revenues of over $1 billion, assets of $16 billion, annual benefits payments of more than $820 million, and benefits obligation to more than 465,000 workers and retirees in more than 2,500 pension plans. PBGC has 13 mission-critical systems, 12 of which have been replaced in the last 4 years. The corporation is on schedule to complete validation and implementation of these replacement systems by February 1999. The Financial Accounting and Reporting System (FARS), the one system that has yet to be replaced, is not due to be implemented until June 1999. This system is critical to the tracking of billions of dollars related to PBGC’s annual financial transactions. Because of this late implementation date, PBGC is now beginning to look at other options in the event FARS is not ready in time. Given the challenges Labor faces in making sure that all of its mission-critical systems are adequately tested and in addressing the complexities of the large number of federal-state partnerships, it will be difficult for the department to enter the new century without some problems. Therefore, it is critical that Labor initiate the development of realistic contingency plans to ensure continuity of core business processes in the event of Year 2000-induced failures. Business continuity and contingency plans should be formulated to respond to two types of failure: those that can be predicted (e.g., systems renovations that are already far behind schedule), and those that are unforeseen (e.g., systems that fail despite having been certified Year 2000 compliant, or those that cannot be corrected by January 1, 2000, despite appearing to be on schedule today). Moreover, contingency plans that focus only on agency systems are inadequate. Federal agencies depend on data provided by their business partners as well as on services provided by the public infrastructure. Thus, one weak link anywhere in the chain of critical dependencies can cause major disruption. Given these interdependencies, it is imperative that contingency plans be developed for all critical core business processes and supporting systems, regardless of whether these systems are owned by the agency. Our guide to ensuring business continuity and contingency planning, issued last month, provides further detail. It describes four phases supported by agency Year 2000 program management: initiation, business impact analysis, contingency planning, and testing. Each phase represents a major Year 2000 business continuity planning project activity or segment. According to Labor officials, the department is committed to developing business continuity and contingency plans for each mission-critical business process and supporting systems. The department has now drafted such plans for key benefits processes and supporting systems. Plans for other business areas and supporting systems are expected later this year. This concludes my statement, and I would be pleased to answer any questions that you or other Members of the Subcommittee may have at this time. Year 2000 Computing Crisis: Severity of Problem Calls for Strong Leadership and Effective Partnerships (GAO/T-AIMD-98-278, September 3, 1998). Year 2000 Computing Crisis: Strong Leadership and Effective Partnerships Needed to Reduce Likelihood of Adverse Impact (GAO/T-AIMD-98-277, September 2, 1998). Year 2000 Computing Crisis: Strong Leadership and Effective Partnerships Needed to Mitigate Risks (GAO/T-AIMD-98-276, September 1, 1998). Year 2000 Computing Crisis: State Department Needs To Make Fundamental Improvements To Its Year 2000 Program (GAO/AIMD-98-162, August 28, 1998). Year 2000 Computing: EFT 99 Is Not Expected to Affect Year 2000 Remediation Efforts (GAO/AIMD-98-272R, August 28, 1998). Year 2000 Computing Crisis: Avoiding Major Disruptions Will Require Strong Leadership and Effective Partnerships (GAO/T-AIMD-98-267, August 19, 1998). Year 2000 Computing Crisis: Strong Leadership and Partnerships Needed to Address Risk of Major Disruptions (GAO/T-AIMD-98-266, August 17, 1998). Year 2000 Computing Crisis: Strong Leadership and Partnerships Needed to Mitigate Risk of Major Disruptions (GAO/T-AIMD-98-262, August 13, 1998). FAA Systems: Serious Challenges Remain in Resolving Year 2000 and Computer Security Problems (GAO/T-AIMD-98-251, August 6, 1998). Year 2000 Computing Crisis: Business Continuity and Contingency Planning (GAO/AIMD-10.1.19, August 1998). Internal Revenue Service: Impact of the IRS Restructuring and Reform Act on Year 2000 Efforts (GAO/GGD-98-158R, August 4, 1998). Social Security Administration: Subcommittee Questions Concerning Information Technology Challenges Facing the Commissioner (GAO/AIMD-98-235R, July 10, 1998). Year 2000 Computing Crisis: Actions Needed on Electronic Data Exchanges (GAO/AIMD-98-124, July 1, 1998). Defense Computers: Year 2000 Computer Problems Put Navy Operations at Risk (GAO/AIMD-98-150, June 30, 1998). Year 2000 Computing Crisis: A Testing Guide (GAO/AIMD-10.1.21, Exposure Draft, June 1998). Year 2000 Computing Crisis: Testing and Other Challenges Confronting Federal Agencies (GAO/T-AIMD-98-218, June 22, 1998). Year 2000 Computing Crisis: Telecommunications Readiness Critical, Yet Overall Status Largely Unknown (GAO/T-AIMD-98-212, June 16, 1998). GAO Views on Year 2000 Testing Metrics (GAO/AIMD-98-217R, June 16, 1998). IRS’ Year 2000 Efforts: Business Continuity Planning Needed for Potential Year 2000 System Failures (GAO/GGD-98-138, June 15, 1998). Year 2000 Computing Crisis: Actions Must Be Taken Now to Address Slow Pace of Federal Progress (GAO/T-AIMD-98-205, June 10, 1998). Defense Computers: Army Needs to Greatly Strengthen Its Year 2000 Program (GAO/AIMD-98-53, May 29, 1998). Year 2000 Computing Crisis: USDA Faces Tremendous Challenges in Ensuring That Vital Public Services Are Not Disrupted (GAO/T-AIMD-98-167, May 14, 1998). Securities Pricing: Actions Needed for Conversion to Decimals (GAO/T-GGD-98-121, May 8, 1998). Year 2000 Computing Crisis: Continuing Risks of Disruption to Social Security, Medicare, and Treasury Programs (GAO/T-AIMD-98-161, May 7, 1998). IRS’ Year 2000 Efforts: Status and Risks (GAO/T-GGD-98-123, May 7, 1998). Air Traffic Control: FAA Plans to Replace Its Host Computer System Because Future Availability Cannot Be Assured (GAO/AIMD-98-138R, May 1, 1998). Year 2000 Computing Crisis: Potential for Widespread Disruption Calls for Strong Leadership and Partnerships (GAO/AIMD-98-85, April 30, 1998). Defense Computers: Year 2000 Computer Problems Threaten DOD Operations (GAO/AIMD-98-72, April 30, 1998). Department of the Interior: Year 2000 Computing Crisis Presents Risk of Disruption to Key Operations (GAO/T-AIMD-98-149, April 22, 1998). Tax Administration: IRS’ Fiscal Year 1999 Budget Request and Fiscal Year 1998 Filing Season (GAO/T-GGD/AIMD-98-114, March 31, 1998). Year 2000 Computing Crisis: Strong Leadership Needed to Avoid Disruption of Essential Services (GAO/T-AIMD-98-117, March 24, 1998). Year 2000 Computing Crisis: Federal Regulatory Efforts to Ensure Financial Institution Systems Are Year 2000 Compliant (GAO/T-AIMD-98-116, March 24, 1998). Year 2000 Computing Crisis: Office of Thrift Supervision’s Efforts to Ensure Thrift Systems Are Year 2000 Compliant (GAO/T-AIMD-98-102, March 18, 1998). Year 2000 Computing Crisis: Strong Leadership and Effective Public/Private Cooperation Needed to Avoid Major Disruptions (GAO/T-AIMD-98-101, March 18, 1998). Post-Hearing Questions on the Federal Deposit Insurance Corporation’s Year 2000 (Y2K) Preparedness (AIMD-98-108R, March 18, 1998). SEC Year 2000 Report: Future Reports Could Provide More Detailed Information (GAO/GGD/AIMD-98-51, March 6, 1998). Year 2000 Readiness: NRC’s Proposed Approach Regarding Nuclear Powerplants (GAO/AIMD-98-90R, March 6, 1998). Year 2000 Computing Crisis: Federal Deposit Insurance Corporation’s Efforts to Ensure Bank Systems Are Year 2000 Compliant (GAO/T-AIMD-98-73, February 10, 1998). Year 2000 Computing Crisis: FAA Must Act Quickly to Prevent Systems Failures (GAO/T-AIMD-98-63, February 4, 1998). FAA Computer Systems: Limited Progress on Year 2000 Issue Increases Risk Dramatically (GAO/AIMD-98-45, January 30, 1998). Defense Computers: Air Force Needs to Strengthen Year 2000 Oversight (GAO/AIMD-98-35, January 16, 1998). Year 2000 Computing Crisis: Actions Needed to Address Credit Union Systems’ Year 2000 Problem (GAO/AIMD-98-48, January 7, 1998). Veterans Health Administration Facility Systems: Some Progress Made In Ensuring Year 2000 Compliance, But Challenges Remain (GAO/AIMD-98-31R, November 7, 1997). Year 2000 Computing Crisis: National Credit Union Administration’s Efforts to Ensure Credit Union Systems Are Year 2000 Compliant (GAO/T-AIMD-98-20, October 22, 1997). Social Security Administration: Significant Progress Made in Year 2000 Effort, But Key Risks Remain (GAO/AIMD-98-6, October 22, 1997). Defense Computers: Technical Support Is Key to Naval Supply Year 2000 Success (GAO/AIMD-98-7R, October 21, 1997). Defense Computers: LSSC Needs to Confront Significant Year 2000 Issues (GAO/AIMD-97-149, September 26, 1997). Veterans Affairs Computer Systems: Action Underway Yet Much Work Remains To Resolve Year 2000 Crisis (GAO/T-AIMD-97-174, September 25, 1997). Year 2000 Computing Crisis: Success Depends Upon Strong Management and Structured Approach (GAO/T-AIMD-97-173, September 25, 1997). Year 2000 Computing Crisis: An Assessment Guide (GAO/AIMD-10.1.14, September 1997). Defense Computers: SSG Needs to Sustain Year 2000 Progress (GAO/AIMD-97-120R, August 19, 1997). Defense Computers: Improvements to DOD Systems Inventory Needed for Year 2000 Effort (GAO/AIMD-97-112, August 13, 1997). Defense Computers: Issues Confronting DLA in Addressing Year 2000 Problems (GAO/AIMD-97-106, August 12, 1997). Defense Computers: DFAS Faces Challenges in Solving the Year 2000 Problem (GAO/AIMD-97-117, August 11, 1997). Year 2000 Computing Crisis: Time Is Running Out for Federal Agencies to Prepare for the New Millennium (GAO/T-AIMD-97-129, July 10, 1997). Veterans Benefits Computer Systems: Uninterrupted Delivery of Benefits Depends on Timely Correction of Year-2000 Problems (GAO/T-AIMD-97-114, June 26, 1997). Veterans Benefits Computer Systems: Risks of VBA’s Year-2000 Efforts (GAO/AIMD-97-79, May 30, 1997). Medicare Transaction System: Success Depends Upon Correcting Critical Managerial and Technical Weaknesses (GAO/AIMD-97-78, May 16, 1997). Medicare Transaction System: Serious Managerial and Technical Weaknesses Threaten Modernization (GAO/T-AIMD-97-91, May 16, 1997). Year 2000 Computing Crisis: Risk of Serious Disruption to Essential Government Functions Calls for Agency Action Now (GAO/T-AIMD-97-52, February 27, 1997). Year 2000 Computing Crisis: Strong Leadership Today Needed To Prevent Future Disruption of Government Services (GAO/T-AIMD-97-51, February 24, 1997). High-Risk Series: Information Management and Technology (GAO/HR-97-9, February 1997). The first copy of each GAO report and testimony is free. Additional copies are $2 each. Orders should be sent to the following address, accompanied by a check or money order made out to the Superintendent of Documents, when necessary. VISA and MasterCard credit cards are accepted, also. Orders for 100 or more copies to be mailed to a single address are discounted 25 percent. U.S. General Accounting Office P.O. Box 37050 Washington, DC 20013 Room 1100 700 4th St. NW (corner of 4th and G Sts. NW) U.S. General Accounting Office Washington, DC Orders may also be placed by calling (202) 512-6000 or by using fax number (202) 512-6061, or TDD (202) 512-2537. Each day, GAO issues a list of newly available reports and testimony. To receive facsimile copies of the daily list or any list from the past 30 days, please call (202) 512-6000 using a touchtone phone. A recorded menu will provide information on how to obtain these lists. | Pursuant to a congressional request, GAO discussed the significant information technology challenges that the upcoming century change poses to the Department of Labor, and to several of its agencies, focusing on: (1) specific year 2000 issues facing two elements of Labor's Employment and Training Administration; (2) the year 2000 efforts of the Office of Workers' Compensation Programs and of the Bureau of Labor Statistics; and (3) observations on the year 2000 readiness of the Pension Benefit Guaranty Corporation. GAO noted that: (1) Labor and its agencies have made progress, but are still at risk in several areas; (2) these areas include making benefits payments to laid-off workers, collecting labor statistics, and ensuring accurate accounting for pension benefits; (3) several of the systems supporting these business areas are at risk; some could fail as early as January 1999 because they involve calculations a year into the future; and (4) accordingly, it is critical that appropriate contingency plans be developed to ensure business continuity in the event of systems failures. |
Several federal programs—mainstream and targeted—may be available to assist those experiencing homelessness in rural and nonrural areas. Mainstream programs—such as Temporary Assistance for Needy Families, public housing, the Supplemental Nutrition Assistance Program, Medicaid, and the Workforce Investment Act—provide a wide range of assistance, such as cash assistance, housing, food, health care, and job training, for low-income people including those experiencing homelessness. Targeted programs—such as the Emergency Shelter Grant and Runaway and Homeless Youth programs—also provide a range of services but are designed specifically for individuals or families experiencing homelessness. The McKinney-Vento Homeless Assistance Act (McKinney-Vento) is the principal federal legislation designed to provide funding for shelter and services to persons experiencing homelessness. McKinney-Vento originally consisted of 15 programs providing, among other things, resources for emergency shelter, transitional housing, job training, primary health care, education, and permanent housing. The current act has been amended several times and was most recently reauthorized by the HEARTH Act. For the most part, these amendments have expanded the scope and strengthened the provisions of the original legislation by expanding eligible activities and creating new programs. This legislation continues to represent the primary source of funding for targeted programs serving persons experiencing homelessness. HUD administers both competitive and formula-based McKinney-Vento programs that fund activities to address homelessness in rural and nonrural areas. HUD’s competitively awarded homeless programs comprise the “Continuum of Care” (CoC) system. According to HUD, the program is based on the understanding that homelessness is not caused solely by a lack of shelter, but also involves other physical, social, and economic needs. Through the CoC system HUD allocates homeless assistance grants to organizations that participate in homeless assistance program planning networks. The planning network or CoC refers to a group of providers and key stakeholders in a geographical area—a city, a county, a metropolitan area, or an entire state—that join to plan for the homeless housing and service system within that geographic area and apply for HUD’s competitive homeless program funding. Rural areas typically organize into regional or balance-of-state (areas in the state not already covered by other continuums) CoC systems which may include a mixture of rural and nonrural areas. Areas in 37 states or territories are organized as balance- of-state CoCs, while other states such as Minnesota and Nebraska have organized into regional CoC systems. Several other federal agencies also have programs targeting homelessness that primarily provide supportive services—including the Departments of Education (Education), Homeland Security (DHS), Labor (Labor), Justice (DOJ), Health and Human Services (HHS), and Veterans Affairs (VA). McKinney-Vento also authorized the creation of the U.S. Interagency Council on Homelessness (Interagency Council), which currently includes 19 member agencies. McKinney-Vento mandated that the Interagency Council identify duplication in federal programs and provide assistance to states, local governments, and other public and private nonprofit organizations to enable them to serve those experiencing homelessness more effectively. The HEARTH Act revises the Interagency Council’s mission to coordinate the federal response to homelessness and create a national partnership at every level of government and with the private sector to reduce and end homelessness. HEARTH also mandates that the Interagency Council develop and annually update a national strategic plan to end homelessness. The Interagency Council’s plan, which was released in June 2010, aims to align federal resources effectively and appropriately with four key goals: (1) prevent and end homelessness for families, youth, and children; (2) prevent and end homelessness among veterans; (3) end chronic homelessness; and (4) “set a path” to end all types of homelessness. As described in our June 2010 report, federal programs define homelessness differently. HUD administers programs under McKinney- Vento that specifically target persons experiencing “literal” homelessness (that is, living in shelters or in places not meant for human habitation, but not in precarious housing situations). According to HUD officials, Congress directs federal agencies as to which definition of homelessness shall be used within each program; furthermore, as HUD’s housing resources are not an entitlement, funding must be targeted to those most in need. The statutory definition of homelessness for Education, DOJ, and some HHS targeted programs is broader than that for HUD programs. For example, under McKinney-Vento, the Education for Homeless Children and Youth program’s definition of homelessness includes children and youth who are living in substandard housing, while the Healthcare for the Homeless program’s definition includes those who are “doubled up,” or living temporarily with another household because they cannot afford housing of their own. Table 1 categorizes definitions of homelessness across federal agencies with targeted homeless assistance programs. In our June 2010 report, we recommended that Education, HHS, and HUD develop a common vocabulary for homelessness and determine if the benefits of collecting data on housing status in targeted and mainstream programs would exceed the costs. The HEARTH Act broadens the McKinney-Vento definition of “homeless individual,” and also defined the terms “homeless,” “homeless person,” and “homeless individual with a disability.” Federal agencies also do not employ a single definition of “rural” and the definitions generally are not comparable across agencies. In a prior GAO report, we discussed the three most common federal definitions of rural— from the Bureau of the Census, the Department of Agriculture’s (USDA) Economic Research Service, and the Office of Management and Budget— which have differing criteria, such as population threshold or proximity to urban areas. However, even within one measure such as population threshold, different agencies can use different parameters and therefore identify different areas as rural. The mandate for this report in the HEARTH Act identifies two distinct communities to be included in this review of homelessness in rural areas—tribal lands and colonias. Because the federal government has a unique legal and political relationship with Native American tribes and Alaska Native entities, the administration of housing, homeless assistance, and supportive service programs on tribal lands differs. Federal agencies that have distinct roles and responsiblities to these groups include the Bureau of Indian Affairs (BIA), HUD, and HHS. BIA-administered programs include social services, economic development, housing improvement, and disaster relief. HUD’s Office of Native American Programs is responsible for the implementation and administration of programs, such as housing and community development, that are specific to Native Americans and Alaska Natives. The Indian Health Service within HHS is responsible for providing federal health services to Native Americans and Alaska Natives. Unlike Native Americans and Alaska Natives, the federal government does not have a unique legal and political relationship with colonias. However, the Cranston-Gonzalez Act of 1990 recognized colonias within U.S. borders as distressed communities and designated set-aside funding to advance opportunities for homeownership and economic self-sufficiency in these areas. Individuals and families in colonias may lack safe, sanitary, and sound housing and be without basic services such as potable water, adequate sewage systems, utilities, and paved roads. The characteristics or forms of homelessness in the rural areas we visited ranged from the more visible, such as living in shelters, to the less visible, such as living in overcrowded or substandard housing. The range of living situations of persons experiencing homelessness in rural areas may overlap with the living situations of those experiencing homelessness in nonrural areas. Some persons experiencing homelessness lived in shelters or transitional housing. Shelters, where they existed, provided one of the visible entry points to receiving both housing assistance and supportive services. Some shelters we visited conduct initial assessments of individuals and families experiencing homelessness to determine their needs. The shelters may provide case management or mental health services or provide referrals to services within the area. We also observed various shelter types—some served specific groups, such as domestic violence victims or youth, while others were multipurpose. Some shelters were traditional, small communal shelters; some organizations used scattered site housing as shelters; and some shelters had no fixed location. For example, some service providers issued hotel vouchers, while others had moving shelters in which churches or other organizations would offer space. The shelter would be located in one organization’s donated space for a set period of time before moving to another organization. Services available to clients also varied greatly among shelters. Some shelters offered a full range of on-site services such as mental health services, substance abuse treatment, case management, and job training. Other shelters offered limited services or lacked the funding to pay for 24-hour staff. Some areas without shelters relied on volunteers for homeless services because of limited or nonexistent funding. Other forms of homelessness we observed or heard about in rural areas we visited included persons who owned or rented substandard housing or had established temporary alternative living arrangements such as doubling-up (short stays with persons who offer space). In some rural areas, infrastructure challenges contributed to substandard housing. For example, we observed some houses built in floodplains in colonias we visited in Texas. Additionally, building codes may not exist or may not be enforced in some rural areas. We also observed houses with boarded-up windows, caved-in floors or ceilings, and dangerous alternative heating sources in rural areas in several states. Persons living in similar housing in urban areas may more easily be identified as literally homeless as such structures could be condemned. Some individuals and families in rural areas lived in overcrowded homes, sometimes with multiple generations living together. In some places we visited, we heard that doubling-up or multigenerational living was a cultural norm or an accepted practice because people “take care of their own.” Some people had very few options. For example, on tribal lands many families have lived for long periods in overcrowded housing because waiting lists for housing are extremely long and private financing is rare due to legal issues with land ownership. Tribal officials from the Pueblo of Acoma reservation recently conducted a housing inventory and found approximately 155 overcrowded units on the reservation out of approximately 700 occupied units. Providers told us that severely overcrowded situations often were associated with domestic violence and child abuse. Providers said youth experiencing homelessness often “couch surfed,” trading goods or services such as drugs, sex, money, or child care for a temporary stay in someone’s home. Not all federal programs include such living conditions in their definitions of homelessness, and persons living in these situations may not be eligible for some federal assistance. Finally, some individuals and families experiencing homelessness in the rural areas we visited were sleeping in areas not meant for human habitation, including outdoor locations, vehicles, and abandoned buildings. For example: On tribal lands in Arizona, we heard of persons living in dry river beds or in outbuildings such as barns or backyard sheds. In Maine, we were informed of year-round encampments in the woods. In one case, the local fire department inspected and sanctioned a large fire pit for an encampment with the intent of minimizing the number of smaller pits. In Minnesota, we observed abandoned buses and ice houses that were used by persons without regular shelter and heard from a previously homeless woman about how she built a structure using a pallet, a large cardboard box, and a tarp to keep out the rain. She told us that she placed the structure in an old mining pit to avoid detection. These individuals meet both the existing McKinney-Vento and HEARTH Act definitions of homeless and could be eligible for federal assistance. However with a limited number of shelters or other outreach, they may not be accessing services. Providers and persons experiencing homelessness emphasized that some persons experiencing homelessness wanted to remain hidden as they often were sought by abusive partners, parents, creditors, or the police. In the case of some families, parents were afraid that their children would be taken from them by social services. Due to limited comprehensive data and challenges in combining data from different federal sources, understanding the extent of homelessness in rural and nonrural areas is difficult. Several agencies are required to collect data on segments of the homeless population, but as described in our June 2010 report, these data have shortcomings and do not fully describe the incidence and prevalence of homelessness in rural or nonrural areas. HUD developed two sources of data—the Homelessness Management Information System (HMIS) and the biennial Point-in-Time (PIT) count—for understanding the extent of homelessness. These data are reported to Congress annually for the Annual Homeless Assessment Report (AHAR) on the extent and nature of homelessness in the United States. Under the direction of Congress, HUD created a set of technical data collection standards for local HMIS, instructed programs receiving HUD McKinney-Vento funding to report to those local systems, and encouraged all programs for homeless people, regardless of their funding source, to report data to HMIS. HMIS records and stores client-level information on the characteristics (on an ongoing basis throughout the year) and service needs of homeless persons and the data are used to produce counts of the sheltered homeless population over a full year. In addition to HMIS, the PIT counts of both sheltered and unsheltered homeless populations are based on the number of persons experiencing homelessness on a single night during the last week in January (every other year), and the data are included as part of the CoC applications, which are submitted to HUD annually. CoCs conduct a PIT count every other year with 452 CoCs completing a count in 2009. PIT counts include the “street counts” that estimate the number of unsheltered homeless people in each community, as well as estimates of sheltered homeless people based on a census of shelter and transitional housing occupants on a particular night. Although other programs are encouraged to report data to HMIS, agencies such as HHS, Education, and VA have their own systems for collecting data. For example, HHS’s Runaway and Homeless Youth Management Information System (RHYMIS) collects demographic and service data on runaway and homeless youth being served by HHS’s Family and Youth Services Bureau’s programs. To demonstrate compliance with the Elementary and Secondary Education Act of 1965 (ESEA), as amended, Education collects data on homeless children and youth served by ESEA programs and the Education of Homeless Children and Youth program through the Consolidated State Performance Report. The McKinney-Vento Act requires local school districts to have Homelessness Liaisons, provide appropriate services and support, and collect and report data to Education annually. Additionally, through VA’s Northeast Program Evaluation Center, VA collects data on each individual veteran that enters one of VA’s specialized homeless veterans programs. And, through the Community Homelessness Assessment Local Education and Networking Groups (CHALENG) process, VA collects population-based data by conducting local community group surveys with VA staff and community participants. CHALENG data is nationally compiled in an annual report to provide prevalence estimates of veteran homelessness and to assess the needs of the population as well as gaps in local services. Lastly, the Census Bureau’s decennial population and housing census collects data on places in which the homeless population receive services as well as targeted nonshelter outdoor locations. While the Census makes an effort to count all residents, including those experiencing homelessness, the 2010 Census does not plan to report a separate count of the population experiencing homelessness or a count of the population who use homelessness services, and the Census Bureau advises against using its data on homelessness from the 2000 Census. Because of different statutory requirements for each federal agency— including data collection requirements and differences in definitions— these data do not reflect the full extent of homelessness in rural or nonrural areas. Each agency focuses on the segments of the homeless population that the agency serves, resulting in incompatible data for comparison and analysis. For example, HHS’s Runaway and Homeless Youth Program, for which data is collected in RHYMIS, focuses on the runaway and homeless youth being served by the Basic Center Program, the Transitional Living Program for Older Homeless Youth, and contacts made by the Street Outreach Program grantees. HHS provides homeless assistance to adult individuals and families through programs such as Health Care for the Homeless, Projects for Assistance in Transition from Homelessness (PATH), Grants for the Benefits of Homeless Individuals, and Service in Supportive Housing. All of these programs collect data on their relevant populations based on statutory requirements. VA collects data on homeless veterans as part of its annual CHALENG survey, in accordance with different statutory requirements. However, in December 2009, HHS established an agreement with HUD for PATH providers to move towards reporting under the HMIS. Also, according to HUD officials, there has been an initial evaluation of aligning some of VA’s homelessness data with HUD’s homelessness data. The varying definitions of “homelessness” and “rural”—as well as the extent to which “rural” is reported—also limit the ability to understand the incidence and prevalence of homelessness in rural areas. For example, according to officials, doubled-up persons are included in some VA and HHS program definitions but excluded from HUD’s definition. Thus, data on homelessness are captured differently across federal agencies. Similarly, although our work did not focus on potential reasons for the different definitions, these differences across federal programs make comparing the extent of homelessness in rural and nonrural areas difficult. For instance, HUD’s AHAR formally classifies locations into two groups— principal cities and suburban or rural areas. Specifically, HUD estimates that about 1.56 million people were homeless in emergency shelters or transitional housing at some point during fiscal year 2009. More than two- thirds (or about 1.1 million) of them were located in principal cities, while one-third (or about 0.5 million) were in suburban or rural jurisdictions. HHS’s RHYMIS and VA’s CHALENG do not break out the counts of homelessness between rural and nonrural areas. HUD’s PIT count is the only data collection effort designed to obtain a national count of those experiencing homelessness, and while a more in- depth discussion of the difficulties associated with collecting the data can be found in our June 2010 report, there are some additional challenges particular to rural areas. Persons experiencing homelessness are inherently difficult to count. They are mobile, can seek shelter in secluded areas, and may not wish to attract the notice of local government officials. Moreover, rural areas are often large and have widely dispersed populations and difficult-to-reach locations, exacerbating the difficulties of finding and counting persons experiencing homelessness, including those who do not necessarily want to be found. Count methodologies vary by CoCs and might not be well implemented. Service providers who conduct the PIT counts are meeting their mandated requirements under McKinney-Vento. However, with no funding to pay for the count, service providers often rely on volunteers to meet an unfunded mandate. Particularly in areas of the United States where average temperatures are below freezing in January, finding unsheltered persons and recruiting volunteers to count them becomes difficult. Although HUD officials told us that the benefit of a January count relates to the increased demand for shelters at the coldest time of year, homeless shelters and services are limited in rural areas, and in some counties, nonexistent. In a few of the states we visited, commitments from state and local officials and advocates have enhanced the process, resulting in an ability to recruit volunteers and local organizations who have built a trusting relationship with homeless populations. According to officials and service providers in the states we visited, HUD’s PIT count likely has undercounted the rural homeless population, but to what extent is unknown. While HUD officials acknowledge the shortcomings of their counts, they believe significant progress has been made in recent years in collecting homelessness data, particularly their estimate annually since 2005 of the extent of homelessness and their efforts to ensure data quality through providing technical assistance. Another factor associated with the completeness of federal agency data is the lack of migration data. According to federal agency officials and service providers, very little is known about the migration between rural and nonrural areas of those experiencing homelessness because there is no requirement or formal system for tracking migration patterns. Although no federal programs formally track or are required to track migration information, some local service providers maintain that information for their own purposes. For example, the Kentucky Housing Corporation, beginning in 2009, included questionnaires to track migration within and across states. Those experiencing homelessness may migrate to and from nonrural areas for many reasons. For example, service providers told us that persons experiencing homelessness in rural areas have migrated to nonrural areas following a job loss, to reconnect with families, and to obtain supportive services. Conversely, people have migrated from nonrural areas to rural areas to connect with families and, in the case of tribal lands, to receive services. Furthermore, because persons experiencing homelessness are more mobile, and formal migration data do not exist, the potential exists for duplicated counts—complicating any comparison of the extent of homelessness between rural and nonrural areas. Several federal agencies fund programs, through state intermediaries or local homeless providers, which are targeted to the homelessness population or which assist low income persons and families including those experiencing homelessness. Some federal programs specifically target homelessness, while others assist low income persons and families, including those experiencing homelessness, or include assistance for persons experiencing homelessness among eligible uses. In total, these programs fund permanent and short term housing and a variety of supportive services such as mental health services, substance abuse treatment, case management, and job training. Targeted homeless funding is often further targeted to segments of the population such as youth or veterans. See figure 1 for examples of targeted and mainstream or nontargeted programs that may benefit persons experiencing homelessness and the types of assistance available under each program. HUD funds programs targeted to the homeless populations through state or local entities for the Emergency Shelter Grant (ESG) program and to providers who participate in CoCs. The ESG program is dispersed by formula, while three grant programs—the Single Room Occupancy, Shelter Plus Care, and Supportive Housing programs—are awarded competitively through the CoC process. HUD receives a single appropriation for its targeted programs and administratively determines the amount of funding for the ESG program. ESG funding is awarded based on the Community Development Block Grant (CDBG) formula, which designates that 70 percent of funding is awarded directly to entitlement cities and counties and 30 percent is awarded to state entities that determine the dispersion of funding for the more rural parts of the state. Organizations located in areas or municipalities not receiving direct ESG allocations compete for funding through the state entity. For example in 2009 in Maine, only Portland received its own allocation of about $94,000, while organizations from all other areas or municipalities within the state competed for about $770,000. HUD’s three competitive homeless assistance grants are awarded through the CoC process using a scoring system where HUD scores the planning document submitted by the CoCs as part of the application. Programs that have previously received funding, referred to as renewals, receive a higher funding priority and are funded before new programs are considered for funding. In 2008, 86 percent of the competitive homeless assistance grants were renewals. Although CoC funding is awarded competitively, HUD determines a need factor called the pro rata need (also based on the CDBG formula) for each CoC. According to a HUD official, in calculating the preliminary pro rata need, HUD allocates 75 percent of funding to entitlement cities and counties that qualify for direct ESG allocations and 25 percent of funding to all other areas. All CoCs have an identified need factor, but CoCs may not have funded programs as new funding is awarded in order of CoC score, which is based on multiple factors. HHS and other federal agencies—including Education, Labor, VA, DHS, and DOJ—largely operate their targeted programs through state entities or by directly funding community-based public or nonprofit entities. HHS provides funding for a number of programs, including Runaway and Homeless Youth, Health Care for the Homeless, and PATH. Funding for Health Care for the Homeless is distributed competitively, while PATH funding is distributed to states, Washington, D.C. and U.S. territories that distribute the funding. The PATH formula, which has remained unchanged since 1990, primarily considers the urban population of the state or territory and designates a minimum of $300,000 for states and $50,000 for territories. In 2009, 18 states and the District of Columbia received the state minimum. DHS, through the Federal Emergency Management Agency, funds the Emergency Food and Shelter Program, which distributes funding to local entities through the United Way of America or similarly functioning organizations. Funding is formula-based and considers poverty rate and unemployment. Some providers in very small communities told us that they receive federal funding only through the Emergency Food and Shelter Program. Mainstream federal programs may assist persons experiencing homelessness but the level of assistance directed towards homelessness is generally unknown as some programs are not required to track if participants have been or are experiencing homelessness. Mainstream programs provide assistance to individuals and families and include HHS’ Temporary Assistance for Needy Families; USDA’s food programs such as the Supplemental Nutrition Assistance Program and the Special Supplemental Nutrition Program for Women, Infants, and Children; HUD’s housing programs such as public housing and the Housing Choice Voucher program; the Social Security Administration’s Supplemental Security Income and disability insurance programs; and VA’s disability compensation program. Funding in other federal programs also may be used for homeless assistance based on the decisions of state, local, or tribal governments. Homeless programs are one of many eligible uses for funding in programs such as HUD’s CDBG program and USDA’s Community Facilities Loan program. CDBG is formula-based with state entities receiving and dispersing the portion of funding intended for rural areas, while the Community Facilities Loan program is awarded competitively through USDA’s state offices. Some programs direct funding to areas that are in particular need of housing infrastructure. For example, the Cranston- Gonzalez Act requires states that share a border with Mexico to set aside CDBG funds for the colonias. This funding may be used to expand water and sewer services and to provide housing assistance. USDA’s agency for rural development also funds programs to improve infrastructure in the colonias. Tribes receive funding for housing, health care, and other services through HUD’s Native American Housing Assistance and Self-Determination Act (NAHASDA) programs and a variety of programs offered through HHS and BIA. These programs, although not specifically targeted at homelessness, may assist persons experiencing homelessness. They are available to recognized tribes only and funding generally is formulaic, based on tribal enrollment. Generally, NAHASDA money is distributed to tribal-designated housing entities that use money to build or refurbish housing. BIA programs are funded as contracts awarded to designated tribal entities to provide a range of services. In both cases, tribal governments determine priorities, usage, and eligibility. Housing funds are distributed to regional BIA offices through a formula process and individuals receive assistance based on priority until funds are exhausted. The amount of federal funding for targeted homeless assistance programs in rural areas is uncertain. According to the Congressional Research Service, in fiscal year 2009 federal agencies spent more than $2.85 billion on programs targeted to address the needs of individuals and families experiencing homelessness. HUD’s targeted homeless programs represent the largest funding source for federal targeted homeless assistance, which for fiscal year 2009 totaled more than $1.7 billion or more than 62 percent of total targeted funding. Figure 2 shows the targeted funding by federal agency. We were unable to determine the total portion of this funding that went to rural areas. Determining what funding went to rural areas is difficult because some federal agencies use self-reported data that may not be accurate, do not distinguish between rural and nonrural areas, or do not track whether funding went to such areas. As discussed earlier in this report, federal agencies use multiple definitions of rural, complicating any determination of what types of areas received funding. For instance, HUD’s CoC programs maintain data on the amount of assistance for rural areas; however, grant applicants could designate (self-identify)—based on a HUD provided definition of rural area—whether they were in rural areas or not. Table 2 shows the funding based on this designation for fiscal years 2006- 2008. In fiscal year 2008, according to the HUD data, 9.3 percent of CoC funding went to rural areas, which represented about 15 percent of total projects. Similarly, VA can determine spending levels in rural areas for its grant and per diem program using self-reported data. Table 3 shows funding and the number of beds based on this designation for fiscal years 2007-2009. In fiscal year 2009, according to VA data, 13.5 percent of capital grant awards under the Grant and Per Diem program funding went to rural areas, which represented 8.5 percent of the funded beds. HUD’s ESG program targets 30 percent of its funding toward nonentitlement cities or counties, which represent more rural areas. However, according to HUD, ESG provides discretion to the state entity to decide how to allocate ESG funds. A state may limit funds to nonentitlement areas and metropolitan cities and urban counties that did not receive individual allocations, or may choose to fund entitlement cities and counties that received direct allocations from HUD. Other agencies also maintain limited information on the amount of targeted homeless funding that is allocated to rural or nonrural areas. Depending on the program, HHS and Education do not track whether funding is for providers or projects in rural or nonrural areas. Labor has two size categories within its targeted Homeless Veterans’ Reintegration program, one for urban areas and one for nonurban areas, with different dollar amounts available. However, Labor officials said their definition of nonurban was an area with less than 569,463 persons, which is at least 10 times the population limit specified in other agencies’ definitions of rural. Similarly, funding information on the mainstream and other nontargeted programs that can provide support to individuals or families experiencing homelessness is limited. Individuals and families who meet the qualifications for services under mainstream programs are eligible regardless of whether they live in rural, tribal, or nonrural areas. Some mainstream programs, such as Temporary Assistance for Needy Families, that may offer assistance to individuals or families experiencing homelessness are not required to track housing status, which prevents a determination of how much funding went to persons in rural and nonrural areas. For other nontargeted programs, funding for homelessness is often difficult to disaggregate from other spending. For example, HUD’s CDBG funds have many eligible uses as well as usage clauses that required a certain percentage of funding to be used for projects that benefit low- income persons. The building of shelters and transitional housing are among several eligible uses that would assist persons experiencing homelessness; however, the total amount of assistance to specific types of projects is unknown. A certain percentage of CDBG funds for states bordering Mexico are targeted to the colonias, but the amount of funding that specifically addresses homelessness is unknown. For NAHASDA and other programs that fund assistance to tribal entities, individual tribal governments determine usage and disaggregating funds used for persons experiencing homelessness would need to be done at the tribal level. However, USDA, which has nonfood programs that primarily serve rural areas, was able to disaggregate funding within its Community Facilities Loan Program. Eligible uses under this program include homeless and domestic violence shelters, community centers, and fire stations. For fiscal years 2004-2009, the program financed a total of 7 homeless shelters and 76 domestic violence shelters for a total of about $29.7 million of the program’s $4.5 billion total for those years. We were unable to determine whether the distribution of federal funding for supporting persons experiencing homelessness was proportional to need in rural and nonrural areas. Such a determination would require complete data on the total number of persons experiencing homelessness in both rural and nonrural areas, as well as reliable information on the funding available in both rural and nonrural areas. We found that the counts of homelessness are not complete for this purpose, and as stated above, funding levels are nondeterminable for a variety of reasons. According to state and local officials, as well as individuals experiencing homelessness we interviewed in the states we visited, limited availability of services, lack of transportation, and lack of affordable housing have been some common barriers that the rural homeless population encounters when seeking assistance. Factors such as geography, population density, and socio-economic conditions also can make access to services challenging in rural areas—particularly when considered in combination with the barriers cited above. Providers we spoke to in the states we visited said homeless shelters and transitional housing in rural areas are scarce and serve a wide geographical area, and in some instances, counties do not have shelters. A shelter we visited in Maine with 63 beds is the only multi-purpose shelter that serves the entire homeless population in a county of nearly 1,000 square miles. In addition, 4 of the 16 counties in Maine are without emergency shelters, with 1 of those 4 counties using hotels as an alternative in the winter. Some shelters may dedicate services to a specific subpopulation such as youth, domestic violence, and substance abuse clients, which could narrow the availability of assistance for some individuals or populations. Many of the providers with whom we spoke have had to turn away individuals and families because their shelters were full and backlogged. According to officials in Maine, between June and August 2009, shelters across the state turned away 500 families, including a total of 200 children. Because shelters are one of the visible points of entry to a network of services such as health care, alcohol and drug treatment, job training, and case managers, those experiencing homelessness in rural areas who are without shelters may be more likely to be disconnected from caseworkers who can provide referrals to these supportive services. However, community action agencies, faith-based organizations, and other nongovernmental entities may offer assistance to networks of services. Similarly, supportive services, such as medical and dental, mental health, food, and job training, are also limited in rural areas. For example, one service provider in rural Kentucky stated that the closest mental health center was 50 minutes away, while another service provider in rural Maine told us that the closest psychiatrist was about an hour and a half away. Also in Maine, rural service providers told us that there is no funding to support job training. Furthermore, officials said that domestic violence is associated with homelessness in rural communities and tribal areas, and those individuals have limited resources or services. According to those we interviewed, the lack of transportation in rural areas has hindered the homeless population in accessing services. Rural areas can be isolating due to the combination of expansive land size and sparse population. Persons experiencing homelessness might be geographically cut-off from the limited homeless service providers available in their area, and would need to travel long distances to receive needed services. Many of the state and local officials, service providers, and individuals experiencing homelessness interviewed told us that public transportation either was nonexistent or limited (i.e., infrequent service and limited coverage areas). If homeless individuals missed their appointments, they have to reschedule for another appointment at a later time thereby delaying services, or their services could be denied according to one service provider in Minnesota. Individuals experiencing homelessness in some of the areas we visited with no public transportation reported that they utilized dial-a-ride services provided by community action agencies or relied on friends or caseworkers. The cost of public transportation can also be an issue for those with very little income, although some local service providers with whom we spoke were able to give bus passes to their clients. Alternatively, some local nonprofits provided automobiles or buses to connect individuals and families to services, but coverage areas also were limited. According to many of the people we interviewed, persons experiencing homelessness and seeking assistance also may encounter the barrier of limited safe and affordable housing in rural areas. Providers in certain areas of the states we visited raised concerns about the shortage of affordable housing and, in some cases, quality of housing available in the areas, noting that they were aware of some properties that lacked complete plumbing or heat. In some of the rural areas we visited, deteriorating housing conditions for private market units may be more severe due to the absence of building code enforcement. According to a service provider in eastern Kentucky, many homes in the areas are heated with wood or coal (a potential fire hazard), and others lacked complete plumbing. Moreover, because market rents in eastern Kentucky have been so low compared to nonrural areas due to high poverty rates, programs, such as the Low- Income Housing Tax Credits (LIHTC) are examples of financial incentives to attract investors who have shied away from supporting low-income housing development in the area. Furthermore, according to providers we spoke with in Kentucky and Texas, topographic conditions, such as limited flat land in eastern Kentucky and flood plains in the colonias in Webb and Hidalgo counties in Texas, have discouraged investors and developers from investing in these rural areas. According to a service provider in Arizona, development on tribal lands is restricted by legal issues relating to sovereign land, which reduces banks’ willingness to finance projects. Resistance in local communities also has presented obstacles to building new housing as described by those we interviewed. For example, Minnesota state officials noted that some local communities have resisted the building of shelters and other housing for the homeless or low-income populations because they believe that undesirable persons will move to their communities. For similar reasons, a local government in Texas has not sought funds from state or other sources to fund homeless programs, according to a local shelter provider. Compounding the issue of lack of affordable housing, service providers in some of the states we visited have experienced long waiting lists (about 2 years) for the Housing Choice Voucher Program (tenant-based Section 8). For example, service providers in Maine told us that they have not been able to obtain tenant- based Section 8 vouchers since December 2008. Based on those with whom we spoke and relevant research, individual barriers such as mental health issues, felony records, and no proof of identification have hindered those seeking assistance. According to the 1996 National Survey of Homeless Assistance Providers and Clients, two- thirds of the rural homeless population report having a mental health or substance abuse problem and may require specialized services such as psychiatric referral and treatment. Several individuals with whom we spoke in a shelter indicated that they felt more mentally and emotionally stable after being put on medication received under public health care coverage through the help of shelter staff. Also, program eligibility and rules may exclude some felons from federal housing assistance, including tenant-based and project-based Section 8 programs. Without federal housing assistance, these individuals could remain homeless because the ability to find a job that would pay for market rent could also be affected by their criminal records. Another individual barrier is the lack of documentation to prove identity. Without birth certificates, driver’s licenses, and Social Security cards which, according to some providers with whom we spoke, some persons experiencing homelessness lack, individuals and families might not be able to apply for and obtain services. Table 4 illustrates some examples of barriers for persons experiencing homelessness, as discussed above and further identified in our interviews with local service providers and homeless individuals in the states we visited. According to state and local officials and local service providers in the states we visited, administrative burden, lack of affordable housing, and challenges related to geography and population density were barriers for rural homeless service providers. Some of the local service providers with whom we spoke indicated that they operated with limited staff and, due to capacity issues, assumed a wide variety of responsibilities from providing direct service to clients to applying for federal and other grants. In particular, service providers in rural areas with whom we spoke have responded to limited resources by applying to, and assembling multiple funding sources from both state and federal programs. As a result, the time consumed in grant writing and meeting the various compliance and review requirements set by statute represented an administrative and workload burden, according to service providers and state officials with whom we spoke. For example, providers in Maine expressed frustration with the duplicative review for the Supportive Housing Grant Program and tenant- based Section 8 Program, both of which HUD administers but under separate authorities. According to some service providers with whom we spoke, many grant applications also require data to demonstrate resource needs. Especially in rural areas with no shelters or visible points of entry for services, counts of the homeless are not documented, and without data it is hard to prove that the services are needed. Because of the administrative burden and challenges in meeting application requirements, some providers with whom we spoke were discouraged from applying for funds from certain programs. A coalition we spoke to in Maine said that many of its members were discouraged by the requirements of programs that received stimulus funds and therefore considered not applying for them. Also, as described in our June 2010 report, issues related to multiple federal definitions of homelessness have posed challenges for service providers. Moreover, according to Minnesota state officials and service providers we spoke with, Minnesota’s definition of homelessness is different from some federal programs, creating another level of complexity in understanding the definition and determining client eligibility. According to state officials, Minnesota’s definition of homelessness includes those who, as long as the person or family’s situation is not stable are doubling up and “couch surfing” for at least a year or four separate occasions over a 3 year period. While this is consistent with a broader definition of homelessness used by Education under the McKinney-Vento Act, it has not been consistent with HUD’s definition of chronic homelessness. State and local officials and rural service providers cited a lack of affordable housing as another challenge for service providers when addressing homelessness in rural areas. Specifically, some of the local service providers with whom we spoke have been unable to move people from emergency shelters, homeless shelters, or transitional housing programs to permanent housing due to shortages of tenant-based Section 8 vouchers and a shortage of affordable housing. According to service providers in multiple locations, due to the shortage in tenant-based Section 8 vouchers, the shelters they work with are full and stays at shelters have lengthened. Without financial assistance, those experiencing homelessness may find it challenging to move out of short-term housing. Furthermore, to the extent that tenant-based Section 8 vouchers have been available, some providers told us in their communities that the current housing stock has been deteriorating and limited new housing units have been built, so there is nowhere for that voucher to be used. According to HUD, between 1995 and 2007, LIHTC—the principal federal subsidy mechanism for supporting the production of new and rehabilitated rental housing for low-income households—were used predominately for new construction. With that said, the number of new construction units has declined since 2005. Moreover, according to HUD regional office officials, the lack of affordable housing also is attributable to the significant reduction in size of the housing projects being built. As a result, some providers told us long waiting lists for tenant-based Section 8 vouchers exist. According to a rural service provider in Kentucky, the tenant-based Section 8 voucher waiting list had 3,000 names on it. The persons with whom we spoke also consistently said the size of service areas and low population densities in rural areas presented obstacles to service provision. The combination of expansive service areas and sparse populations require many service providers to drive long distances to serve their clients. For example, several rural service providers, particularly case workers, described their vehicles as their offices because of the amount of time they spent traveling between meetings with other service providers and serving clients. Furthermore, according to HUD, because funding is limited, many rural service providers cannot afford large staffs and often wear many hats. In an urban area, separate staff or separate agencies might be responsible for assessing different needs such as housing, nutrition, education, job-search, mental and physical health, and substance abuse needs. However, in a rural area, one individual may be the client’s primary point of contact and may have to consider the whole range of issues. Furthermore, some rural areas do not have broadband services and some providers we spoke with said that they are excluded from some of the communications and resources available over the Internet. For instance, HUD regional office officials acknowledged that some rural service providers have been unable to connect to some of their technical assistance workshops and learn about application preparation, project administration, and management. Local officials and service providers have cited other barriers such as variability of local commitments and diminishing purchasing power. In some of the states we visited, some service providers mentioned variability in local and state commitment, which can influence the homeless assistance programs. For example, 10 years ago Minnesota invested in an intensive case management pilot program which provides housing and supportive services to assist people with long histories of homelessness. Because of the success of the pilot, the Minnesota legislature has continued to appropriate funding to finance supportive housing for five long-term homeless projects in areas that include approximately 80 percent of Minnesota’s population, according to a service provider in Minnesota. In contrast, other communities have been resistant to supporting homeless programs, such as one community organization in Texas described that their local government resisted acquiring additional funds in fear of attracting more homeless individuals and families to the community. Diminishing purchasing power also affects the ability of local service providers to address needs in their communities. According to CoC participants, Maine receives PATH funds, but the amount has remained steady at $300,000 per year for the last 17 years. According to officials, the buying power of the program has diminished to $158,000 (in real dollars) today compared to 17 years ago. Similarly, the per diem rate, funded through HUD’s ESG program, has diminished from $12.41 in 2008 to $11.21 in 2009, nearly a 10 percent decrease, although service providers in Maine have increased services such as adding more beds in the shelter. While a few examples of federal collaboration regarding homelessness have demonstrated aspects of effective collaboration, effective collaboration has been limited between HUD and HHS, two of the key federal agencies funding housing and supportive services that include programs for more than one subpopulation. In an October 2005 report, we identified key collaborative practices among federal agencies that include agreeing on roles and responsibilities, defining and articulating a common outcome, establishing mutually reinforcing or joint strategies, and identifying and addressing needs by leveraging resources. Collaboration to link supportive services and housing is particularly significant for rural areas because of the complex system of barriers in rural areas, such as limited bed capacity in shelters, distance to services, and lack of transportation. Such linkage can enhance strategies to address challenges that limited resources and the other barriers pose. One study regarding the linking of affordable housing with supportive services— supportive housing—indicated that over the long term, it could save public resources by reducing the cycle of homelessness through improved housing stability and behavioral health outcomes. Moreover, some studies indicated that offering housing with supportive services resulted in fewer hospital days and emergency room visits, which are publicly provided. Two completed demonstration projects—Collaborative Initiative to Help End Chronic Homelessness (CICH) and Ending Chronic Homelessness through Employment and Housing—and the existing HUD-VASH program demonstrated key collaboration practices identified in our October 2005 report, such as defining roles and responsibilities and leveraging resources. Under the CICH, HUD, HHS, and VA agreed on roles and responsibilities and leveraged resources by allotting 3-year grants from HHS and VA and up to 5-year grants from HUD to 11 communities. Similarly, Ending Chronic Homelessness through Employment and Housing was a partnership between Labor and HUD in which, through a cooperative agreement, HUD and Labor defined roles and responsibilities and leveraged resources, also consistent with key collaboration practices. Since 2008, under the HUD VASH program, HUD has designated more than 30,000 tenant-based Section 8 vouchers to public housing authorities for veterans who are homeless and VA provided funding for supportive services, including case management and clinical services. Particularly, VA identified a number of Veterans Affairs Medical Centers to participate in the program and provide case management resources. While these efforts demonstrated practices that enhanced and sustained collaboration, particularly linking housing assistance and supportive services, HUD-VASH has not demonstrated collaborative strategies that could benefit rural areas specifically, according to officials and rural service providers in some of the states we visited. Because the HUD vouchers must be linked to VA facilities, the recipients of the vouchers have been mostly in nonrural areas in which most VA medical centers are located. However, according to HUD officials, innovative approaches, such as using a mobile clinic, are now being used to serve rural areas. Furthermore, according to VA officials, HUD and VA have discussed opportunities to improve voucher allocation in rural areas. Additionally, the Interagency Council has developed the first-ever Federal Strategic Plan to Prevent and End Homelessness. The plan, which was presented to Congress on June 22, 2010, reflects interagency agreements on a set of priorities and strategies agencies will pursue over 5 and 10-year timeframes according to population. Also, according to HUD and HHS officials, the two departments, as part of the President’s fiscal year 2011 budget, are proposing two demonstration initiatives, one involving 4,000 housing vouchers with health, behavioral health, and other supportive services for chronically homeless persons, and another involving 6,000 housing vouchers linked with mainstream services like job training and income assistance through TANF for homeless and at-risk families with children. Additionally, according to HUD and HHS officials, the two departments established working groups to identify collaboration opportunities related to homelessness. However, given that the Council’s strategic plan has only recently been released and that the proposal in the President’s fiscal year 2011 budget has yet to be approved, the impact of both of these efforts is uncertain. According to officials and providers we interviewed, HUD and HHS are the key agencies serving the general population of those experiencing homeless. For instance, HUD officials noted that the agency was the only federal provider of permanent supportive housing for the homeless. While several agencies provide supportive services, including HUD, the health- related services on which HHS focuses correspond to needs often associated with persons experiencing homelessness, particularly mental health and substance abuse treatment (see table 5). Service providers with whom we spoke consistently cited HHS as the appropriate agency for supportive services. However, according to officials and rural providers we interviewed (and nonrural providers interviewed for our June 2010 report), there is little evidence that HUD and HHS have formally agreed on their respective roles and responsibilities, or identified ways to leverage resources to support the delivery of coordinated housing and supportive services. According to HUD officials, beginning in 2002, in response to a requirement in the 2001 HUD Appropriations Act, HUD shifted its emphasis towards funding housing for persons experiencing homelessness. This reduced the proportion of the total CoC funding which went to supportive services from 50 percent in 2002 to 34 percent in 2008, as illustrated in figure 3. In subsequent years, CoCs submitted new and renewal projects with mostly housing activities (such as operation and leasing), and according to HUD officials, this resulted in more than 40,000 newly constructed housing units. During this shift towards housing assistance, HUD required new and renewal applicants to provide information on how those projects planned to coordinate and integrate with other mainstream health, social services, and employment programs. Even though HUD officials noted that it relied on other federal agencies to fill the supportive services gap, providers we visited told us they are challenged to secure supportive services funding from agencies other than HUD. A requirement that HUD applicants provide information on plans to coordinate with other agencies does not directly address this concern of these service providers. HUD and HHS, which both have missions to address homelessness, have not adopted some of the key practices that could be used to enhance collaborative efforts, particularly during the period when HUD shifted its resources and responsibilities. HUD officials said that they consulted with HHS prior to their shift in resources and responsibilities. HHS officials told us that there was no formal discussion or agreement between them and HUD about how HHS might fill the gap in supportive services created by HUD’s shift toward housing. We previously have recommended that federal agencies adopt a formal approach—including practices such as a memorandum of agreement or formal incentives focused on collaboration, signed by senior officials—to encourage further collaboration. However, while HUD and HHS have not previously done this, they reported that they have started discussions as part of their demonstration initiatives for fiscal year 2011. Without formally linking housing and supportive services across federal agencies, federal efforts to address homelessness may not be as effective as they could be. According to HUD officials, from 2001 to 2007, HUD and several partners—HHS, VA, Labor, Education, and the Interagency Council—held a series of Policy Academies which focused on fostering collaboration, enhancing partnerships, and building capacity. Additionally, HHS and HUD collaborated to create FirstStep to encourage use of mainstream services. However, the impact of this collaboration is not clear, as evidenced by numerous rural providers who were not aware of the collaboration. In addition, service providers with whom we spoke in both rural and nonrural areas consistently raised concerns about the lack of coordination between HUD and HHS. In spite of HUD’s housing emphasis, which encouraged local communities to coordinate with other mainstream supportive services programs, and HUD’s efforts in issuing guidance to rural areas on ways to collaborate with other organizations, some service providers we spoke with mentioned that they did not observe coordination across federal agencies. They cited the administrative challenges they faced in developing programs for the homeless that incorporated both housing and services. Particular to Kentucky, state officials and service providers told us that HHS’s PATH program, due to state stipulations, limits resources for serving rural clients, many of whom suffer from mental health or substance abuse problems. The lack of service dollars also affects organizations that could access HHS funding. Officials who administer several shelter and transitional housing programs in rural Maine told us they sought nongovernmental funding to fill the gaps in services. For example, HHS’s Transitional Living Program provided $200,000 for supportive services over 5 years, but the officials had to seek additional supportive services funds through foundations and private donors. Development by HUD and HHS of formal efforts to link housing and services, which may include their proposed collaboration in the President’s fiscal year 2011 budget, could enhance the effectiveness of federal efforts to address homelessness. The issue of rural homelessness presents a number of challenges for federal agencies, not the least of which is determining its extent. Data limitations and the array of federal programs, some of which are not specifically targeted toward homelessness and some of which do not track if their services or dollars have been expended in rural areas or on persons experiencing homelessness, have resulted in multiple data sets that do not allow for an overall assessment of the characteristics and extent of rural homelessness or a comparison with nonrural homelessness. The data issues are enormously challenging, but they also highlight the importance of coordinating within existing programs to mitigate some of the impact of the information gaps and to effectively deliver services. As HUD and HHS consider collaborative efforts to address homelessness, formal coordination across these agencies that links supportive services and housing—a model that has shown to be effective—needs to include tangible and accessible opportunities for providers to bridge the gap in funding for supportive services that can be joined with housing for persons experiencing homelessness. Providers with whom we met in rural areas were generally unaware of any collaborative efforts between HUD and HHS that would assist them in linking housing and supportive services. Particularly during HUD’s shift in its resources and responsibilities in 2002, HHS and HUD, the primary agencies for supportive services and housing, did not implement some of the key practices for effective collaboration that could have limited gaps in services. More effective collaboration can create incentives and opportunities for homeless housing and supportive services to be linked, which is considered to be important for the effective delivery of assistance to persons experiencing homelessness, and to further reduce administrative challenges for local service providers. By more formally linking housing and supportive services, HUD and HHS could increase their ability and opportunities to address gaps in efforts to effectively address homelessness and decrease challenges to service providers and persons experiencing homelessness. To strengthen formal collaboration efforts, we recommend that the Secretary of Housing and Urban Development and the Secretary of Health and Human Services direct the appropriate program offices to further explore opportunities to more formally link housing and supportive services—in the most appropriate forms and combinations of mainstream and targeted programs identified by both agencies—with specific consideration for how such collaboration could minimize barriers to service provision in rural areas. We provided draft copies of this report to the Departments of Agriculture, Education, Health and Human Services, Housing and Urban Development, Interior, Labor, and Veterans Affairs and the Executive Director of the U.S. Interagency Council on Homelessness for their review and comment. Both HHS and HUD generally agreed with our recommendation and provided technical comments which we incorporated, as appropriate. Letters from the Deputy Assistant Secretary for Legislation at the Department and Health and Human Services, and the Assistant Secretary of Community Planning and Development at the Department of Housing and Urban Development, are reprinted in appendixes II and III of this report, respectively. The Departments of Labor and Veterans Affairs and the staff of the U.S. Interagency Council on Homelessness did not provide formal comments but provided technical comments which we also incorporated, as appropriate. The Departments of Agriculture and Interior did not provide any comments. HUD’s Assistant Secretary of Community Planning and Development stated in written comments that HUD agrees that increased collaboration among federal agencies would improve the delivery of services in rural areas. In addition, HUD stated that due to statutory requirements, federal agencies do not employ a single definition of “rural” and it may not be reasonable for all agencies to utilize the same definition of rural as the purposes of the programs may be vastly different. We do not recommend that agencies utilize a single definition of rural but rather recognize that the varying definitions limit the ability to understand the incidence and prevalence of homelessness in rural areas. HUD also commented that this report presents a limited review of HUD’s data collection and reporting efforts and does not acknowledge the progress that HUD has been making in this area or the value of the data currently being collected, or that their Annual Homeless Assessment Report is the only national estimate of homelessness to use longitudinal data. Since we recently issued a report that provides a detailed review of HUD’s data collection and reporting efforts and discusses the efforts HUD has taken to improve the data, we did not provide this same level of detail in this report. We have added a reference to our June 2010 report for additional information on these topics. In addition, as noted in our June 2010 report, HUD’s data in their Annual Homeless Assessment Report are not longitudinal in that they do not follow specific individuals over time; rather HUD collects aggregated data that track numbers of homeless over time. HUD commented that they have undertaken efforts to better align their homelessness data with homelessness data from HHS and VA. We acknowledged these efforts in the report. HUD also commented that the report indicates that effective collaboration hinges predominately on the use of a common vocabulary and offered barriers it considers more significant to effective collaboration. Discussions of issues related to a common vocabulary are not described in this report but are included in our June 2010 report. Additionally, while HUD agrees with our discussion about the proportion of CoC dollars awarded for supportive services activities having decreased, they commented that the total dollar amount associated with those service remains significant. We do not suggest that the total dollar amount of HUD funded supportive services is insignificant, but rather that the decrease in the proportion of dollars for supportive services has contributed to a gap in funding for providers. Further, HUD commented that it has worked with HHS to improve access by homeless persons to their programs and that federal coordination and collaboration are evident in the U.S. Interagency Council on Homelessness’s Federal Strategic Plan to Prevent and End Homelessness. We recognize in our report actions that HUD and HHS have taken to collaborate; however, we believe that we correctly assess the opportunities for further progress by the agencies in linking housing and supportive services across their programs. HUD also commented that it agreed that a common vocabulary among federal agencies and increased collaboration would improve the delivery of services in rural areas, but that the existence of both of these elements does not equate to a seamless integration of various streams of funding to create a project to serve homeless persons. We are not suggesting that a common vocabulary and increased collaboration by themselves will equate to a seamless integration of funding streams, but we believe that it could help to improve the delivery of services. Finally, HUD commented that it believes our report’s focus on the anecdotal experiences of local providers does not provide a complete picture of efforts made by HUD regarding data collection, interagency collaboration, and the funding of supportive services. As noted earlier, we did not seek to repeat the level of detail on HUD’s efforts regarding data collection as had already been included in our June 2010 report and we refer readers to this report for additional information. Also, while our report provides the perspectives of local providers as gathered from six site visits, we also conducted numerous interviews with national stakeholder groups and federal agency officials, and reviewed relevant reports and federal agency documents. Based on all of the information we gathered and reviewed, we believe we have correctly assessed the data collection, interagency collaboration, and funding of supportive service issues referred to by HUD in their comment. HHS’s Deputy Assistant Secretary for Legislation stated in written comments that HHS strongly agrees with the importance of collaboration with HUD to effectively address homelessness. In addition, HHS commented that GAO’s reference to the demonstration initiative—around housing vouchers for homeless people—included in the Fiscal Year 2011 President’s Budget was incomplete. We added an expanded description of this initiative. HHS commented that the Patient Protection and Affordable Care Act will contribute to filling gaps in supportive services for homeless people. We did not examine the Patient Protection and Affordable Care Act as part of our review. HHS also commented that the discussion of funding and services in the report needs to distinguish between linking homeless individuals with the services that they need and aligning services with housing programs that target specific homeless populations. We acknowledge that collaboration between HHS and HUD related to housing and supportive services could take different forms. As we state in our recommendation, the two agencies should explore opportunities to link housing and supportive services while considering the most appropriate forms and combinations for this collaboration. We will send copies of this report to interested congressional committees, the United States Interagency Council for the Homeless, and to the Departments of Agriculture, Education, Health and Human Services, Housing and Urban Development, Interior, Labor, and Veterans Affairs. This report will also be available on our home page at no charge at http://www.gao.gov. If you have any question about this report, please contact me at (202) 512-8678 or [email protected]. Contact points for our Offices of Congressional Relations and Public Affairs may be found on the last page of this report. GAO staff who made key contributions to this report are listed in appendix IV. To address all of our objectives, we conducted site visits to six states— Arizona, Kentucky, Maine, Minnesota, New Mexico, and Texas. During these visits, we interviewed federal, state, and local housing and homelessness officials and nonprofit homelessness organizations, and toured rural areas in which homelessness was present. We selected the site visit locations based on several factors, including (1) discussions with advocates and researchers in the field of homelessness—including the Housing Assistance Council, the National Alliance to End Homelessness, the National Law Center on Homelessness and Poverty, and the Urban Institute—to learn about rural homelessness issues and the outcomes across different states; (2) a review of studies and reports on local and state efforts to serve the homeless in rural areas, including papers prepared for the 2007 National Symposium on Homelessness Research that highlighted issues related to rural homelessness; (3) the presence of tribal lands and colonias; and (4) geographical diversity. While on site visits we interviewed federal field office officials, state officials, local providers, and local advocates, and in Minnesota panels of homeless individuals. We also toured service areas and providers facilities, and in Texas we toured several colonias. On the site visits to Arizona and New Mexico we visited the tribal lands of the San Carlos Apache Tribe of the San Carlos Reservation, Arizona; the Tohono O’odham Nation of Arizona; the Pueblo of Acoma, New Mexico; and the Pueblo of San Felipe, New Mexico. We interviewed tribal officials from the tribal designated housing entities, service providers on and off tribal lands, and advocates. We reviewed relevant laws, regulations, and program documentation and interviewed officials from various federal agencies, including Departments of Agriculture, Education, Health and Human Services, Housing and Urban Development, Interior, Labor, Veterans Affairs, and the U.S. Interagency Council on Homelessness (Interagency Council). We also conducted interviews with a variety of stakeholders, including advocates and researchers. To describe the characteristics of homelessness in rural areas, we reviewed existing research and studies on homelessness issues, particularly those that are related to rural homelessness. We conducted interviews with relevant federal and state officials, service providers, national homeless and poverty organizations, and to the extent possible, homeless individuals and families to obtain their perspectives on the conditions of homeless in rural areas and the extent of migration to nonrural areas for assistance. Specifically, we interviewed federal officials to understand the extent data is available in estimating the incidence and prevalence of homelessness in rural areas and how it compares to nonrural areas. To identify the federal homeless assistance and amount of funding awarded, we reviewed statutes, regulations, and reports, including our prior work, on federal homeless assistance for both targeted and mainstream programs. We interviewed federal, state, and local officials, to understand the range of assistance that is available to assist homeless individuals or families in rural areas, how those assistance programs are delivered, and the amount of funding that has been awarded. To the extent that data were available for comparison, we interviewed selected federal officials to understand funding differences between rural and nonrural areas. Specific data from some programs funded by the Departments of Agriculture, Housing and Urban Development, and Veterans Affairs were determined to be reliable enough to use in this report. To identify the barriers persons experiencing homelessness and homeless service providers encounter, we interviewed state and local officials, homeless service providers, and to the extent possible, homeless individuals and families for information on barriers encountered when seeking assistance, barriers encountered when providing assistance, and any challenges related to federal coordination and efforts. We also interviewed select federal officials, including officials from the Interagency Council, to understand the extent of federal collaboration in providing services to persons or families experiencing homelessness in rural areas. We conducted this performance audit from September 2009 to July 2010 in accordance with generally accepted government auditing standards. Those standards require that we plan and perform the audit to obtain sufficient, appropriate evidence to provide a reasonable basis for our findings and conclusions based on our audit objectives. We believe that the evidence obtained provides a reasonable basis for our findings and conclusions based on our audit objectives. In addition to the individual named above, Marshall Hamlett, Assistant Director; Aglae Cantave; Chir-Jen Huang; Karen Jarzynka; John Lord; Paul Thompson; Marc Molino; LuAnn Moy; Andrew Pauline; and Barbara Roesmann made key contributions to this report. | The Homeless Emergency Assistance and Rapid Transition to Housing (HEARTH) Act of 2009 directed GAO to conduct a broad study of homelessness in rural areas. In this report, we provide information about rural homelessness issues, based in significant part on our work in rural areas within six selected states. Specifically, the report addresses the following questions: (1) What are the characteristics of homelessness in rural areas? (2) What assistance is available to individuals or families experiencing homelessness and what amount of funding have the federal departments and agencies awarded to organizations that assist persons experiencing homelessness in rural areas? (3) What barriers do persons experiencing homelessness and homeless service providers encounter when seeking assistance or funding to provide assistance? To address these issues, GAO reviewed relevant literature, conducted site visits, and interviewed agency officials. Rural homelessness involves a range of living situations but comparing the extent of homelessness in rural and nonrural areas is difficult primarily due to data limitations. Based on GAO visits to six states, persons experiencing homelessness in rural areas could be living in one of a limited number of shelters, in extremely overcrowded situations, in severely substandard housing, or outdoors. While HUD and other agencies collect some data on homeless populations, several challenges exist in using these data to compare the extent of homelessness in rural and nonrural areas. They include difficulties in counting transient populations, limited reporting by service providers in federal data systems, inconsistent reporting across programs, and focusing on the segments of the homeless population that the agency serves. Definitional differences also make comparisons difficult. For instance, the three most common federal definitions of rural use differing criteria such as population or proximity to urban areas. Even within one measure such as population, different agencies can use different parameters and therefore identify different areas as rural. A number of federal programs exist to support those experiencing homelessness in rural areas. Targeted and nontargeted programs fund permanent and emergency housing and supportive services such as mental health services, case management, and job training. However, federal agencies maintain limited data on the amount of homeless assistance awarded to rural areas, making comparisons with assistance awarded to nonrural areas difficult. For instance, HUD maintains some data on the amount of homeless assistance awarded to rural areas through its targeted programs, but the data are based on providers' identification of locations as rural or not. Nontargeted programs can serve persons experiencing homelessness but do not track how much funding is used for homeless assistance. As a result of data limitations such as these, comparisons of funding levels offer limited insight into the relationship between the size of the homeless population in an area and the amount of funding received. Barriers to accessing and providing homeless services in rural areas include limited access to services, large service areas, dispersed populations, and a lack of transportation and affordable housing according to state and local officials and persons experiencing homelessness in the states we visited. For instance, many rural areas have few shelters or shelters with few beds serving very large areas. A program in which HUD provides housing vouchers to homeless veterans and the Department of Veterans Affairs provides clinical and case management services to these same veterans is one of a limited number of examples of formal collaboration and leveraging of federal resources that link housing and supportive services. The effects of limited collaboration may be particularly acute in rural areas because of the barriers cited above. Without a more formal linking of housing and supportive services by HUD and HHS, two of the key agencies for funding these activities, the effectiveness of federal efforts to address homelessness may be diminished. GAO recommends that the Departments of Housing and Urban Development (HUD) and Health and Human Services (HHS) explore further opportunities to strengthen formal collaboration on linking housing and supportive services to address homelessness, with specific consideration for how such collaboration can minimize barriers to service provision in rural areas. HHS and HUD generally agreed with the recommendation. |
To qualify for Medicaid coverage for long-term care, including nursing home care, individuals must be within certain eligibility categories—such as those who are aged or disabled—and meet functional and financial eligibility criteria. The financial eligibility standards differ based on whether an individual is married or single. Federal law also limits Medicaid payments for long-term care for individuals who have transferred assets for less than FMV during a specified time period. States are responsible for assessing applicants’ financial eligibility for Medicaid. Common ways individuals become financially eligible for Medicaid coverage of long-term care, including nursing home care, are provided below. Supplemental Security Income (SSI). Individuals who participate in SSI, a program that provides cash assistance to aged, blind, or disabled individuals with limited income and resources, are generally eligible for Medicaid. Medically needy. Individuals who incur high medical costs may be able to “spend down” their income below the state-determined income eligibility limit for Medicaid. Such individuals are referred to as “medically needy.” In 2012, 32 states and the District of Columbia had a medically needy option, although not all extended this option to those who needed nursing home care. Special income level for residents of a nursing home or institution. Individuals can qualify for Medicaid if they reside in nursing facilities or other institutions in states that have elected to establish a special income level under which individuals with incomes up to 300 percent of the SSI benefit (300 percent of the benefit was $2,163 per month in 2014) are eligible for Medicaid. In 2012, 43 states and the District of Columbia had elected this option. Some states also allow applicants to place income in excess of the special income level into a qualified income trust and receive Medicaid coverage for their care. This type of trust, also known as a Miller trust, is available in states that offer the special income level option but do not also offer the medically needy option for nursing home care. The Medicaid program generally bases its characterization of assets— income and resources—for individuals who are 65 years or older or have disabilities on that used by SSI. Income is anything received during a calendar month, paid either in cash or in-kind, that is used or could be used to meet food or shelter needs. Resources are cash or real or personal property that are owned that can be converted to cash and be used for food or shelter. (See table 1 for examples of different types of assets.) In establishing policy for determining financial eligibility for Medicaid coverage for long-term care, including nursing home care, states can decide, within federal standards, which assets are countable. For example, states may disregard certain types or amounts of income, and may elect not to count certain resources toward financial eligibility. Although the resources that are considered not countable varies by state, for the purposes of determining Medicaid eligibility for long-term care, they generally include an individual’s primary residence (typically if the individual expresses the intent to return home), an automobile, household goods and personal effects, burial spaces, burial arrangements up to a certain value, and certain types of life insurance. While an individual’s primary residence is generally not a countable resource for determining Medicaid eligibility, federal law specifies that an individual with substantial equity interest in his or her home is to be excluded from eligibility for Medicaid payment for long-term care; the amount of allowable equity interest is established by each state within federal guidelines. For 2014, these guidelines specified that state established allowable equity interest amounts could range from $543,000 to $814,000. In most states, to be financially eligible for Medicaid coverage for long- term care, including nursing home care, individuals must have $2,000 or less in countable resources ($3,000 for a married couple). However, specific income and resource standards vary depending on the way an individual becomes eligible for Medicaid. (See table 2.) Eligible individuals generally must contribute a portion of their income toward the costs of nursing home care but are allowed to retain a small personal needs allowance, which varies by state but must be at least $30 per month, to pay for the individual’s clothing and other personal needs. Federal law requires states to use specific minimum and maximum income and resource standards in determining Medicaid eligibility for married applicants when one spouse is in an institution (referred to as the institutionalized spouse), such as a nursing home, and the other remains in the community (referred to as the community spouse). These provisions enable the institutionalized spouse to become eligible for Medicaid, while leaving the community spouse with sufficient assets to avoid impoverishment. Resources. The resources of both the institutionalized spouse and the community spouse are considered when determining initial financial eligibility for Medicaid coverage for nursing home care. The community spouse may retain an amount equal to one-half of the couple’s combined countable resources, up to the state-specified maximum resource level. States’ maximum resource levels cannot exceed the maximum federal standard, which was $117,240 for 2014. generally referred to as the community spouse resource allowance. If one-half of a couple’s combined countable resources is less than a state-specified minimum resource level, then the community spouse may retain resources up to the minimum level. States’ minimum resource levels cannot be less than the federal minimum resource standard, which was $23,448 for 2014. to make up the difference. As of January 1, 2014, federal standards specified that most states’ minimum needs allowance can be no lower than $1,938.75, and no higher than $2,931.00 per month. Federal law limits Medicaid payment for long-term care services, including nursing home care, for individuals who divest themselves of—or “transfer”—their assets for less than FMV within a specified time period. As a result, when an individual applies for Medicaid coverage for long- term care, states conduct a review, or “look-back,” to determine whether the applicant (or his or her spouse, if married) transferred assets to another person or party. Per the DRA, the look-back period for transfers made on or after February 8, 2006, is 60 months; prior to the DRA, the look-back period was generally 36 months. If the state determines that an applicant transferred an asset for less than FMV during the look-back period, the individual may be ineligible for Medicaid coverage for long- The penalty term care for a period of time, called the penalty period.period generally begins on the later of (1) the first day of a month during or after an individual transfers assets for less than FMV, or (2) the date on which the individual would otherwise be eligible to receive coverage for services were it not for the penalty period. Federal law exempts certain transfers made during the look-back period from the penalty provisions. Exemptions include certain transfers of assets to a spouse or a disabled child, among other things. A transfer does not result in a penalty period if the individual can demonstrate to the state that the transfer was made exclusively for purposes other than qualifying for Medicaid.the state determined that application of the penalty would result in an undue hardship; that is, it would deprive the individual of (1) medical care such that the individual’s health or life would be endangered, or (2) food, clothing, shelter, or other necessities for life. Additionally, a penalty would not be applied if The DRA also specified circumstances under which the purchase of certain assets—such as an annuity, promissory note, or loan—is considered a transfer for less than FMV for purposes of determining Medicaid eligibility. (See table 3 for a summary of these selected DRA provisions.) Most, but not all, of these provisions became applicable on the date of the DRA’s enactment, February 8, 2006. To assess applicants’ financial eligibility for Medicaid coverage for long- term care, including nursing home care, and to determine whether they transferred assets for less than FMV, states generally require applicants to submit applications and to provide documentation of certain assets reported on the applications. Our prior work has shown that states varied in the amount of documentation required from applicants; for example, 17 states required all applicants to provide 60 months of documentation of financial and investment resources, while 27 states required applicants to provide just the current month’s documentation. We also previously found that all state Medicaid programs obtained some amount of asset information from third parties, such as financial institutions or other government agencies, such as the Social Security Administration.information helps states verify the accuracy of applicants’ reported assets, and to determine if applicants have assets they failed to report or transferred for less than FMV during the look-back period. The processing of Medicaid applications—including the collection of documentation and information from applicants and third parties—is generally performed by local or county-based eligibility workers. Forty-one percent of the 294 approved applicants whose Medicaid nursing home application files we reviewed had total resources—both countable and not countable resources—of $2,500 or less; and nearly 75 percent of the approved applicants owned at least some resources that were not countable in their financial eligibility determination. Almost two-thirds of approved applicants had annual gross incomes of $20,000 or less, and 5 percent were found to have transferred assets for less than FMV. Of the 294 approved Medicaid nursing home applicants whose files we reviewed in selected counties in three states, 41 percent—121 applicants—had total resources of $2,500 or less. Total resources included both resources that were countable and those that were not countable as part of applicants’ Medicaid financial eligibility determination and, for married applicants, resources of both the applicant and the spouse. Another 44 percent of approved applicants—129 applicants— had between $2,501 and $100,000 in total resources, and 14 percent of approved applicants—42 applicants—had over $100,000 in total resources. Median total resources for all approved applicants was $7,660, which was less than the median net worth of elderly households in the United States. Married applicants, who made up 24 percent of the approved applicants, had higher median resources ($70,137) than single applicants ($3,034). (See fig. 1.) (See fig. 2.) Sixty-five percent of approved applicants whose files we reviewed—192 applicants—had annual gross incomes of $20,000 or less, another 30 percent—88 applicants—had annual gross incomes between $20,001 and $50,000, and 5 percent—14 applicants—had annual gross incomes greater than $50,000. The median annual gross income of approved applicants was $16,260 ($1,355 per month), which was less than the median annual income of the elderly in the United States. In contrast to resources, the median annual gross income of married approved applicants ($16,260) was nearly the same as that of their single counterparts ($16,284); consistent with how Medicaid eligibility is determined, applicants’ income includes just that of the applicant, regardless of marital status. (See fig. 4.) Social Security was the primary source of income for approved applicants we reviewed, comprising three-quarters of their annual income, on average. Almost all approved applicants—95 percent—received Social Security, and nearly half—45 percent—received income from a retirement account or pension. Few applicants received income from other sources, such as an annuity, trust, or promissory note. For slightly more than half (33) of the 60 married approved applicants who had a spouse living in the community, the community spouse was allowed to retain at least some of the applicant’s income to bring their monthly income up to the state’s minimum needs allowance. The median value of the amount of the applicant’s income that the community spouse was allowed to retain was $1,102 per month. Files for 5 percent of approved applicants reviewed—15 applicants— showed transfers of assets for less than FMV during the look-back period; such transfers are to result in the assessment of a penalty period. The median amount of assets transferred was $24,608, and the amounts ranged from $5,780 to $296,221. The majority of applicants identified as transferring assets for less than FMV—14 of the 15 applicants— transferred money. Applicants typically transferred assets to a child or grandchild (9 of the 15 applicants). Thirteen of the 15 applicants found to have transferred assets were not married. All but one of the applicants found to have transferred assets were from New York, the remaining applicant was from South Carolina.transferred assets, the median length of the penalty period assessed was nearly 4 months, and the length ranged from half a month to nearly 25 months. We identified four main methods used by applicants—or described by eligibility workers, state officials, attorneys, or other representatives from law practices—to reduce countable assets and qualify for Medicaid coverage for nursing home care. These four methods are: (1) spending countable resources on goods and services that are not countable, (2) converting countable resources into noncountable resources that generate an income stream, (3) giving away countable assets, and (4) increasing the amount of assets the community spouse retains. One method Medicaid applicants could use to reduce assets is paying off existing debt or making certain purchases. When such purchases and payments convert a countable resource, such as money in the bank, into a good or service that is not countable toward Medicaid financial eligibility, they effectively reduce the applicants’ assets. Eligibility workers mentioned possible goods that would not be countable that applicants could purchase. Eligibility workers in 10 of the 12 counties interviewed stated that purchasing burial contracts and prepaid funeral arrangements, which are generally noncountable resources, was a common way applicants reduced their countable assets; and eligibility workers from one state said they recommend making such purchases to applicants. Eligibility workers also reported that applicants spend down their countable resources on upgrades to their homes, such as a new roof or carpeting. States may require applicants to provide documentation related to these purchases, such as construction contracts or receipts, to verify that the purchases were not made for less than FMV. Applicants can also use countable resources to purchase services, which are not considered a resource. For example, applicants may pay for a personal service contract, also referred to as a care agreement, which is an arrangement in which an individual pays another person, often an adult child, to provide certain services—such as grocery shopping or transportation to medical appointments—over a period of time. Although personal service contracts are not considered a resource, payment for the contracts involve a transfer of resources, and thus must be assessed to determine whether the transfer was made for less than FMV. If such contracts are determined to have been made for less than FMV, then the applicant would be subject to a penalty period. According to CMS, states can establish reasonable standards for assessing whether or not a transfer using a personal service contract is made for less than FMV. Our interviews with state Medicaid officials indicate that states’ standards for assessing the FMV of personal service contracts vary. Some states require that payments under the contract be made at the time the services are rendered; thus, these states would consider a lump sum payment made for services that had been provided sometime in the past or for services that will be provided in the future to be a transfer for less than FMV. In contrast, officials from one state we spoke with indicated that the state does not have standards regarding when payment must be made. Officials from this state reported seeing at least 100 applications each month containing personal service contracts. Personal Service Contracts The files we reviewed included a $7,055 personal service contract between an applicant and her daughter for the provision of 10 hours of care per week at a rate of $11 per hour for an estimated 1.2 years. Another applicant had a $134,316 contract with her son to provide 20 hours of services per week at a rate of $35 per hour for an estimated 3.7 years. Under both personal service contracts, the provider received one lump sum payment. Among the Medicaid application files that we reviewed in selected states, 16 of the 294 approved applicants (5 percent) had a personal service contract—all of which were determined to be for FMV. The median value of the personal service contracts was $37,000; the value of the contracts ranged from $4,460 to $250,004. Applicants may reduce their countable resources by purchasing certain financial instruments that generate an income stream. While the income stream is likely countable, the principal of the financial instrument might not be a countable resource when determining an applicant’s financial eligibility. For these purchases to be effective in helping the individual qualify for Medicaid coverage, the income generated would need to be less than the applicant’s expenses, including the cost of nursing home care; otherwise the applicant would not likely be income-eligible for Medicaid coverage for nursing home care. Additionally, the principal would need to be a noncountable resource, otherwise the applicant would not likely be resource-eligible for Medicaid coverage. Irrevocable Annuities In certain circumstances an irrevocable annuity can be considered a countable resource. For example, according to CMS, if the annuity can be sold on the secondary market because its owner or payee may be changed (i.e. the annuity is assignable), then the annuity is a countable resource. One instrument applicants can purchase to convert countable resources into noncountable resources with an income stream is an irrevocable and nonassignable annuity that complies with the DRA. A representative from one law office that we spoke to in an undercover capacity indicated that an annuity is an option that could allow at least some resources to be left for the applicant’s heirs. While the individual noted that the income generated from the annuity must be spent on nursing home care, he explained that the applicant may be able to save some money to leave to his children because the amount the applicant would have to pay toward his nursing home care would be based on the Medicaid nursing home payment rate, which is likely less than what the applicant would have otherwise had to pay privately. Medicaid officials from more than half the states for which we conducted interviews indicated that the use of annuities has increased over the past few years, and officials from one of these states indicated that this increase was a result of clearer guidelines in the DRA on annuities. A promissory note is a written, unconditional agreement, usually given in return for goods, money loaned, or services rendered, whereby one party promises to pay a certain sum of money at a specified time (or on demand) to another party. states’ standards for determining whether to treat the principal of promissory notes as a countable resource vary. Medicaid officials from one state told us that the principal of promissory notes could be considered a countable resource if it were negotiable. Medicaid officials from another state said that the principal would be a countable resource if the note could be converted into cash within 20 days. Applicants may reduce their countable assets by giving some or all of their assets as a gift to another individual, such as an adult child. Such gifts are typically treated as a transfer for less than FMV and, if given during the look-back period, would likely result in a penalty period. The length of the penalty period is calculated based on the value of the gift and the private payment rate for nursing home services in the state or locality. However, our interviews identified mechanisms that either reduce the length of the penalty period after it has started or provide funds to pay for care during the penalty period. These mechanisms are referred to as “reverse half-a-loaf” because they can be used to preserve at least half of an individual’s resources. A “reverse half-a-loaf” mechanism that reduces the length of the penalty period involves gifting countable assets to someone else and then, after eligibility has been determined and the penalty period begins, having a portion of the gift returned to the applicant. This option only works in states that choose to consider a partial return of transferred assets in recalculating the penalty period. According to CMS, states can choose whether or not to consider a partial return of transferred assets. In states that consider partial returns, the original length of the penalty period would be shortened in proportion to the amount of assets returned. Another “reverse half-a-loaf” mechanism involves an applicant gifting a portion of their countable resources, incurring a penalty, and converting other countable resources into an income stream for the applicant—such as through an annuity or promissory note—to pay for nursing home care during the penalty period. The amount of income generated from the annuity or promissory note would be equivalent to the shortfall between the applicant’s other monthly income, such as Social Security and retirement income, and the cost of his/her nursing home care during the penalty period. A representative from one law office we spoke to in an undercover capacity suggested that the applicant could gift about 50 percent of her resources, and while serving a penalty period, the applicant would use monthly income from a promissory note plus other monthly income to pay for the nursing home care. Another representative from a law office mentioned that the larger the applicant’s income, the larger the amount that the applicant can gift. This is because an applicant with higher income would need less additional income from an annuity or promissory note to cover the costs of nursing home services during the penalty period. Thus, an applicant with higher income would need to place a smaller amount of their countable resources into an annuity or promissory note, allowing them to gift more of their countable resources even if it may result in a longer penalty period. Reverse Half-a-Loaf One applicant who appeared to use the “reverse half-a-loaf” mechanism gifted $62,470 to his children and was assessed a 6 month penalty period. This applicant also loaned $63,118 to one of his children in return for a promissory note that provided $10,543 in income per month during the 6 months of the applicant’s penalty period. Among the 294 approved applicants whose files we reviewed, we identified 5 applicants (2 percent) who appeared to have used one of the “reverse half-a-loaf” mechanisms; 4 of the applicants appeared to use the mechanism that involved creating an income stream through a promissory note to pay for nursing home care during the penalty period. These 4 applicants gifted between $20,150 and $227,250 worth of resources, and had penalty periods of between 2 months and 22 months. An additional method married applicants could use to reduce countable assets is to increase the amount of assets that the community spouse is able to retain. Given the federal law regarding the treatment of the community spouse’s resources and provisions intended to protect married individuals, there are several different mechanisms for increasing the assets retained by the community spouse. Federal law permits the community spouse to retain an amount equal to one-half of the couple’s combined countable resources, up to the state- specified maximum resource level. However, our work identified a mechanism that could result in a community spouse retaining more than the maximum standard in instances where the state did not exercise its right to sue the community spouse to recoup the resources due to the institutionalized spouse. Under this mechanism, an institutionalized spouse may transfer all his or her resources to the community spouse, while assigning to the state the right to bring a support proceeding against the community spouse. In this way, a community spouse who refuses to make any resources available to the institutionalized spouse may be able to retain all of the couple’s resources unless the state chooses to sue the community spouse for support.officials, some states take legal action to recoup funds from the community spouse in cases of spousal refusal, while other states do not. According to information from state Medicaid officials from one state told us that they do not see many applications claiming spousal refusal, adding this is likely because the state would take legal action against the community spouse to recoup expenses. Officials from other states told us that, in cases of spousal refusal, they do not take action against the community spouse. Of the 70 married approved applicants whose files we reviewed, 13 had applications that contained a claim of spousal refusal. (See table 5.) These 13 applicants resided in two states and the community spouse retained a median value of $291,888 in nonhousing resources; two of the community spouses were able to retain over $1 million in nonhousing resources. Six of the 13 applicants also provided monthly income support to their community spouse. Married applicants may reduce their countable assets by purchasing an irrevocable and nonassignable annuity that pays out income to the community spouse. Although annuities for the community spouse must be actuarially sound—that is, they must pay out during the community spouse’s life expectancy—and must name the state as a remainder beneficiary, there are no other limitations on the time period in which annuities must pay out. Additionally, there is no limit on the amount of income from the annuity, as the community spouse’s income is not countable as part of the institutionalized spouse’s eligibility. While any portion of the income from the annuity that is not spent in the month it is received becomes a resource, a community spouse’s resources are generally not assessed again after his or her spouse is initially deemed eligible, and thus would not affect the institutionalized spouse’s eligibility. Annuities for the Community Spouse State Medicaid officials, county eligibility workers, and attorneys who provided information on the value of annuities for the community spouse reported average values ranging from $50,000 to $300,000. Officials from one state reported seeing annuities for the community spouse worth more than $1 million. Medicaid officials from one state indicated that they have seen annuities that disbursed all of the payments to the community spouse shortly after the annuity was purchased, while officials from another state said that annuities can have large monthly payments for the community spouse, such as $10,000 per month. Thus, married applicants may use countable resources to purchase an irrevocable annuity that pays potentially large amounts of income for the community spouse over a short period of time without affecting the institutionalized spouse’s eligibility. A representative from one law office we spoke to in an undercover capacity suggested that the creation of an annuity can be done quickly and therefore, is a tool for last minute planning. Similar to the annuities for the applicant, Medicaid officials from several states said that the use of annuities for the community spouse has increased over the past few years. Officials from three states said that the increase may be a result of the passage of the DRA, because it clarified how annuities for the community spouse could be set up. Married applicants may seek a court order that requires the institutionalized spouse to pay a specified monthly income or provide additional resources to support the community spouse. Such court orders could allow the community spouse to receive income or resources in excess of maximum standards. Federal law requires that a community spouse’s income allowance be no less than the amount of the court order of support. One state Medicaid official that we spoke to said that applicants who use court orders will have a preeligibility asset test, or needs assessment, conducted to determine the amount of excess resources that the married couple would have to spend down before applying for Medicaid, after which they will seek a court order of resource support that allows the spouse to keep an amount of the couple’s combined resources that is above the state’s maximum resource allowance. Of the 70 married approved applicants whose files we reviewed, 1 applicant had a court order of spousal income support that required the institutionalized applicant to divert $5,014 of her monthly income to the community spouse, which was greater than the state’s minimum needs allowance. Eligibility workers from all 12 counties in which we conducted interviews stated that bank statements were the most useful source of information for identifying and verifying applicants’ financial eligibility. According to the eligibility workers we spoke with, bank statements show transactions, such as payments of life insurance premiums, the movement of lump sums of money over time, or transfers of money in and out of accounts. Presumably, these workers had access to itemized bank statements— periodic statements issued by a financial institution to its customers detailing all account activity for that period. Eligibility workers from one county said that bank statements allowed them to best understand an applicant’s financial history. Additionally, bank statements can include red flags or triggers that can lead eligibility workers to ask the applicant for additional information. For example, eligibility workers from counties in which we conducted interviews indicated that large withdrawals or patterns of withdrawals, incomplete documentation (e.g., missing pages), or an applicant having a large number of accounts can prompt further inquiry. Eligibility workers also reported that reviews of bank statements could lead to the identification of unreported assets or accounts. The most commonly unreported asset those eligibility workers reported finding in bank statements were life insurance policies. Specifically, eligibility workers from 7 of the 12 counties in which we conducted interviews reported that life insurance policies are commonly not reported and may be found while reviewing itemized bank statements because the statements may show a payment for the life insurance premium. Life insurance policies that have a cash value could affect an applicant’s eligibility. Although eligibility workers indicated that bank statements are the most useful source of information on applicants’ assets, we have previously found that over half of states require only a single month’s documentation for financial and investment resources, such as bank accounts. Having only a single month’s bank statement could be sufficient to determine the current value of an applicant’s account, but it may not allow eligibility workers to identify patterns of withdrawals over time which could indicate the need for additional review. All the eligibility workers we interviewed, however, said they ask for additional information if they see large withdrawals in the bank statements that were submitted. For example, eligibility workers from one county that requires only a single month of documentation said if there is questionable information in the documentation they will request that the applicant submit additional months of documentation. Additionally, we previously found that few states require applicants to provide itemized bank statements as documentation of their resources.bank statements even if not required, without such detailed statements, eligibility workers may not be able to discover unreported assets, such as life insurance policies. While applicants may submit itemized Some eligibility workers we interviewed indicated that applicants’ income tax returns were also a helpful source of information to identify applicants’ unreported assets. Specifically, eligibility workers from three counties (in two states) told us that that they ask applicants for a copy of their federal tax return. For example, eligibility workers from one county stated that they require applicants to provide 5 years of tax returns. These workers indicated that income tax returns include much information that workers would otherwise not be able to access, such as information about ownership of life insurance policies, stocks, or any other asset that earns dividends. In our previous work, we found that only one state requires the submission of income tax returns. In addition to bank statements and tax returns, eligibility workers also reported finding some asset-related search tools helpful in identifying and verifying applicants’ assets and transfers. Workers from one county in Florida that had recently begun piloting an electronic asset verification system (AVS)—a system that allows workers to contact multiple financial institutions to determine if an applicant has, or had, an account and the value of any existing accounts—noted that this new system has been useful in identifying unreported assets and transfers. The state’s AVS collects information from participating banks on any accounts held by an applicant for nursing home coverage in the prior 60 months. If a bank account is found, the information is populated into the state’s electronic eligibility system for eligibility workers to use in evaluating applicants’ financial eligibility. Officials from Florida told us that their AVS is connected to the vast majority of banks operating in their state. Although all states were required to have an electronic AVS in place by the end of fiscal year 2013, only 2 of the 12 states for which we conducted interviews reported having implemented an AVS. In our prior work, we found that states identified challenges to implementing an AVS, including a lack of resources—money, staff, or time—to implement the system, and challenges getting financial institutions to participate. Eligibility workers from one county reported using certain commercial investigative software that pulls together publically available information nationwide to help verify or identify applicants’ assets or transfers. This software can help eligibility workers find information on unreported assets and transfers, such as information about property deeds or ownership of a business. The workers reported that this software is used in cases where the eligibility worker suspects the applicant owns, for example, an out-of-state unreported asset. In this county, only the two eligibility worker supervisors and investigative staff have access to this software. We provided a draft of this report to HHS for review. HHS had no general comments but provided technical comments that we incorporated as appropriate. As agreed with your offices, unless you publicly announce the contents of this report earlier, we plan no further distribution until 30 days from the report date. At that time, we will send copies to the Administrator of CMS and other interested parties. In addition, the report will be available at no charge on the GAO website at http://www.gao.gov. If you or your staffs have any questions about this report, please contact me at (202) 512-7114 or [email protected]. Contact points for our Offices of Congressional Relations and Public Affairs may be found on the last page of this report. GAO staff who made key contributions to this report are listed in appendix III. Of the 350 Medicaid applicants whose files we reviewed in selected counties in three states (Florida, New York, and South Carolina), most were over 75 years old, single, and female. (See table 6.) The median age of applicants was 84 years old. A majority of applicants— 80 percent—had been living in a long-term care facility, such as a nursing home, at the time they applied for Medicaid coverage of nursing home care. The median length of time these applicants had been living in facilities was 2.3 months; the length of time ranged from less than 1 month to 6 years. Some applicants—15 percent—were already covered under Medicaid for basic medical services at the time that they applied for coverage of nursing home care. Additionally, 24 percent of the applicants had evidence in their application file that they received assistance from an attorney or financial planner in applying for Medicaid coverage for nursing home care. Over 80 percent of the applicants whose files we reviewed (294 of 350) were approved for Medicaid coverage for nursing home care, while 15 percent of applicants (52 of 350) were initially denied Medicaid coverage. (See fig. 5.) Most of these applicants (39 of 52) were denied because they failed to provide required documentation, a few were denied because they were not functionally eligible (4 of 52), and some applicants (11 of 52) were denied for financial reasons, including having income or resources that exceeded financial eligibility standards. For applicants denied for having excess income, the median amount of excess income was $77 per month; for those denied for excess resources, the median amount of excess resources was $20,407. Most applicants (9 of 11) who were initially denied for financial reasons reapplied and were later approved for Medicaid coverage for nursing home care. Of the 9 applicants who were later approved for Medicaid, 3 applicants spent down assets on long-term care or medical expenses, 2 applicants spent down assets on other goods or services, 2 applicants placed excess income into a qualified income trust, and 2 applicants were later approved for other or unknown reasons. To examine the financial characteristics of applicants approved for Medicaid nursing home coverage, we reviewed a random sample of Medicaid nursing home application files in selected counties in three states. To select states, we used information from a 2011 GAO web- based survey of Medicaid officials from each of the 50 states and the District of Columbia. We scored states based on their survey responses to questions on the extent to which they: 1. verify applicants’ assets with financial institutions; 2. conduct property record searches; and 3. obtain information covering the 60-month look-back period. Weighing each question equally, we ranked states on the basis of their total score and placed them into three groups (low, medium, and high) using naturally occurring breaks in the data. (See table 7.) In selecting states, we considered the geographic dispersion of states, as well as the following: among states in the “low” group, we focused on states that reported generally obtaining only 1 month of documentation; and among states in the “high” group, we focused on states that reported conducting all three activities to some extent—verifying assets with financial institutions, conducting property searches, and obtaining 60 months of documentation. From the ranked group of low and high states, we selected an initial set of states plus additional alternative states, and conducted interviews with state officials to determine whether they could provide us with needed data in order to select a sample of counties and application files to review. If a state informed us they were unable to provide such data, we replaced the state with the next alternative state from the respective group. We interviewed officials from a total of 11 states. Officials from 6 states (2 high and 4 low) told us they were unable to produce needed data due to data system limitations. Officials from 1 state (a high state) told us they were technically able to produce needed data but would not be able to do so within a reasonable timeframe due to competing demands for their information technology resources. This left us with 4 states—2 high states and 2 low states—that were able to produce the data we needed. Based on these interviews, we selected one state from the low group (Florida) and two states from the high group (New York and South Carolina). In 2012, Medicaid spending for institutional long- term care was $3.3 billion in Florida, $11.5 billion in New York, and $801 million in South Carolina. To choose counties in our selected states, we considered three factors. 1. Size of the population aged 65 and older.2. Median income of households with householders aged 65 and older.3. Number of Medicaid nursing home applications received. Carolyn L. Yocom, (202) 512-7114 or [email protected]. In addition to the contact named above, Michelle B. Rosenberg, Assistant Director; Kaycee M. Glavich; Robert Graves; Drew Long; Katherine Mack; Linda McIver; Vikki Porter; Daniel Ries; Laurie F. Thurber; and Jennifer Whitworth made key contributions to this report. | Medicaid paid for nearly one-third of the nation's $158 billion in nursing home expenditures in 2012. To be financially eligible for Medicaid, individuals cannot have assets above certain limits. Not all assets are countable in determining Medicaid eligibility; federal law discourages individuals from reducing their countable assets, for example by transferring them to family members, to qualify for Medicaid. Although Congress has acted multiple times to address financial eligibility requirements for Medicaid coverage of nursing home care, methods exist through which individuals, sometimes with the help of attorneys, can reduce their assets and qualify for Medicaid. GAO was asked for information on the extent to which individuals may be using available methods to qualify for Medicaid coverage. GAO (1) examined financial characteristics of applicants approved for Medicaid nursing home coverage in selected states; (2) identified methods used to reduce countable assets to qualify for Medicaid; and (3) identified information eligibility workers consider the most useful in assessing applicants' financial eligibility. GAO analyzed a random, but nongeneralizeable, sample of Medicaid nursing home applications in two counties in each of three states (Florida, New York, and South Carolina), selected based on several factors including states' asset verification efforts and demographics. GAO also interviewed officials from the Centers for Medicare & Medicaid Services, state Medicaid officials, county-based Medicaid eligibility workers, and attorneys. GAO's review of 294 approved Medicaid nursing home applications in three states showed that 41 percent of applicants had total resources—both countable and not countable as part of financial eligibility determination—of $2,500 or less and 14 percent had over $100,000 in total resources. Nearly 75 percent of applicants owned some noncountable resources, such as burial contracts; the median amount of noncountable resources was $12,530. GAO identified four main methods used by applicants to reduce their countable assets—income or resources—and qualify for Medicaid coverage: 1. spending countable resources on goods and services that are not countable towards financial eligibility, such as prepaid funeral arrangements; 2. converting countable resources into noncountable resources that generate an income stream for the applicant, such as an annuity or promissory note; 3. giving away countable assets as a gift to another individual—such gifts could lead to a penalty period that delays Medicaid nursing home coverage; and 4. for married applicants, increasing the amount of assets a spouse remaining in the community can retain, such as through the purchase of an annuity. Eligibility workers GAO spoke with identified bank statements as the most useful source of information for assessing financial eligibility. They explained that bank statements could lead to the identification of unreported assets, such as life insurance policies, or show patterns of withdrawals that prompt further inquiry. The Department of Health and Human Services provided technical comments on a draft of this report, which GAO incorporated as appropriate. |
The Bureau’s 2020 Census early research agenda is focused on conducting the 2020 Census at a lower cost than the 2010 Census while maintaining high quality results. In order to do this the Bureau has developed a range of design alternatives for the 2020 Census. The Bureau’s 2020 design alternatives have potential for containing costs but also have the potential to increase risks. The design alternatives focus on options to use the Internet and other social media to increase response rate, target address canvassing, and expand the use of administrative records. Figure 1 shows the current range of six 2020 Census design alternatives currently being considered and how the three key efforts fit into them. According to the Bureau, the final 2020 design is likely to incorporate both existing approaches as well as design alternatives that have never been used in the decennial census. Greater changes to the overall design will result in greater potential for cost savings. However, greater design changes also could result in greater risk, and testing will be needed to identify the risks, costs, and benefits of any new approaches. According to the Bureau, alternative one has the lowest risk because it most closely mirrors the 2010 Census design (mailout of census forms, and in-person follow-up of non respondents) and is not dependent on implementing innovations such as increased use of administrative records and targeted address canvassing. The Bureau formally kicked off initial planning for the 2020 Census on October 3, 2008, with the 2020 Census Planning Summit. At that meeting, decennial-census managers and subject matter experts discussed challenges, strengths, and weaknesses that would need to be considered during the 2020 Census strategic decision-making process. From 2009 to 2011, during the options analysis phase of 2020 Census planning, Bureau officials went through a research topic winnowing process where they: identified cost and quality drivers, conducted brainstorming sessions, received expert input (e.g., National Academy of Sciences), cataloged over 600 ideas, clustered those ideas into over 100 projects with research questions, and then prioritized them against the for the 2020 Census. The Bureau identified Bureau’s Guiding Principles26 research projects to inform preliminary design decisions with the goal of conducting the 2020 Census at a lower cost than the 2010 Census, while maintaining high quality. Using the 26 research projects, Bureau officials plan to validate the feasibility of the various strategies for reducing costs between fiscal years 2012 and 2014. Bureau officials stated that they are planning to narrow down the design alternatives by September 2014, and that research would continue into the next phase. Bureau officials believe that conducting research earlier in the decade will better position them to make more effective changes to the 2020 Census design. Figure 2 shows the five phases of the life cycle for the 2020 Census. The Bureau is now in the “Early Research and Testing” phase and is currently refining and developing its 26 project plans. These plans include, among other requirements, project goals, objectives, scope, limitations, and skills required, and had a set of required iterative research and testing deliverables due 30, 60, 90, and 120 days after project kickoff. According to Bureau documentation, this process encouraged the development and proper consideration of ideas. The Bureau selected 17 of the 26 projects to start in fiscal year 2012. The remaining projects are scheduled to begin in fiscal years 2013 and 2014. Of the 17 research projects the Bureau is conducting in 2012, 14 projects are to inform design decisions related to the Internet, administrative records, and targeted address canvassing. See figure 3 for a list of these 14 research projects and their objectives. According to the Bureau’s timeline, project teams are to complete their work on these 14 projects by September 2014. Move mouse over each activity to see more information afterwards CLICK to close the open pop-up information display panel. To print text version of this graphic, go to appendix II. Research on new methods likely to result in a more cost-effective 2020 Census must be accomplished early enough in the decade to confirm their likely impact on both cost and quality and to inform timely design decisions. The use of the Internet as a response option, a potential move towards targeted address canvassing, and the possible use of administrative records to replace data collected during census field operations present the Bureau with opportunities to reduce costs while maintaining a high quality census. As part of the 2020 Census planning process the Bureau has identified both program-level and project-level risks associated with these options. According to the Bureau, program- level risks span the entire 2020 research and testing phase and if not managed properly could jeopardize the phase’s goals and objectives. In contrast, project-level risks pertain to the successful completion of specific projects. However, the Bureau has not developed mitigation and contingency plans for the project-level risks. Also, the Bureau has not developed cost estimates for any of its 2020 research and testing projects as required in guidance provided to project teams. Finally, some of the project plans we reviewed were incomplete. For example, not all project plans identified the necessary staff resources, while other project plans failed to provide performance metrics for measuring progress and for determining the project’s final outcome. During the 2000 Census, the Bureau piloted an Internet response option that had a limited number of respondents. They considered building on this 2000 experience for the 2010 Census, but the Bureau decided in July 2006 not to include the Internet option in the design for the 2010 Census because test results indicated that the Internet option did not increase the overall response rate, including response among hard-to-count population groups, and they had underestimated the costs of the contract that included developing the Internet option. However, more recent tests conducted in 2011 showed that adding an Internet response option increased the overall response rate. The 2011 test results, coupled with the increased prevalence and accessibility of the Internet, led Bureau officials to commit to providing an Internet response option for the 2020 Census. With regard to the cost for the 2020 Census, if this option can help achieve an overall increase in the response rate it can save money, since Bureau field staff would need to visit fewer households during nonresponse follow-up (NRFU), which is the largest and most costly census field operation. Furthermore, testing has shown that the cost of an Internet survey is low compared to a mail survey, which incurs printing and postage costs. Moreover, web survey responses are generally available more quickly and are of better quality than responses from a mail survey because there is no lag time as the responses are captured in real time and there are reminders to prompt the respondent if a question is unanswered. Quicker and complete responses can also help reduce the amount of time and money spent on following up on late or incomplete census forms. In April and November 2011, the Bureau tested an Internet response option in its American Community Survey (ACS), and beginning in January 2013, the Bureau plans to offer it as a response option. Bureau officials have stated that they intend to build on this existing information technology infrastructure in order to reduce the cost of implementing an Internet option for the 2020 Census. Given the Bureau’s decision to move forward with an Internet design option, six research and testing projects are focused on how best to implement an Internet response option in concert with other self-response options. The project team with primary responsibility for coordinating the design of the Internet response option is tasked with answering the following research question: How does the Bureau leverage technology and new response modes (including the Internet) to increase self-response, improve nonresponse follow-up data collection strategies, while maintaining overall quality? One objective of this project is to determine what contact strategy should be used to inform the public that census responses can be filed via the Internet in order to increase self-response (i.e., Bureau use of email, social networks or phone for initial contact or for reminders). Contact strategy testing will examine the impact of various Bureau instructions to respondents, as well as the timing of the delivery of the mailing pieces, on such factors as response rates, return rates, percentage of Internet returns, and speed of returns. This project will also determine what mode (paper, Internet, or phone) is best for each demographic, geographic, and language group, as well as determine the effect a lack of access to technology has on each demographic group. Additionally this project will refine and test security features. The other five projects will cover such areas as types of languages that will be offered by response mode, public perception and potential concerns about an Internet response, and management of the workload for multiple modes of response. In the 2010 and earlier censuses, the Bureau mounted a full address canvassing operation, where field staff verified every housing unit in the nation to update the Master Address File (MAF) and the associated mapping system called TIGER® (Topologically Integrated Geographic Encoding and Referencing). This labor-intensive effort was one of the more expensive components of the 2010 Census: the 2010 Address Canvassing Operation required 140,000 temporary workers to verify 145 million addresses (by going door-to-door) at a cost of $444 million, or 3 percent of the $13 billion total cost of the 2010 Census. One of the reasons the Bureau conducted a full address canvassing for the 2010 Census was because it wanted to capture hidden and hard-to-capture addresses, such as housing units in converted garages and large storage sheds. For the 2020 Census the Bureau would like to reduce the amount of field work and cost of address and map updates by targeting the address canvassing operation. According to Bureau planning documents, through early research and testing the Bureau plans to attempt to determine the quality and stability of its address file in terms of the number of changes (adds, deletes, duplicates, and corrected addresses) that took place to each census block in 2010. Depending on that outcome, the Bureau would target for address canvassing only those blocks where the quality of the addresses was determined to be inadequate. To determine whether to target address canvassing for the 2020 Census, the Bureau has two ongoing efforts to improve the Bureau’s map and address databases. First, the Bureau’s Geography Division is working with the United States Postal Service (USPS) and other federal agencies on a new program called the Geographic Support Systems (GSS) Initiative, which allows government agencies at all levels to regularly share and continuously update their address lists with the Bureau. According to current plans, USPS will continue providing the Bureau with address updates. Likewise, tribal, state, and local governments, which maintain address lists for purposes such as emergency response and property assessment, will also have the opportunity to share addresses with the Bureau throughout the decade, rather than solely 2 years prior to the decennial, as had been the case in prior decennial censuses. Additionally, the GSS Initiative is working to develop, and in some cases improve, methods for identifying and capturing hidden and hard-to- capture addresses. As part of this first effort, the Bureau is investigating the role and possible contributions the private sector can make in improving its address and mapping databases. For the 2010 Census the Bureau relied heavily on the private sector to update addresses and maps. Specifically, in June 2002, the Bureau awarded an 8-year contract of about $200 million to improve the accuracy of its mapping database and investigate options and methods of updating its address database. The contract, among other tasks, corrected in TIGER® the location of streets, boundaries, and other map features so that coordinates would be aligned with their true geographic locations. According to Bureau officials, continued reliance on the private sector is necessary in order to maintain the major upgrades that were made to its address and mapping databases last decennial. The Geography Division has nine contracts in place, totaling about $90 million dollars, to help it manage its mapping and address database (see app. III for a list of those contracts). Some of the work being done by the private sector includes a service contract to provide system upgrades and maintenance to the MAF/TIGER® database and a data entry services contract to update the MAF/TIGER® database with address information provided by state and local governments. Moreover, to ensure the most current address and mapping data are available for the 2020 Census, the Bureau, in April 2012, began conducting market research with three private-sector firms to assess how those firms might assist the Bureau with its address and mapping needs. Possibilities to be explored include how to best maintain address and map data, understand private-sector innovation and technology, and options for address and map data-sharing methods. According to Bureau officials, negotiations concerning the scope, tasks, and activities to be completed with the first contractor have taken place. However, negotiations with the remaining two firms have not begun. Use of the private sector for mapping is an area we have previously reported needs to be explored. Specifically, in December 2010, we listed a number of reexamination areas which have particular implications for controlling costs and improving accuracy and raised the question: To what extent can private-sector and other sources of information such as maps, address lists, and geographic databases be employed to help support the census? The second effort to improve the Bureau’s address and mapping database is centered on the 2020 Research and Testing Program. There are three research projects designed to inform the Bureau’s decision about the extent to which it might be able to conduct a targeted address canvassing operation. Two projects will use modeling to predict where coverage errors (e.g., missed or duplicate addresses) occur in the MAF. These models will be used to assess the quality of data sources, types of errors, and what information, such as a missing map location for an address, is not in the MAF. If the Bureau decides to conduct targeted address canvassing, this information will be used to determine which areas meet acceptable quality standards, as well as where targeted address canvassing would be effective. According to the Bureau, collectively the two projects are to answer the following question: As the related GSS Initiative proceeds, how will the Bureau determine the required level of quality needed in the address frame to conduct an accurate census and then measure the quality of the continually updated MAF for that purpose? The third research project in this effort, the Local Update of Census Addresses (LUCA) Program Improvement project, will examine how to modify the Bureau’s existing partnership program in consultation with the GSS Initiative. The LUCA program is a partnership program that provides an opportunity for local and tribal governments to review and update individual address information or block-by-block address counts from the MAF and associated geographic information in the TIGER® database just prior to the decennial. The goal of LUCA is to improve the completeness and accuracy of address information. This research project’s objective is to determine the best way to modify and improve LUCA procedures to ensure compatibility with continual updating of address information throughout the decade. The project will also determine whether it is necessary for local and tribal governments to actively participate in LUCA, a once-a-decade operation, if they have been submitting addresses and mapping data continuously throughout the decade as part of the GSS Initiative. Administrative records are a growing source of information on individuals and households. For purposes of the decennial census, the Bureau is considering administrative records from government agencies, including tax data and Medicare records, as well as commercial sources to identify persons associated with a particular household address. During the 2010 Census, the Bureau made limited use of administrative records. For example, the Bureau used USPS files to update its address list, and federal agency records (such as those from the Department of Defense) were used to count military and federal civilian employees stationed outside of the United States. The amount of and quality of administrative records the Bureau is able to collect will impact the amount of cost savings the Bureau is able to realize. could allow the Bureau to reduce the scale of its NRFU operation and reduce the need for field office space and staff. The 2012 research and testing projects are also focused on identifying the best available administrative records to use for address frame building. Administrative data from other sources would be combined with USPS data, thus allowing the Bureau to continuously update its MAF throughout the decade. Finally, administrative records could reduce the cost of quality control, according to Bureau officials. In order to ensure the accuracy of the field work conducted during census field operations, such as NRFU, the Bureau sends quality control staff into the field to verify the work completed by a random sample of enumerators. Bureau officials are determining for 2020 whether administrative records can be used as a quality control check, rather than sending staff into the field. There are nine research and testing projects that will inform the Bureau’s decision making on the extent to which the Bureau can expand the use of administrative records in order to reduce costs. These research and testing efforts are focused on determining whether the quality of administrative records is sufficient to be used for this purpose. Initial testing is to be completed and decisions on these matters are to be made by September 2014. Of the nine, there are two primary administrative records research projects. They are tasked with answering the following research questions: How can the Bureau best develop and maintain an independent collection of administrative records and assess the quality of those records (best sources and methods)? How can the Bureau leverage administrative records (including commercial files) to significantly reduce decennial census cost while maintaining quality? The objective of one of these projects is to acquire, process, and analyze administrative records from federal, state, and commercial sources to assess their utility for the 2020 Census. The other project will research and test methods to enhance NRFU operations with administrative records, such as replacing phone or in-person collected data with administrative data. Bureau officials are aware that the changes they want to make to the decennial census come with many risks. The Bureau has identified and prioritized from high to low both program-level and project-level risks. According to the Bureau, program-level risks span the entire 2020 research and testing phase and if not managed properly could jeopardize the phase’s goals and objectives. In contrast, project-level risks pertain to the successful completion of projects. In accordance with best risk management practices, the Bureau has identified and drafted mitigation plans for all of the 14 program-level risks it has identified. In May 2012 the Bureau designated two of the 14 program-level risks as high risk: Timely research and testing results: The 2020 research and testing strategy involves “many small field tests to research design alternatives with an accelerated, agile, and informed decision-making process for incorporating changes to the 2020 Census design.” According to the Bureau, if the research and testing results are late, then decisions will not be made on time and the program may not be ready to move out of the research and testing phase on schedule. According to the Bureau’s 2020 Census Risk Management Mitigation Plans, officials have begun implementing a mitigation strategy for this risk, including documenting clear roles and responsibilities and communicating them to staff; establishing a schedule that contains decision milestones and tracking interdependencies of research results and testing projects; and reviewing ongoing project status including updates on dependencies, risks, and metrics. Significant budget cuts: The Bureau reported that if its funding for 2020 Census planning is significantly reduced for fiscal year 2013, key projects will have to be delayed and as a result the Bureau could have major technical and operational difficulties making preliminary design decisions. According to Bureau documents, to mitigate this risk, Bureau officials have briefed staff from House of Representatives Subcommittee for Commerce, Justice, Science and Related Agencies, Committee on Appropriations, and the Office of Management and Budget on the implications of reduced funding and plan to brief oversight committee staff. In addition, Bureau officials reported they have analyzed budgetary needs for fiscal year 2013 and prioritized projects to manage limited resources. Related to these risks, a June 2012 congressional hearing held by the Joint Economic Committee discussed the impact of eliminating or reducing funding to the ACS. According to Bureau officials, such action would have a significant impact on the 2020 Census research and testing program because ACS is one of its testing platforms. This risk is not listed as a program-level risk, or part of the current risk mitigation plans, but Bureau managers told us they are strategizing on what they will do if ACS is not funded and will update the risk mitigation plan accordingly. The Bureau has identified lack of support from external stakeholders as a medium program-level risk. Bureau officials are concerned that if external stakeholders, such as Congress, the Office of Management and Budget, and the National Academy of Sciences, do not support research on alternative design options, then the research and testing agenda will have to be redesigned. To manage this risk, Bureau officials have communicated the alternative design options to a wide range of external stakeholders, but are concerned that support may diminish as time passes and stakeholders change. To mitigate this risk, the Bureau is engaging external stakeholders in communications regarding 2020 research and testing efforts and seeking feedback on Bureau plans. According to Bureau documents, the Bureau has met with external stakeholders, including congressional staff on its House of Representatives and Senate oversight committees, to discuss 2020 Census planning, and is working on a strategy for keeping stakeholders informed as plans progress. Unlike the program-level risks, risk mitigation and contingency plans have not been drafted to address the project-specific risks. Specifically, each of that the Bureau’s research and testing projects has its own risk registeridentifies and prioritizes the risks associated with that project, but no risk mitigation or contingency plans have been developed for these project- level risks. Several risks appear in multiple project team risk registers, including tight time frames and accurate cost information. For example, one Internet-related project listed that there is a risk that if tests are not timed properly, and if time frames are too tight then they may not be able to apply what they have learned from one test to the next. Similarly, one of the administrative records project teams was concerned that one year to integrate data, build a model, and conduct adequate analysis of administrative records was “not realistic.” In another example concerning cost data, two teams stated that without accurate cost data at the project level, research results will not be sufficient to inform the design of the 2020 Census. Project teams also identified project-level risks directly related to the use of administrative records in place of data collected by enumerators during field visits. Among these risks is access to administrative records to build a high quality compilation of administrative records for each household across the country. To accomplish this task, the Bureau needs timely access to data collected by the federal government and, as previously mentioned, is currently compiling administrative records from various federal agencies including the Departments of Housing and Urban Development and Health and Human Services. However, not all agencies are authorized to provide their data to the Bureau thus limiting, and in some cases preventing, the Bureau’s use of that data. Bureau officials provided us with two examples of agency administrative record sources that they are not authorized to access: records maintained under the Family Educational Rights and Privacy Act and the National Directory of New Hires. Bureau officials said they would like to have access to these and other data sources for statistical purposes in order to further increase the number and improve the quality of available administrative records. According to Bureau officials, reviewing and determining whether they have access to administrative records with every agency is a time consuming process and the Bureau would like to have the ability to fully access and use agency administrative data, especially since the confidentiality of census data are protected by Title 13.forward, according to a senior Bureau official, legislation might need to be enacted that would compel federal agencies to provide the Bureau with access to administrative data for the decennial census. However, the To move this enactment of such legislation is likely to be a time consuming process that raises serious policy concerns including whether the Bureau has made a sufficiently strong case that it needs access to all federally collected data and the resulting impact on personal privacy protections. According to Bureau officials, the project teams did not submit risk mitigation and contingency plans for the project-level risks as required at the 90-day checkpoint because after reviewing all of the project-level risk registers the project leaders first wanted to unduplicate similar risks across projects in order to prevent redundancies. Bureau officials were not able to provide a date for when risk mitigation and contingency plans would be available. However, they stated they are committed to managing risk in order to avoid the missteps encountered in 2010 when the Bureau was on our high-risk list due to weaknesses in managing IT, operational planning, and cost estimating. In our prior work, we reported that risk mitigation involves identifying, analyzing, prioritizing, and documenting risks, and ideally more than one alternative should be assessed. The Department of Commerce’s Inspector General has recommended that risk management activities begin from the outset of the current decennial census life cycle, rather than just before field operations. Without mitigation plans the 2020 Census planning team may not be able to fully manage risks associated with these projects. The Bureau did not develop cost estimates for any of its 2020 research and testing projects by the 90-day checkpoint as required in guidance provided to project teams. The importance of reliable cost estimates is underscored by the Bureau’s experience leading up to the 2010 Census, where we found that the Bureau’s cost estimates lacked detailed documentation on data sources and significant assumptions and was not comprehensive because it did not include all costs. Partly as a result, some operations had substantial variances between their initial cost estimates and their actual costs. For example, the 2010 address canvassing operation cost $88 million more than the original estimate of $356 million, an overrun of about 25 percent; and the Bureau’s 2010 NRFU operation cost $1.6 billion, about $660 million, or 29 percent, less than the Bureau initially estimated. According to 2020 Census planning documents, at the 90-day checkpoint project teams were to: (1) prepare and submit cost estimate requests needed for the project; (2) document estimates for completing the work for the project; (3) identify and document funds needed for additional resources and requirements, and (4) prepare and submit requests for additional funds. According to a senior Bureau official, cost estimates have not yet been completed because more work needs to be done to determine project costs and they are in the process of formulating cost estimates for each project. The Bureau’s early research and testing is currently refining the project plans associated with the14 projects related to the Internet, administrative records, and targeted address canvassing. Each of the research and testing projects has a set of required deliverables due 30, 60, 90, and 120 days after project kickoff. We determined that each project team had provided the 120-day required deliverables on schedule to Bureau managers in June 2012. The research and testing documents required by the 2020 Census planning team and delivered by the 14 project teams describe management and technical plans for each project, and include a team charter, project plan, resources, preliminary schedule, and field tests. These documents are important because they serve as the baseline for each of the research and testing projects. However, not all resource requirements were documented. For example, some project teams did not fully document the types of skills needed, or perform a skills gap assessment to determine the resources needed to carry out their respective projects as required in the Bureau’s planning template (the template lays out in detail what is to be included in the deliverables). Bureau officials plan to use this skills information to allocate staff to ensure teams have the skills necessary to complete their projects. While 11 project teams provided all the required information, 2 project teams conducting research on issues that will inform decisions on targeted address canvassing and expanded use of administrative records, respectively, did not provide documentation that a skills gap analysis was conducted and another project researching expanded use of administrative records did not provide the necessary skill sets. According to Bureau officials, they are working to document these skills sets, as well as any gaps. Completing this analysis is important to ensuring sufficient resources are available for conducting the research and testing projects. We also found incomplete performance metric documentation for several projects. According to Bureau guidance, project teams were to provide performance metrics (including the methodology for monitoring and evaluating project performance), as well as exit criteria for determining each project’s final outcome. However, the “Enhancing Demographic Analysis” team that is researching the use of administrative records to assess the accuracy of census counts at the national level did not provide any of the required performance metrics, while six teams failed to include performance metrics that could be used to monitor research and testing progress. According to Bureau officials, not all teams followed the project templates, and those teams have been asked to adhere to the requirements and provide all necessary information. Project performance metrics are a key element of effective project planning. As we have noted in prior work on project planning, measurable performance goals should be identified and performance data should be gathered to determine progress and whether desired outcomes have been achieved. Absent such metrics, the Bureau does not have the assurance that it will be able to avoid potential slips in the research and testing schedule, or certainty as to whether project outcomes will be adequate for making decisions. Just over 7 years remain until Census Day 2020. While this might seem like an ample amount of time to shore up the Bureau’s planning process and take steps to control costs, past experience has shown that the chain of interrelated preparations that need to occur at specific times and in the right sequence leave little room for delay or missteps. According to the Bureau, if 2010 operations are repeated in 2020, continued growth in population size and complexity will likely lead to an unsustainable increase in census cost. Further, traditional enumeration methods may no longer effectively produce a high quality census. To contain costs and maintain quality, bold innovations in both planning for and conducting the 2020 Census will be required. The early research and testing phase represents a critical stage in preparing for the 2020 Census. At this time Bureau management is shaping the next decennial census as it determines what new operations will be a part of the 2020 Census design, which operations need to be revised, what risks remain, and how those risks will be mitigated. We have highlighted some of the cost savings that can be attained through three new operational changes being considered—the use of the Internet as a self-response option, replacing enumerator collected data with administrative records, and targeting only certain addresses for field verification. However, these innovations also come with risks that need to be managed. Specifically, while the Bureau has identified project-level risks for the 14 projects we reviewed, it has not developed risk mitigation plans for them. Given the number of changes the Bureau would like to make for 2020 it is imperative that risks are sufficiently managed and that mitigation plans be in place. For example, the Bureau needs to manage the risk for accessing federally collected administrative data that it will use for the 2020 Census. While it currently has access to some federally collected data, the Bureau would like access to all federally collected data, which according to the Bureau would require a statutory change. However, such a change raises serious policy concerns including the impact on personal privacy protections, and most likely would be a time consuming process. Therefore, it is imperative that risk mitigation and contingency plans be in place if the Bureau is unable to successfully gain access to all federally collected data. Other areas that need attention include ensuring that all research and testing projects have reliable cost estimates, so as to avoid research and funding shortfalls, that performance metrics are identified to ensure project goals are monitored and met, and that skills are identified to ensure the selection and assignment of appropriate staff to each project. We recommend that the Acting Secretary of Commerce require the Under Secretary for Economic Affairs who oversees the Economics and Statistics Administration, as well as the Acting Director of the U.S. Census Bureau, to take the following three actions to improve the Bureau’s Research and Testing for the 2020 Census, and thus better position the Bureau to carry out a cost-effective decennial census: Develop risk mitigation and contingency plans for all projects to ensure that risks are adequately managed to minimize their effect on the project. Develop cost estimates for each project. Ensure documentation for projects are complete, including specifying the performance metrics that will be the basis for determining that each of the projects has completed its work and identifying skills needed to inform the selection and assignment of appropriate staff to each research project. The Acting Secretary of Commerce provided written comments on a draft of this report on October 22, 2012. The comments are reprinted in appendix IV. The Department of Commerce agreed with the assessments and recommendations of the report. In addition, the Acting Secretary of Commerce provided a technical comment and suggestion where additional context might be needed, and we revised the report to reflect this comment. The Bureau in its comments stated that our report accurately represented the extensive work that has been completed during the early research and testing phase for the 2020 Census. To address our concerns, the Bureau noted that it is now focusing on managing risks at the project level and will begin obtaining more specific cost estimation details for each project. The Bureau also agrees with our recommendations to ensure that performance metrics and skill sets are identified for all projects and teams. Finally, the Bureau stated that these efforts are either already underway or are planned as a major focus during fiscal year 2013. As arranged with your offices, unless you publicly announce the contents of this report earlier, we plan no further distribution until 30 days after the date of this report. At that time, we will send copies of this report to the Acting Secretary of Commerce, the Under Secretary of Economic Affairs, the Acting Director of the U.S. Census Bureau, and interested congressional committees. The report also is available at no charge on the GAO website at http://www.gao.gov. If you have any questions on matters discussed in this report, please contact me at (202) 512-2757 or by e-mail at [email protected]. Contact points for our Offices of Congressional Relations and Public Affairs may be found on the last page of this report. Key contributors to this report are located in appendix V. This report evaluates the U.S. Census Bureau’s (Bureau) efforts to improve the cost-effectiveness of the enumeration, paying particular attention to the following three key efforts that past Bureau research has shown could result in substantial cost savings: (1) leveraging the Internet to increase self-response; (2) improving how the Bureau builds its address and mapping databases, including a possible move to targeted address canvassing, and use of private-sector geographic data; and (3) using administrative records, such as tax data, to reduce nonresponse follow-up costs. To meet our objectives of identifying what opportunities and risks, if any, the Bureau might need to consider for these efforts going forward, and examining to what extent these three efforts are on track with respect to scheduling, resources, and other performance metrics, we reviewed Bureau documents pertaining to the early planning of the 2020 Census. These generally consisted of the Bureau’s operational plans, strategic framework documents, strategies and planning memorandums, timelines, and benchmarks. Many of these documents were considered draft, but Bureau officials said they were sufficiently developed for purposes of our review. To describe the Bureau’s efforts to use private-sector firms to assist with its address and mapping needs, we spoke to agency officials and reviewed the Bureau’s current mapping and address contracts and its request for information to solicit input from private-sector firms. We interviewed Bureau officials responsible for the early planning of the 2020 Census and inquired about their process for designing their research and testing program, as well as opportunities and risks presented by these three key efforts. We reviewed our prior reports on and other reports on leading practices to identify gaps in the Bureau’s research and testing efforts as it relates to schedule, resources, and performance metrics. We also reviewed reports from and spoke to knowledgeable stakeholders, such as officials at the National Academy of Sciences to determine opportunities and risks related to the Internet, administrative records, and the address and mapping databases. In addition, we spoke with Bureau officials and reviewed our prior work to identify obstacles the Bureau may need to address moving forward; for example, legal barriers to the Bureau’s access to administrative records. To assess the Bureau’s progress in meeting its stated goals for the research and testing program, we evaluated whether each of the 14 research projects the Bureau initiated in 2012 had provided the required deliverables: the 120 day project plan, the project schedule, the project charter, and the project risk register. We also performed a content analysis of Bureau planning documents. For this analysis we examined the deliverables for each of the 14 research projects. We developed a data collection instrument to record the presence or absence of 11 pieces of information, or elements, in the deliverables for each project. The 11 elements were identified through a review of the Bureau’s project plan template which outlines information that each project was expected to report by the end of the 120-day initiation phase. A coding dictionary was created to provide a uniform set of coding criteria for each element coded. Each element could be coded as present, partially present, or absent. During the coding process, two analysts independently coded documents for each project using the coding dictionary as a guide. In the next phase, the two coders met to reconcile any discrepancies between their coding decisions and then made a final determination for that element. In cases of disagreement, the engagement methodologist was consulted as a tiebreaker. Following the coding process, the team analyzed the number of present and absent elements to identify patterns for each element across the 14 projects, as well as the completeness of documentation for each project. This engagement did not examine the Bureau’s information technology policies, procedures, and information security in depth because our information technology team is working on two engagements that cover these issues. Appendix II: Fourteen Research Projects Will Inform Design Decisions on Key Efforts (Text for Interactive Figure 3) Objectives in Internet development Develop requirements for the Internet response option and coordinate the relationship between different response modes (i.e., Internet, paper, telephone) Appendix III: Census Mapping and Address Contracts Description of services Develop, implement, and support a system which allows the Census Bureau (Bureau) to update its Master Address File (MAF) with TIGER® (Topologically Integrated Geographic Encoding and Referencing) data, the U.S. mapping data, as the data is received. Analyze mapping data as it is provided by state and local governments and other agencies, and upload changes into TIGER®. Customize and maintain software so that over 40,000 state, local, and tribal governments can update and verify the Bureau’s address and mapping databases. Supply digital map files and digital aerial imagery to maintain and update the MAF/ TIGER® database. Customize, install, and provide technical support for software to process and edit files to outline geographic areas, and support mapping applications, including the use of handheld computers to collect and edit data. Provide software to match addresses from surveys and other agencies to the MAF/ TIGER® database. Develop and maintain software which automatically places text on Bureau maps so all map features are clearly identified. Update and consolidate the infrastructure, servers and database, of the MAF/ TIGER® system. Provide services for the modernization of the Bureau’s MAF/TIGER® system, including expansion, design, programming, operation and maintenance of the infrastructure supporting the MAF/ TIGER® system. Cost of the most recent purchase. Other key contributors to this report include Lisa Pearson, Assistant Director; David Bobruff; Robert Gebhart; Richard Hung; Kirsten B. Lauber; Andrea Levine; and Timothy Wexler. 2020 Census: Sustaining Current Reform Efforts Will Be Key to a More Cost-Effective Enumeration. GAO-12-905T. Washington, D.C.: July 18, 2012. 2020 Census: Additional Steps Are Needed to Build on Early Planning. GAO-12-626. Washington, D.C.: May 17, 2012. Decennial Census: Additional Actions Could Improve the Census Bureau’s Ability to Control Costs for the 2020 Census. GAO-12-80. Washington, D.C.: January 24, 2012. 2010 Census: Preliminary Lessons Learned Highlight the Need for Fundamental Reforms. GAO-11-496T. Washington, D.C.: April 6, 2011. 2010 Census: Data Collection Operations Were Generally Completed as Planned, but Long-standing Challenges Suggest Need for Fundamental Reforms. GAO-11-193. Washington, D.C.: December 14, 2010. GAO Cost Estimating and Assessment Guide: Best Practices for Developing and Managing Capital Program Costs. GAO-09-3SP. Washington D.C.: March 2, 2009. 2010 Census: Census Bureau Should Take Action to Improve the Credibility and Accuracy of Its Cost Estimate for the Decennial Census. GAO-08-554. Washington, D.C.: June 16, 2008. Information Technology: Significant Problems of Critical Automation Program Contribute to Risks Facing 2010 Census. GAO-08-550T. Washington, D.C.: March 5, 2008. 2010 Census: Cost and Design Issues Need to Be Addressed Soon. GAO-04-37. Washington, D.C.: January 15, 2004. High-Risk Series: Quick Reference Guide. GAO/HR-97-2. Washington, D.C.: February 1997. | GAO's prior work has shown that it will be important for the Bureau to reexamine the design of the census in order to ensure a cost effective census in 2020. As requested, this report evaluates the Bureau's efforts to improve the cost-effectiveness of the enumeration, paying particular attention to the following three key efforts: (1) leveraging the Internet to increase self-response; (2) improving how the Bureau builds its address and mapping databases, including a possible move to targeted address canvassing, and use of private-sector geographic data; (3) and using administrative records to reduce nonresponse follow-up costs. This report (1) identifies what opportunities and risks, if any, the Bureau might need to consider for these efforts going forward and (2) examines to what extent these three efforts are on track with respect to scheduling, resources, and other performance metrics. To meet these objectives, GAO reviewed Bureau documents and interviewed officials. According to U.S. Census Bureau (Bureau) officials, to inform timely design decisions, research on new methods to improve the cost effectiveness of the 2020 Census must be accomplished early enough in the decade to confirm their likely impact on both cost and quality. Three key efforts--(1) the use of the Internet as a response option, (2) a potential move towards targeted address canvassing, and (3) the possible use of administrative records to replace data collected during census field operations--present the Bureau with potential opportunities to reduce costs while maintaining quality. The Bureau's 2020 Research and Testing Program has 14 fiscal year 2012 projects focused on informing design decisions related to the three key efforts. Bureau officials are also aware that the changes they are testing come with many risks, and for each project the Bureau has identified a number of risks and prioritized them from high to low. However, the Bureau has not developed mitigation or contingency plans for these project risks. For example, there are several risks, including tight time frames and accurate cost information, without mitigation and contingency plans. Additionally, GAO found that the Bureau had not developed cost estimates for any of its 2020 research and testing projects as required in guidance provided to project teams. Unreliable cost estimates was one of the reasons the 2010 Census was placed on GAO's high-risk list. Without timely cost estimates, it will be difficult for the Bureau to ensure that resources are adequate to support the research and testing program. The Bureau met its internal deadline for submitting each of its 14 research project's plans and charters. However, not all the project plans were complete. For example, some project teams did not fully document the types of skills needed or perform a skills gap assessment to determine the resources needed to carry out their respective projects as required in the Bureau's planning template. According to Bureau officials, they are working to document these skills sets, as well as any gaps in skills. Completing this analysis is important to ensuring sufficient resources are available for conducting the research and testing projects. Additionally, performance metric documentation for several projects was incomplete. According to Bureau guidance, project teams were to provide performance metrics for measuring progress and for determining the project's final outcome. However, one team did not provide either of these required performance metrics, while six other teams did not include performance metrics that could be used to monitor research and testing progress. Absent these metrics, the Bureau does not have the assurance that it will be able to avoid potential schedule slips or the certainty as to whether project outcomes will be adequate for making decisions. GAO recommends that the Acting Census Director take a number of actions to improve the Bureau's research and testing for the 2020 Census, such as developing risk mitigation plans, contingency plans and cost estimates for each project, and performance metrics and skill sets for those projects that do not have them. The Department of Commerce concurred with GAO's findings and recommendations and provided one clarification, which was included in the final report. Also, the Bureau in its comments noted that it has begun to address GAO's recommendations. |
The MMWR series is one of three scientific publications published by CDC and is regarded as CDC’s flagship publication. The publication’s primary audience is made up of professionals, including medical professionals, such as clinicians, and state and local public health officials, and the publication also reaches CDC’s federal partners, such as EPA and the Centers for Medicare & Medicaid Services (CMS). In addition to the weekly reports, the MMWR series also includes MMWR Recommendations and Reports, which contain in-depth articles that relay policy statements for prevention and treatment on all areas in CDC’s scope of responsibility, such as recommendations from CDC advisory committees. CDC can also issue articles that it calls Dispatches to allow for immediate publication of urgent public health information. The Dispatches are generally subsequently published in the MMWR. The April 2, 2004, MMWR weekly report included an article on the BLLs of District residents that was first published as a Dispatch on March 30, 2004. Lead is a dangerous contaminant commonly found in the environment that can affect almost every organ and system in the body. The main target for lead toxicity is the nervous system. In addition to causing behavior problems and learning disabilities in young children, elevated BLLs can cause such effects as damage to the brain and kidneys. In pregnant women, elevated BLLs may cause miscarriage. Drinking contaminated tap water is one way humans may be exposed to lead. While measures taken during the past two decades have greatly reduced exposures to lead in tap water, lead still can be found in some metal water fixtures, interior water pipes, or pipes connecting a house to the main water pipe in the street. Lead in tap water usually comes from the corrosion of older fixtures; lead service lines, including lead service pipes; or the solder that connects pipes. Federal law requires that blood lead screening tests be made available to all children enrolled in Medicaid. CMS’s State Medicaid Manual requires that these screenings be performed at ages 12 and 24 months and that all children aged 36 to 72 months who have not previously been screened also receive a blood lead test. The American Academy of Pediatrics agrees with these requirements for screening and has also stated that efforts must continue to test children who are at high risk for lead exposure. Beginning in 1995, elevated BLLs—the first noninfectious condition—were designated as a nationally notifiable condition reportable to CDC. The District (along with 36 states and the city of New York) has reported elevated BLLs of 10 micrograms per deciliter (μg/dL) of blood or higher for children to CDC. The District has reported this BLL information to CDC since 1997. The District’s Childhood Lead Poisoning Screening and Reporting Act of 2002 requires that each health care provider or facility in the District perform a blood test for lead poisoning as part of a well-child care visit for each child that they serve who is under the age of six and resides in the District. The test must occur between ages 6 months and 14 months, and a second test must occur between ages 22 months and 26 months. Both tests must be performed unless parental consent is withheld or an identical test has already been performed within the previous 12 months. If a child’s age exceeds 26 months and a blood lead screening has not been performed, the child must be screened twice before age 6. The District also requires health care providers or facilities to report the results of blood tests for lead poisoning on every child under age 6 who resides in the District to the child’s parents. As the nation’s public health agency, CDC has set levels of concern—the BLL that should prompt public health actions—for lead exposure since the 1960s. In 1991, CDC set the level of concern at 10 μg/dL of blood for children aged 6 months to 15 years and 25 μg/dL for adults. However, CDC has also recognized that a BLL of 10 μg/dL does not define a threshold for the harmful effects of lead—in other words, no safe blood lead level has been identified for children. The Lead Contamination Control Act of 1988 authorized CDC to initiate programs to eliminate childhood lead poisoning in the United States. As a result of this act, the CDC Childhood Lead Poisoning Prevention Program (CLPPP) was created. One of the program’s primary responsibilities is to educate the public and health care providers about childhood lead poisoning. CDC’s CLPPP also provides funding to state and local health departments to determine the extent of childhood lead poisoning by screening children for elevated BLLs. Since the inception of CDC’s lead program, nearly 60 state and local jurisdictions have received funding for their state and local CLPPPs. CDC’s efforts contribute to the Healthy People 2020 initiative, which includes an objective to eliminate elevated BLLs in children. As of 2007 to 2008, the latest years for which data were available, approximately 1.2 percent of children aged 1 to 5 years nationwide had BLLs exceeding 10 µg/dL. In addition, the Advisory Committee on Childhood Lead Poisoning Prevention advises and guides CDC regarding new scientific knowledge and technical developments and their practical implications for childhood lead poisoning prevention efforts. In November 2010, the advisory committee initiated a work group to recommend new approaches, terminology, and strategies for defining elevated BLLs among children. Under the Safe Drinking Water Act, EPA is responsible for regulating contaminants that may pose a public health risk and that are likely to be present in public water supplies, including lead. EPA’s Lead and Copper Rule established a 15 parts per billion (ppb) lead action level as a regulatory standard for water utilities in an effort to prevent and mitigate the adverse health consequences resulting from elevated lead levels in drinking water. Water systems must sample tap water at locations that are at high risk of lead contamination, generally because they are served by lead service lines or are likely to contain lead solder in the household plumbing. If more than 10 percent of the samples at residences contain lead levels over 15 ppb, the water systems must take action to lower these levels, such as replacing lead service lines in the distribution system or treating water to reduce its corrosion of the service lines, and notify EPA and residents. The District’s Water and Sewer Authority owns and operates a system that delivers water—produced by the U.S. Army Corps of Engineers Washington Aqueduct—to customers in the District. In 2000, the Washington Aqueduct began to use chloramine instead of chlorine in its disinfection process. This change likely contributed to elevated water lead levels. By late 2001, the Water and Sewer Authority became aware that the levels of lead in the District’s tap water were above EPA’s limit of 15 ppb, and it notified EPA of that fact in August 2002. Beginning in 2002, the Water and Sewer Authority notified its customers of the elevated water lead levels by issuing notices, distributing educational brochures, and holding public meetings. In the fall of 2003, the Water and Sewer Authority requested assistance from DCDOH in responding to District residents’ inquiries about the health effects of the elevated water lead levels. District residents, including infants and children, would have been exposed to elevated levels of lead in tap water during this period if they used unfiltered water for drinking, cooking, or preparing infant formula or juice. Staff from NCEH, along with individuals from DCDOH and the U.S. Public Health Service, contributed to CDC’s investigation on the effect of lead in the District’s tap water on the BLLs of residents, which was presented in the April 2, 2004, MMWR article. The 2004 MMWR article reported the results of two analyses from CDC’s investigation, which was conducted in February and March 2004. (See app. I for a copy of the 2004 MMWR article.) The first analysis was conducted to identify trends in BLLs in District residents before and after the changes in the water disinfection process. The second analysis was conducted to determine whether residents in homes with the highest water lead levels (300 ppb or greater) had BLLs at or above CDC’s level of concern of 10 μg/dL. The summary statement of the 2004 MMWR article’s findings noted that the elevated water lead levels might have contributed to a small increase in BLLs among District residents. The article’s Editorial Note section opened with a sentence that incorrectly stated the results of the first analysis. The sentence read, “The findings in this report indicate that although lead in tap water contributed to a small increase in BLLs in D.C., no children were identified with BLLs ≥ 10 μg/dL, even in homes with the highest water lead levels.” The statement that “no children were identified with BLLs ≥ 10 μg/dL” was incorrect, relative to the first analysis. Since the 2004 MMWR article was published, CDC officials have said that in its first analysis some children were identified with BLLs ≥ 10 μg/dL, which is CDC’s level of concern for children. The last part of the statement indicating that none of the children in homes with the highest water lead levels had BLLs > 10 μg/dL was correct, in that none of the 30 children in the second analysis had BLLs that reached CDC’s level of concern, according to CDC officials. While the 2004 MMWR article discussed some limitations to its findings, it did not discuss other limitations that addressed how information in the 2004 MMWR article could be used. For example, it did not state that the article should not be used to make conclusions about the contribution of lead in tap water to BLLs in the District. The statement in the 2004 MMWR article that incorrectly links the results of the two analyses in the same editorial note and the incomplete description of the limitations to the article’s findings have resulted in this information being interpreted in the press and by others in ways other than as CDC intended. For example: In a May 2004 hearing before the House Committee on Government Reform, some business and environmental advocates included references to the 2004 MMWR article to (1) support their assertion that the elevated water lead levels did not warrant a panicked reaction in the District or (2) draw conclusions about the relationship between BLLs and water lead levels in the District, which CDC later stated were inappropriate. In July 2004, a newspaper article from a major metropolitan city that was experiencing elevated lead levels in schools’ tap water included information about the 2004 MMWR article’s findings to support statements that downplayed the seriousness of the effect of elevated water lead levels in the city on the health of children. In a February 2008 fact sheet, the Water and Sewer Authority referenced the 2004 MMWR article and included statements that gave the impression that the health of District children had not been affected by elevated lead levels in the District’s tap water. In February 2009, the General Manager of the Water and Sewer Authority was quoted in a newspaper article as saying that CDC’s view was that residents’ health had not been affected by elevated water lead levels in the District. As recently as December 2010, news articles in the District reported that in the 2004 MMWR article CDC indicated that it found no evidence of measurable or significant harm to the public health of District children from elevated lead levels in tap water. In addition, CDC officials have recognized that the 2004 MMWR article may have led people to conclude that there was no danger to children from the elevated water lead levels. Although CDC does not have a policy to monitor the use of or clarify information in public health publications, such as the information in the 2004 MMWR article, the agency issued statements to address confusion it created related to elevated lead levels in the District’s tap water. However, as of January 2011, the agency had no plans to publish an overview of the current knowledge about the effects of lead in tap water on BLLs in children. Specifically, CDC has not published an overview of what is known and not known about tap water as a source of lead exposure and the potential health effects on children, as suggested by the CDC internal incident analysis. CDC officials told us that although the agency does not have a policy to monitor the use or clarify interpretations of information in public health publications, such as the 2004 MMWR article, the agency has issued statements to address confusion it created related to the 2004 MMWR article. Specifically, agency officials said they have taken some actions since 2006 to address confusion CDC created about the 2004 MMWR article when they became aware of specific instances of confusion. For example: In July 2006, a CDC official was interviewed for an article published in an environmental science journal and provided information to address public statements attributed to a health advisor for the District’s Water and Sewer Authority that incorrectly characterized information from the 2004 MMWR article. The CDC official stated that the 2004 MMWR article did not say that drinking water with very high water lead levels, such as those found in some District homes, was safe. In February 2008, a CDC official corresponded with the District’s Water and Sewer Authority officials about a statement in a February 2008 fact sheet published by the water authority that incorrectly characterized information in the 2004 MMWR article. Specifically, the CDC official noted that the fact sheet misstated the conclusions of the 2004 MMWR article and gave the impression that the health of District residents had not been affected by elevated lead levels in the tap water. The CDC official requested that the statement be corrected. In April 2009, the Director of NCEH sent a letter to the General Manager of the water authority noting that this correction and others had not been made and once again asked that statements published in the fact sheet be corrected to accurately reflect the conclusions in the 2004 MMWR article: that because no threshold for adverse health effects in young children had been demonstrated, public health interventions should focus on eliminating all lead exposures in children. In 2009, the Chief of the Healthy Homes and Lead Poisoning Prevention Branch contacted officials responsible for drinking water safety in Seattle and New York City to discuss reports that officials were quoted in newspaper articles in those localities and had mischaracterized information in the 2004 MMWR article to downplay the effect of lead in water and that these cities had relaxed their drinking water standards based on the 2004 MMWR article. The CDC official said that she contacted the officials to clarify the 2004 MMWR article’s message about the public health effect of elevated lead levels in the District’s tap water and was assured that they had not used the 2004 MMWR article to make any changes in their drinking water standards. More recently, CDC sent a letter to state and local CLPPP managers, published articles in the MMWR, and contacted District newspaper officials to address confusion it created related to the 2004 MMWR article. Specifically: In May 2010, CDC provided clarifying information in a letter to state and local CLPPP managers. (See app. II for a copy of the May 2010 letter.) The Chief of the Healthy Homes and Lead Poisoning Prevention Branch sent a letter dated May 20, 2010, to state and local CLPPP managers saying that the first sentence in the Editorial Note section in the 2004 MMWR article incorrectly stated the results of the first analysis, as some children were identified with BLLs above 10 μg/dL. Additionally, the letter presented results of a 2009 analysis that included new BLL data that had not been available to CDC in 2004. The letter further stated that the results of this new analysis confirmed the original finding, which CDC stated was that lead in water was associated with an increase in BLLs. The letter also restated CDC’s intended message presented in the 2004 MMWR article— that no safe blood lead level had been identified and all sources of lead exposure should be controlled or eliminated. The letter was also posted on the CDC Web site. On May 21, 2010, CDC issued a Notice to Readers in the MMWR providing the same information about the 2009 analysis and addressing the confusion CDC created related to the 2004 MMWR article. (See app. III for a copy of the May 21, 2010, MMWR Notice to Readers.) On June 25, 2010, CDC issued a Notice to Readers in the MMWR noting the limitations of the results of the second analysis in the 2004 MMWR article. (See app. IV for a copy of the June 25, 2010, MMWR Notice to Readers.) The Notice to Readers stated that the results of the second analysis should not be used to (1) make conclusions about the contribution of lead in tap water to BLLs in the District, (2) predict what might occur in other situations where lead levels in tap water are high, or (3) determine safe levels of lead in tap water. In December 2010, CDC officials said that they contacted a District newspaper when it published news reports that included misinterpretions of the results of the 2004 MMWR article. CDC officials said that they contacted the newspaper the same day that the first news report was published, and for several days thereafter when additional news reports were published, to request clarifications. CDC officials told us that they also had submitted a letter to the newspaper to provide more information to help ensure that the public correctly understood the 2004 MMWR article’s intended message. The letter was published in December 2010 and stated that CDC’s opinion on the health impact of lead in the District’s water supply has not changed and that a new study reports what the agency has been saying since 2004—the presence of lead service lines increases the BLLs in the District’s children. Although CDC has taken actions to address confusion specific to the 2004 MMWR article, as of January 2011, CDC had not taken action to publish an overview of the current knowledge about the contribution of elevated lead levels in tap water to BLLs in children and the associated health effects. The 2010 internal incident analysis of CDC’s involvement in and response to issues surrounding elevated water lead levels in the District noted that because the relative contribution of tap water to elevated BLLs in children has become more apparent as exposure to lead paint and leaded gasoline has been reduced or eliminated, a systematic evaluation of the relative contribution of tap water to elevated BLLs should be conducted. Specifically, the internal incident analysis suggested that CDC conduct such an evaluation and publish the information in an article in the MMWR Recommendations and Reports that would serve as a position paper covering the issues of lead in municipal water supplies and summarizing what is known and not known about its contribution to historic and contemporary BLLs in children. A CDC official said that as of January 2011, CDC had no plans to conduct such an evaluation and publish an overview on the effects of lead in water on BLLs in children in the MMWR Recommendations and Reports. CDC noted that while the agency does not lack the authority to undertake such an evaluation, the agency believes that such an evaluation is better suited to EPA, given EPA’s responsibility, regulatory authority, and expertise. The agency also noted that EPA is currently in the process of reviewing EPA’s regulations for the control of lead and copper in drinking water. CDC noted that the agency could provide technical assistance to EPA and would consider publishing an article after the EPA review is complete. However, publishing an article in the MMWR Recommendations and Reports on the latest findings regarding the relationship between BLLs and lead in water could be of assistance to EPA. Moreover, it would allow CDC, in a timely manner, to address any remaining confusion related to the health effects of lead in water in a venue targeted to CDC’s audience. Because CDC has not published an overview of the health effects of lead in water in the MMWR Recommendations and Reports, clinicians and state and local health officials who look to CDC for comprehensive information on public health issues may be uncertain about what is known and not known about the contribution of elevated lead levels in tap water to BLLs in children. CDC officials told us they had begun an initiative and revised procedures to help ensure the accessibility and clarity of CDC public health communications prior to publication, both agencywide and in NCEH. Specifically, an official from the Office of the Director told us that the CDC Office of the Associate Director of Science has begun an initiative to revise existing procedures to help ensure that information that CDC publishes, such as guidelines and recommendations, is easily accessible by a common portal on CDC’s Web site. As of January 2011, CDC officials were still determining what type of CDC products and communication methods would be included in the initiative. In addition, CDC officials told us that NCEH, the center responsible for lead poisoning prevention programs and the 2004 MMWR article, had revised its clearance procedures for certain products, including those submitted to the MMWR, in an effort to ensure that the information presented is accurate and clear. CDC officials said that the revised NCEH clearance procedures are more rigorous and systematic and include requirements for additional peer review of some products, as well as review of some products by the Office of the Director, to help ensure that senior officials are aware of the products. For example, CDC documents that include major scientific findings or conclusions representing scientific breakthroughs or that directly contradict previous science that served as the basis for public health policy will be elevated to the Office of the Director for review. The officials said that the agency believes the initiative and revised procedures will help to mitigate the risk of other communications being subject to the type of confusion or misinterpretation surrounding the 2004 MMWR article. As of January 2011, CDC did not have time frames for completing the Office of the Director’s initiative. Despite the agency’s current actions to strengthen review of CDC communications prior to publication, CDC officials said that neither the initiative nor the revised procedures will include actions to address confusion after publication. For example, if CDC becomes aware that information is being interpreted incorrectly, the procedures will not direct CDC staff to reach out to newspapers or other entities that have published the information to request corrections or clarifications. The importance of having procedures for this type of outreach was noted in the internal incident analysis, which stated that when CDC messages are not on target or are misinterpreted, such as happened in reaction to the 2004 MMWR article, CDC should respond in appropriate visible forums to publicly and expeditiously correct itself or correct those who are interpreting the message. Further, neither the initiative nor the revised procedures will include any postpublication review of certain types of communications that are similar to the 2004 MMWR article, such as those that are published in an expedited time frame and address urgent or high-profile issues, to determine whether corrections or clarifications are needed based on how the communications have been interpreted or used. Because CDC does not have procedures for addressing confusion after publication, the agency runs the risk that its staff will provide inconsistent responses to interpretations of its information that differ from what CDC intended. Although CDC has taken some belated actions to clarify confusion related to the 2004 MMWR article on BLLs of residents in the District, the agency does not plan to publish a comprehensive review of the role of tap water as a source of lead exposure that would communicate what is known about the contribution of lead in water to elevated BLLs in children. A goal of the Healthy People 2020 initiative is to eliminate elevated BLLs in children. Although significant progress has been made in reducing lead exposure from lead-based paint and leaded gasoline, CDC has an opportunity to refocus its efforts toward accomplishing this Healthy People 2020 goal and to make a significant contribution to scientific literature by clearly describing what is known about the effect of lead in tap water on BLLs in children. CDC’s credibility as the nation’s premier public health agency relies on presenting accurate, reliable, and timely information to the public. Information that is inaccurate or unclear in a CDC public health publication could result in confusion—such as resulted when some readers understood the 2004 MMWR article to state that elevated lead levels in tap water were not a concern in the District or in their area—and could undermine the agency’s credibility. The potential for presenting confusing information may increase when the agency has to respond quickly, as it did when it published the 2004 MMWR article 6 weeks after the DCDOH requested CDC’s assistance. When CDC presents potentially confusing information and does not respond in a timely or consistent fashion to clarify confusion following publication of a public health product, the agency runs the risk that an incorrect interpretation of the intended message could put the public at risk of adverse health effects, such as those that result from elevated water lead levels. CDC can mitigate the risk of such misinterpretations as well as the resulting risk to its credibility by developing procedures that allow it to address confusion in a timely, consistent manner. We are recommending that the Director of CDC take two actions, the first to clarify confusion about the contribution of lead in tap water to elevated BLLs, and the second to improve the clarity of CDC’s published information on public health issues. 1. Publish an article in an MMWR Recommendations and Reports that conveys what is known and not known about tap water as a source of lead exposure and communicates the potential health effects in children of elevated lead levels in water in consultation with EPA, as appropriate. 2. Develop procedures to review previously published information and determine whether additional information should be published to help ensure the correct understanding of the public health message. The procedures could include criteria to use when deciding how to respond in certain situations, such as the event in the District, in which CDC learns of confusion about the public health message and determines that clarification or additional information should be published or CDC issues or releases a product in an expedited time frame or based on uncertain or incomplete information and determines additional information should be published to clarify the original public health message, even if there is no evidence of confusion. CDC reviewed a draft of this report and provided written comments, which are reprinted in appendix V. CDC generally concurred with our recommendations and submitted general comments on the draft. CDC agreed with our first recommendation to publish an article in an MMWR Recommendations and Reports. While CDC previously stated that it had no plans to publish such an article, it stated in its written comments that it now plans to publish an article in an MMWR Recommendations and Reports that will focus on what is known about tap water as a source of lead exposure and summarize the potential health effects in children from lead exposures. Related to our second recommendation to develop procedures to review previously published information and determine whether additional information should be published to help ensure the correct understanding of the public health message, CDC said it planned to adopt several procedures for taking action when the agency becomes aware of confusion about its message. CDC’s written comments indicated that these procedures will be effective when approved by the CDC Director. Specifically, CDC stated that when appropriate, it may take actions to address significant errors of understanding or perception resulting from public health information disseminated by the agency. For example, for errors of understanding or perception in which there is a persistent, broad, or otherwise significant misinterpretation of information in a public health product, CDC will present the scientific conclusions in clear language in several ways, such as a posting on the CDC Web site or by direct outreach to the news and electronic media, including via press releases or letters to the editor. However, within these procedures, CDC did not explicitly address situations where CDC issues or releases a product in an expedited time frame or based on uncertain or incomplete information and determines additional information should be published to clarify the original public health message, even if there is no evidence of confusion. It is important that CDC take this additional step in order to help ensure that the agency can address confusion in a timely manner and thereby mitigate risk to the public’s health or the agency’s credibility. CDC also provided technical comments, which we incorporated as appropriate. As agreed with your office, unless you publicly announce the contents of this report earlier, we plan no further distribution until 30 days from the report date. At that time, we will send copies to the Secretary of Health and Human Services and other interested parties. The report also will be available at no charge on the GAO Web site at http://www.gao.gov. If you or your staff have any questions about this report, please contact me at (202) 512-7114 or at [email protected]. Contact points for our Offices of Congressional Relations and Public Affairs may be found on the last page of this report. Other major contributors to this report are listed in appendix VI. On April 2, 2004, the Centers for Disease Control and Prevention (CDC) published the following article in the Morbidity and Mortality Weekly Report, which presented results of the investigation on the effect of lead in the District’s tap water on the blood lead levels of residents. Additionally, in 2010 CDC added the information contained in the box under the article’s title. The article is presented here in its electronic version, which was accessed from CDC’s Web site. On May 20, 2010, the Centers for Disease Control and Prevention (CDC) sent the following letter to state and local Childhood Lead Poisoning Prevention Program managers to address confusion related to the first sentence in the Editorial Note section of the 2004 Morbidity and Mortality Weekly Report article, which contained an incorrect statement. Additionally, the letter presented results of a recent analysis that included new blood lead level data that had not been available to CDC in 2004. The letter is presented here in its electronic version, which was accessed from CDC’s Web site. On May 21, 2010, the Centers for Disease Control and Prevention (CDC) published the following Notice to Readers in the Morbidity and Mortality Weekly Report (MMWR) to clarify information about the first sentence in the Editorial Note in the 2004 MMWR article and to present results of a recent analysis that included new blood lead level data that had not been available to CDC in 2004. The Notice to Readers is presented here in its electronic version, which was accessed from CDC’s Web site. On June 25, 2010, the Centers for Disease Control and Prevention (CDC) published the following Notice to Readers in the Morbidity and Mortality Weekly Report (MMWR) that noted the limitations of the results of an analysis in the 2004 MMWR article. The Notice to Readers is presented here in its electronic version, which was accessed from CDC’s Web site. In addition to the contact named above, Karen Doran, Assistant Director; April W. Brantley; Natalie Herzog; Amy C. Leone; Lisa Motley; and Roseanne Price made key contributions to this report. | In February 2004, the Centers for Disease Control and Prevention (CDC) was asked to assess the effects of elevated lead levels in tap water on Washington, D.C., residents. In April 2004, CDC published the results. However, an inaccurate statement and incomplete descriptions of the limitations of the analyses resulted in confusion about CDC's intended message. GAO was asked to examine (1) CDC's actions to clarify its published results and communicate current knowledge about the contribution of lead in tap water to elevated blood lead levels (BLL) in children and (2) CDC's changes to its procedures to improve the clarity of the information in its public health communications. GAO reviewed CDC communication policies and procedures and interviewed CDC officials. CDC officials told GAO that although the agency does not have a policy to monitor the use of or clarify information in public health publications, the agency took actions to address confusion it created related to the 2004 Morbidity and Mortality Weekly Report (MMWR) article about elevated lead levels in Washington, D.C., tap water. For example, in 2008, CDC officials contacted District of Columbia Water and Sewer Authority officials requesting corrections to a statement in a fact sheet published by the water authority that incorrectly characterized information from the 2004 MMWR article. In addition, CDC also published articles in the 2010 MMWR intended to clarify the confusion, such as a June 25, 2010, article that discussed limitations about how information in the 2004 article could be used. While CDC took these actions, among others, to clarify confusion about the effect of elevated lead levels in District tap water, as of January 2011, CDC had no plans to publish an overview of the current knowledge about the contribution of elevated lead levels in tap water to BLLs in children, as suggested by a CDC internal incident analysis of issues surrounding the 2004 MMWR article. CDC officials told GAO they had begun an initiative and revised procedures designed to help ensure the accessibility and clarity of CDC public health communications, both agencywide and in the National Center for Environmental Health, the center responsible for lead poisoning prevention programs. For example, under the new initiative, CDC will revise existing procedures to help ensure that information that CDC publishes, such as guidelines and recommendations, is easily accessible by a common portal on CDC's Web site. While the initiative and revised procedures focus on making CDC information more accessible and on preventing errors or unclear statements in CDC communications, they do not include actions to address confusion that may arise after information is published, such as occurred with the 2004 MMWR article. Without agency procedures specifically addressing how and when to take action about confusion after publication, CDC runs the risk of inconsistent responses across the agency when its published information is not interpreted as CDC intended. CDC's mission to promote the nation's public health relies on its credibility in presenting accurate, reliable, and timely information. Communicating the agency's current knowledge about the health effects of lead levels in tap water and developing procedures that allow it to address confusion in a timely, consistent manner could improve the public's understanding of the effect of lead in water and help CDC mitigate the risk of confusion in other situations and protect its credibility. GAO is making two recommendations to CDC: (1) publish an article providing a comprehensive overview of tap water as a source of lead exposure and communicating the potential health effects on children and (2) develop procedures to address any confusion after information is published. CDC generally concurred with GAO's recommendations. For the second recommendation, while CDC described procedures it is developing, the agency did not explicitly address all components of the recommendation. |
The federal government is using a risk-management strategy for reducing its fiscal exposure to climate change that involves providing technical assistance to state, local, and private sector decision makers. Decision makers from all levels of government and the private sector use different types of climate information in their planning processes to reduce the potential impacts of climate change. Climate-related technical assistance for adaptation—adjustments to natural or human systems in response to actual or expected climate change—is a part of a risk-management strategy to help protect vulnerable infrastructure and communities that might be affected by changes in the climate. Such assistance includes, for example, raising river or coastal dikes to protect infrastructure from sea level rise, building higher bridges, and increasing the capacity of storm water systems. One way to reduce the potential impacts of climate change is to build the best available climate information into existing federal, state, local, and private sector planning processes. As discussed in our February 2015 High-Risk update, a key role for the federal government is to provide technical assistance to decision makers to help them translate available climate- related data into the information they need for such planning processes. The President’s June 2013 Climate Action Plan and November 2013 Executive Order 13653 drew attention to the need for improved technical assistance. For example, the executive order directs numerous federal agencies, supported by USGCRP, to work together to develop and provide authoritative, easily accessible, usable, and timely data, information, and decision-support tools on climate preparedness and resilience. Risk management is not a new concept, and it is used extensively almost anywhere decision makers are faced with incomplete information or unpredictable outcomes that may have negative impacts. Broadly defined, risk management is a strategic process for helping decision makers assess risk, allocate finite resources, and take action under conditions of uncertainty. The International Organization for Standardization standards on risk management recommend that organizations such as federal agencies develop, implement, and continuously improve a framework for integrating risk management into their overall planning, management, reporting processes, and policies. For risk management to be effective, these standards state that an organization should comply at all levels with the following principles: Risk management is not a stand-alone activity that is separate from the main activities and processes of the organization. Risk management is part of the responsibilities of management and is an integral part of all organizational processes, including strategic planning and all project and change management processes. Risk management is part of decision making. Risk management helps decision makers make informed choices, prioritize actions, and distinguish among alternatives. Risk management explicitly addresses uncertainty. Risk management explicitly takes account of uncertainty, the nature of that uncertainty, and how it can be addressed. Risk management is based on the best available information. The inputs to the process of managing risk are based on information sources such as historical data, experience, stakeholder feedback, observation, forecasts, and expert judgment. However, decision makers should inform themselves of, and should take into account, any limitations of the data or modeling used or the possibility of divergence among experts. As summarized by a 2011 World Meteorological Organization report on climate information, reducing the risks and realizing the opportunities of climate change require making good decisions based on reliable and appropriate information about past, present, and future climate, as well as properly integrating that information into the decision-making process. The report also states that appropriate use of climate information can help individuals make more informed short- and medium-term decisions relating to their livelihoods and can help organizations and businesses reduce uncertainty in the long term. Governments also need to choose adaptation measures that reduce vulnerability to climate change, according to the report. Decision makers from all levels of government and the private sector use different types of climate information in their planning processes to reduce the potential impacts of climate change. The climate information needs of decision makers are diverse, and the effective use of climate information depends on the circumstances of the decision maker, as stated in the 2011 World Meteorological Organization report on climate information. To be useful, climate information must be tailored to meet the needs of each decision maker, such as an engineer responsible for building a bridge in a specific location, a county planner responsible for managing development over a larger region, or a federal official managing a national-scale program. Further complicating matters, decision makers need climate information at different timescales corresponding to the short, medium, or long-term nature of their planning processes. The 2011 World Meteorological Organization report stated that decision makers need access to expert advice and support to help them select and properly apply climate information. According to a 2010 National Research Council report on making informed decisions about climate change and our October 2009 report on climate change adaptation, most decision makers need a basic set of information to understand and make choices about how to adapt to climate change. This set of information includes the following: Information and analysis about observed climate conditions. This includes information on, for example, temperature, precipitation, drought, storms, and sea level rise and how they may be changing in the local area. This type of information can be most easily conveyed by graphs and maps with some statistics on trends, variability, and data reliability. Information about observed climate impacts and vulnerabilities. Decision makers will need site-specific and relevant baselines of environmental, social, and economic impacts and vulnerabilities resulting from observed changes in the climate against which past and current decisions can be monitored, evaluated, and modified over time. Projections of what climate change may mean for the local area. This includes, for example, projections based on easily understandable best- and worst-case scenarios with confidence and probability estimates and examples of potential climate impacts. The projections may need to be downscaled from complex global-scale climate models to provide climate information at a geographic scale relevant to decision makers. Then, the information would need to be translated into impacts at the local level, such as how increased stream flow for a particular river may increase flooding. Information on the economic and health impacts of climate change. Observed and projected local impacts must be translated into costs and benefits, since this information is needed for many decision-making processes. Agencies across the federal government collect and manage many types of climate information, including observational records from satellites and weather monitoring stations on temperature and precipitation, among other things; projections from complex climate models; and other tools to make this information more meaningful to decision makers. For example, over 750 federal climate-related datasets were publicly accessible through the www.data.gov/climate web portal as of August 2015. The term “climate information system” means a systematic approach for coordinating the development, archiving, and use of such climate information by decision makers, with defined roles for federal agencies and nonfederal entities such as academic institutions. A climate information system coherently organizes different types of climate information and facilitates technical assistance to help decision makers understand how to integrate climate information into their planning processes. Many federal efforts are under way, as the federal government has begun to address the climate information needs of decision makers through various agency activities and government-wide efforts. Coordination is evident, but these efforts are fragmented and do not fully meet the needs of federal, state, local, and private sector decision makers, according to our reports, various studies, and interviews with stakeholders. Many federal climate information efforts are under way, including individual agency activities and government-wide efforts. On February 23, 2015, the Congressional Research Service (CRS) reported that since 2009, federal initiatives have generally increased the priority, number of participants, and specificity of products and actions aimed at climate change adaptation. For example, as of December 2014, almost 40 federal departments and agencies produced climate change adaptation plans and metrics to evaluate adaptation performance, according to this CRS report. Our February 2015 High-Risk update also shows how the President’s June 2013 Climate Action Plan and various executive orders, task forces, and strategic planning documents have identified climate change as a priority. Some agencies have been focusing on how to help their clients understand climate risks and adaptation planning. For example, since 2006, NOAA’s National Integrated Drought Information System has incorporated climate information into drought forecasts to help federal, state, local, and private sector decision makers—such as municipal water supply managers—understand the risk and impact of droughts. Other agency efforts, such as the U.S. Department of Agriculture’s Climate Hubs, the Department of the Interior’s Landscape Conservation Cooperatives and Climate Science Centers, and NOAA’s Regional Integrated Sciences and Assessments program also are designed to help decision makers account for climate information in existing planning processes. USDA Climate Hubs: The U.S. Department of Agriculture (USDA) established regional Climate Hubs to deliver science-based knowledge and practical information to farmers, ranchers, and forest landowners to support decision making related to climate change. Interior’s Landscape Conservation Cooperatives: The Department of the Interior developed a network of collaborative Landscape Conservation Cooperatives composed of federal, state, local, and tribal governments; nongovernmental organizations; universities; and interested public and private organizations to, among other things, develop and provide the science and technical expertise needed to apply climate data in natural resources decision making, such as conservation strategies for sensitive habitats. Interior’s Climate Science Centers: Climate Science Centers partner with natural and cultural resource managers to provide science that helps fish, wildlife, ecosystems, and the communities they support adapt to climate change by, among other things, providing climate, water, and ecosystem modeling to decision makers. National coordination and management for the Climate Science Centers is provided by the U.S. Geological Survey’s National Climate Change and Wildlife Science Center. NOAA’s Regional Integrated Sciences and Assessments program: NOAA’s Regional Integrated Sciences and Assessments program supports research teams at academic institutions that work with public and private decision makers—including local, regional, and state governments; federal agencies; tribal governments; and the business community—to among other things, enhance the use of climate information in decision making. Further, entities within the Executive Office of the President, such as CEQ and OSTP, have led specific government-wide climate information efforts such as the Climate Resilience Toolkit, the Climate Data Initiative, and USGCRP’s May 2014 Third National Climate Assessment. These efforts show how federal agencies have made some progress on better organizing within and across agencies. For example—in response to the 2013 President’s Climate Action Plan and Executive Order 13653— federal agencies led by OSTP and CEQ created the Climate Resilience Toolkit in 2014, which is a website designed to provide scientific tools, information, and expertise to help people manage their climate-related risks and opportunities and improve their resilience to extreme events. In addition, USGCRP’s May 2014 National Climate Assessment summarizes the impacts of climate change on the United States, now and in the future. A team of several hundred experts guided by a 60-member federal advisory committee produced the report, which was extensively reviewed by the public and experts, including federal agencies and a panel of the National Academy of Sciences. In addition, a large stakeholder network was developed in support of the May 2014 National Climate Assessment, and many of the stakeholders involved found the process and product very useful, according to federal officials. Figure 1 shows selected coordination mechanisms for federal climate change activities, and reflects the complex system of interagency councils, committees, and working groups that currently coordinate the climate-related activities of individual agencies. The dashed boxes in figure 1 reflect government-wide activities related to climate information. Current federal efforts are fragmented and do not fully meet the climate information needs of federal, state, local, and private sector decision makers, according to our recent reports; studies from the National Academies and other organizations; and interviews with knowledgeable stakeholders. According to several officials who coordinate federal climate information efforts, the climate information needs of decision makers are not being fully met because of the lack of a mandate for climate information services. Current federal climate information efforts are fragmented, according to our recent reports, various studies, and interviews with knowledgeable stakeholders. As we reported in our February 2015 High-Risk update, federal climate information efforts have begun to focus on providing technical assistance to federal, state, local, and private sector decision makers so they can make more informed choices about how to manage the risk posed by potential climate impacts. However, our 2015 High- Risk update—based on our recent work—found that climate information exists in an uncoordinated confederation of networks and institutions. The federal government’s climate information—composed of observational records from satellites and weather monitoring stations, projections from complex climate models, and other tools—is fragmented across many individual agencies that use the information in different ways to meet their respective missions. That climate information is found across various agencies is not surprising and is expected given the far-ranging climate information needs of decision makers, according to federal officials. They said that federal agencies are doing exactly what they are supposed to be doing consistent with their missions and, while there is fragmentation, there is also coordination and collaboration within and across agencies. A November 2014 report by the State, Local, and Tribal Leaders Task Force on Climate Preparedness and Resilience identified “silos” among and within federal agencies as a barrier to climate resilient planning. Stakeholders we interviewed similarly noted the need to reduce fragmentation of federal climate information efforts. For example, according to stakeholders from the climate modeling community, decision makers are vastly underserved by the current ad hoc collection of federal climate information services. Further, another stakeholder with experience managing federal climate information programs stated that the federal government’s current efforts are uncoordinated and inefficient and that federal agencies have created their own climate programs. According to this stakeholder, these programs are uncoordinated, operate as separate information systems, and fail to share information and learn from each other, partly because of turf battles between them. We found in our February 2015 High-Risk update that existing federal actions and strategies do not clearly define the roles, responsibilities, and working relationships among federal, state, local, and private sector entities, or how such efforts will be funded, staffed, and sustained over time. According to our recent reports, other studies, and interviews with knowledgeable stakeholders, the climate information needs of federal, state, local, and private sector decision makers are not being fully met, which hinders their planning efforts. The International Organization for Standardization standards on risk management recommend that organizations such as federal agencies develop, implement, and continuously improve a framework for integrating risk management into their overall planning, management, reporting processes, and policies. They also state that risk management is based on the best available information. However, as we found in our February 2015 High-Risk update, federal, state, local, and private sector decision makers may be unaware that climate information exists or unable to use what is available, making it harder to justify the current costs of incorporating climate change into planning efforts for less certain future benefits. For example, in September 2014, we found that USDA has made few efforts to quantify the costs and returns of actions that could help farmers make both short- and long-term decisions in the face of a changing climate. Without information that is readily accessible to farmers, they may be reluctant to take action to become more resilient to climate change. We recommended that USDA develop and provide readily accessible information to farmers on the farm-level economic costs and returns of taking certain actions in response to climate change. USDA concurred with this recommendation and continues to make progress. For example, in July 2015, USDA announced the Climate Hubs Tool Shed—an online, searchable database of tools designed to assist these farmers and others in adapting their lands to the impacts of climate change and other risks. Further, the participants in our July 21, 2015, Comptroller General’s Forum on Preparing for Climate-Related Risks: Lessons from the Private Sector stated that the absence of consistent, authoritative climate information made it hard for private sector entities to consider climate information in planning. For example, one participant stated that there is a climate information gap at the regional level, and businesses should not be responsible for making scientific determinations about what climate information to use. Various studies we reviewed and stakeholders we interviewed also show how the climate information needs of decision makers are not being met. For example, a 2012 National Research Council study on climate models reported that decision makers need to find and work with someone with the ability to access climate data and interpret it in the context of a specific decision maker’s need. In many cases, according to the 2011 World Meteorological Organization report on climate information, the knowledge exists to help decision makers but is not converted into services they can access and use. For example, according to one stakeholder we interviewed from academia, the federal government does an excellent job collecting climate observations and archiving quality climate data, but it does not communicate or translate this information in ways useful for decision makers. As a result, according to this stakeholder, decision makers do not understand how climate information is relevant to them and do not know how to incorporate it into their planning efforts. Federal officials responsible for coordinating government-wide climate information efforts told us that the federal government does not know what information decision makers want or need, and decision makers generally do not know what information is available or what information they need to account for climate change in their planning. According to several officials who coordinate federal climate information efforts, the climate information needs of decision makers are not being fully met because of the lack of a mandate for climate information services. Further, according to certain federal officials, agency climate programs were created to meet individual agency missions and are not necessarily focused on the needs of other decision makers. Federal efforts only recently transitioned to creating government-wide infrastructure for providing climate information to decision makers, according to these officials. They said that, in the current federal structure, the provision of climate information is an inherently interagency activity that relies on the cooperation and shared resources of many agencies, but interagency coordination is weak by design with an inconsistent mandate to use specific climate information in federal decision making. Significant changes to this model would require structural changes in the way that the government operates. Germany, the Netherlands, and the United Kingdom have organized systems to meet the climate information needs of decision makers, according to documents we reviewed and officials we interviewed from these countries. In each climate information system we selected, the government provides direction and funding, and entities within and outside the government help translate climate information to meet decision makers’ needs, although each system is organized differently. The following descriptions of the climate information systems in Germany, the Netherlands, and the United Kingdom were based on our review of government documents describing these programs and discussions with government officials. Germany’s climate information system involves entities both within and outside of the German government, according to documents we reviewed and German officials we interviewed in February 2015. Within the German government, the Interministerial Working Group on Adaptation to Climate Change (see fig. 2), headed by the Ministry for the Environment, develops and implements Germany’s strategy to adapt to the effects of climate change—known as the German Adaptation Strategy. The strategy describes how the German government is to work with the country’s state governments and nongovernment groups to identify both climate risks and appropriate actions to address them. Within the Ministry for the Environment, an office called KomPass advises the German government on climate and adaptation policy. Specifically, KomPass evaluates what is known about Germany’s vulnerability to climate change, as well as the risks and opportunities climate change presents. KomPass also assists decision makers by evaluating the costs and benefits of potential adaptation strategies in Germany and sharing this information with them. The Ministry of Transport and the Ministry of Research also play key roles, according to German officials. The Ministry of Transport provides funding for the National Meteorological Service of Germany, which operates observation networks and provides climate information and climate projection data to research institutes and those who help decision makers understand the information, according to German officials. In addition, according to documents we reviewed and German officials, the National Meteorological Service’s regional climate offices help state governments develop adaptation plans and serve as channels of information to decision makers relevant to the regional offices’ area of responsibility. The Ministry of Research provides funding to nongovernment climate adaptation research institutes, according to documents we reviewed and interviews with German officials. For example, the Max Planck Institute for Meteorology develops global climate models and climate projections that are also used to develop regional-level climate projections, and the Potsdam Institute for Climate Impact Research conducts modeling and data analysis to assess socioeconomic effects of climate change. In addition, the Helmholtz Association of German Research Centres has four regional climate offices that work with decision makers to understand their needs and assist them in using the climate information. Each of the regional climate offices focuses on different regions and specific climate issues or impacts. For example, Helmholtz’s North German Climate Office focuses on changes in storms, storm surges, ocean waves, and coastal climate impacts. In addition, the publicly funded Climate Service Center 2.0—a scientific organization of the Helmholtz Association—conducts applied research and development and offers products and advisory services to decision makers in government and the private sector to address their needs in adapting to climate change, according to documents we reviewed and German officials we interviewed. The center also offers training courses for decision makers on how to use climate information, provides guidelines on modeling, and evaluates climate information portals for reliability and usefulness, according to German officials. Like Germany, the Netherlands’ climate information system involves entities within and outside of the government, but fewer entities are involved, according to documents we reviewed and government officials we interviewed in February 2015. Within the government, the Netherlands Ministry of Infrastructure and the Environment is the lead agency on climate change adaptation (see fig. 3). It develops and implements the National Adaptation Strategy, which describes the government’s priorities in adapting to the effects of climate change. The ministry provides funding to the Netherlands Environmental Assessment Agency and the Royal Netherlands Meteorological Institute, called KNMI. The Environmental Assessment Agency advises the ministry on climate and adaptation policy by identifying and evaluating risks facing the Netherlands due to climate change. KNMI conducts climate observations and modeling, and develops authoritative projections and scenarios for the climate information system. The most recent version of these scenarios is called KNMI’14. These projections are considered the authoritative source of climate information in the Netherlands, according to documents we reviewed and Dutch officials we interviewed. The projections are also used by other government agencies, by organizations that translate climate information for decision makers, and by decision makers directly, according to these documents and officials. In addition, KNMI operates a help line that decision makers can use to ask questions about climate change, according to Dutch officials. Outside the government, the Climate Adaptation Services Foundation, a foundation composed of research institutions, consultants, and an alliance of spatial planning organizations, and its predecessor, the Knowledge for Climate Research Programme, have facilitated connections between decision makers and its members, according to documents and officials. Climate Adaptation Services also offers products and services to decision makers, such as the Spatial Adaptation Knowledge Portal, which explains the effects of climate change, describes guiding principles in incorporating climate change into policy development, and showcases how others in the Netherlands are adapting to climate change. Climate Adaptation Services receives some funding from the Ministry of Infrastructure and Environment, as well as funding from decision makers who use its services, although Dutch officials told us that changes to the system are under way. The United Kingdom’s climate information system involves entities within and outside government, according to documents we reviewed and United Kingdom officials we interviewed in February 2015. The government’s Department for Environment, Food and Rural Affairs (DEFRA) in England—together with the devolved administrations in Wales, Scotland, and Northern Ireland—are responsible for leading climate adaptation efforts in the United Kingdom, such as funding the United Kingdom climate information system for adaptation, setting priorities for adaptation, and coordinating with other government and nongovernment partners (see fig.4). As required by statute every 5 years, the department publishes an assessment of climate change impacts across the United Kingdom—the Climate Change Risk Assessment—to help determine the United Kingdom’s priorities for climate change adaptation, according to these documents and officials. The policies, actions, and timelines to address these priorities are described in the National Adaptation Programme, which is also published every 5 years. In addition, the statute requires the Adaptation Sub-Committee of the Committee on Climate Change to advise the department on the preparation of the Climate Change Risk Assessment, as well as to assess the progress made toward implementing the National Adaptation Programme every two years. As a result, according to United Kingdom officials, the Adaptation Sub-Committee provides independent oversight of the climate information system. Also, the Met Office Hadley Centre—a government-funded climate science and services center—conducts climate observations and modeling, and develops authoritative projections for future climate scenarios. The most recent version of these projections is called the UK Climate Projections 2009 or UKCP09. These projections are considered the authoritative source of climate information in the United Kingdom and are used across the United Kingdom by government agencies, organizations that translate the information to meet decision makers’ needs, and decision makers themselves, according to documents we reviewed and officials we interviewed. Another government entity—the Environment Agency’s Climate Ready Support Service—leads the efforts to assist decision makers in using climate information to adapt to the effects of climate change in England. It mainly works through intermediaries outside the government, such as nonprofit organizations, consultants, universities, and trade and professional associations to translate climate information for decision makers, according to government officials. For example, the Environment Agency partially funds Climate UK, a network of regionally based nonprofits that help decision makers at the regional and local level incorporate climate information into their planning and connect with intermediaries. In addition, the Climate Ready Support Service supports the Local Government Association, which works with local authorities on adapting to climate change. Also, outside the government are the research councils, such as the Natural Environment Research Council, that support climate modeling efforts by collaborating with the Met Office Hadley Centre. U.S. federal climate information efforts could be improved by incorporating key organizational and data elements, according to our reports on adaptation and interagency collaboration, National Academies and other studies, observations from site visits to other countries with climate information systems, and interviews with U.S. and international stakeholders. Specifically, the key organizational and data elements that could improve federal climate information efforts are (1) a focused and accountable organization, (2) authoritative data, and (3) technical assistance. A focused and accountable organization that engages in key practices of collaboration would improve federal climate information efforts, according to our reports on adaptation and interagency collaboration, National Academies and other studies, observations from site visits to other countries with climate information systems, and interviews with U.S. and international stakeholders. Collaboration between entities is necessary to address complex, high-risk challenges like climate change. In October 2005, we found key practices to enhance and sustain interagency collaboration include agreeing on roles and responsibilities and establishing mutually reinforcing or joint strategies. In addition, in September 2012, we found that such interagency efforts benefit from clearly defined short-term and long-term outcomes, common terminology and definitions, agreement on how the effort will be funded and staffed, and committed leadership. Other reports also cited the importance of collaboration. For example, the President’s State, Local, and Tribal Leader’s Task Force on Climate Preparedness and Resilience stated in 2014 that coordination among and within federal agencies is vital to ensure that decision makers can navigate federal climate information products and resources. In addition, federal officials and stakeholders we interviewed in the United States and the three countries we visited told us that any successful collaboration on climate information between federal and nonfederal entities required well-defined and clear roles and responsibilities. Further, our October 2005 collaboration report states that agencies must have a clear and compelling rationale to work together to overcome significant differences in agency missions, cultures, and established ways of doing business. According to this report, the compelling rationale for agencies to collaborate can be imposed externally by law or directive or can come from the agencies’ own perceptions of the benefits they can obtain from working together. Federal officials we interviewed who are responsible for coordinating federal climate information programs stated that they need a mandate that allows agencies and partner organizations to perform the functions necessary to improve federal efforts. The reason, these officials said, is that agencies have other missions and, in some cases, are precluded from participating in climate change efforts. Some officials in the United Kingdom stated that people will act if they have a specific duty to manage climate change risk. Similarly, government pressure for action is the backbone of Germany’s climate information system, according to some German officials. Authoritative climate data—a periodically updated set of observed and projected best available climate data for use by decision makers—would improve federal climate information efforts, according to National Research Council studies and other reports, international climate information systems, and interviews with stakeholders. Decision makers need consistent, geographically specific, and accessible information and tools to identify climate risks and support resilience planning in their communities, according to a November 2014 report by the State, Local, and Tribal Leaders Task Force on Climate Preparedness and Resilience. According to domestic and international stakeholders we interviewed, authoritative data are crucial because they define a common starting point for decision makers. However, stakeholders said that a single source of information may not be necessary, as a minimum level of certification, a “seal of approval,” could be applied to multiple data sources that meet certain criteria. Further, according to OSTP staff, centralized data are only part of the answer; there needs to be user demand for such information, and translation of those data for myriad different end users, among other factors. These staff also said that observations and projections are tools, and solely coordinating access to these tools will not, by itself, resolve the issue at hand. Various reports we reviewed and stakeholders we interviewed also emphasized that improved federal efforts should provide authoritative locally-focused information because most decisions are made at the local level. These reports and stakeholders consistently said that locally- focused information makes climate change real to decision makers where they live and work. For example, one stakeholder said that decision makers want to know about the effects of climate change in their local area, as well as the local area of their businesses and customers. German officials echoed this point, stating that locally-focused information helps the public and political leaders realize what climate change means for them where they live. However, CEQ and OSTP staff and other stakeholders cautioned that locally-focused climate projections need to be presented in the necessary regional, national, and global context. According to OSTP staff, in some cases, it may not be possible to realistically project future conditions at the local scale due to inherent limitations in the ability to understand and simulate global systems at the local level. United Kingdom officials also stated that locally-focused information is not necessary for many decisions, and the appropriate geographic scale varies depending upon the hazard and decision under consideration. Clearly organized technical assistance would improve federal climate information efforts by helping different types of decision makers—ranging from those who can define their needs to those who have limited experience using climate information—access, translate, and use climate information, according to one of our recent reports, National Academies studies, other reports, and interviews with stakeholders. In April 2013, we found that local decision makers need assistance from experts to help them translate available climate data into locally relevant information. In addition, the State, Local, and Tribal Leaders Task Force stated that the greatest need is often not the creation of new data or information, but assistance and tools for decision makers to navigate the wide array of resources already available. Federal officials, domestic stakeholders, and officials we interviewed in the three countries we visited told us that expecting decision makers to interpret and use complicated data themselves is insufficient and ineffective. For example, several stakeholders said that decision makers are unable to use climate data without significant translation and support. In addition, federal officials told us that there is no substitute for face-to-face communication with providers of technical assistance. This type of technical assistance is labor- and resource-intensive with a significant formal role for nonfederal institutions, according to federal officials, and is most effective when sustained and iterative in nature—not just scientists handing data and information to decision makers. Various options exist for providing climate information to U.S. decision makers, and these options have strengths and limitations, according to our reports, other studies, interviews with officials from countries with climate information systems, and interviews with knowledgeable stakeholders. According to a 2010 National Research Council report, successful adaptation to climate change involves federal, state, and local governments; the private sector; nongovernmental organizations and community groups; and others. The report said that the challenge is creating a framework where all of the parties work together, taking advantage of the strengths of each and ensuring that they do not get in each other’s way. According to a different National Research Council report, a formal system is critical to longevity and success because such activities are more effective when well-established organizations build trust among information users over time. Studies we reviewed and interviews we conducted with stakeholders identified six options to provide climate information to decision makers: (1) a new federal agency, (2) a single existing agency, (3) a nonprofit or FFRDC, (4) a strengthened USGCRP, (5) a strengthened OSTP or new entity within the Executive Office of the President, and (6) a federally coordinated network of regional organizations. A national climate information system with defined roles for federal agencies and nonfederal entities could emphasize the strengths and deemphasize the limitations of these different options. Table 1 presents a summary of the strengths and limitations of these options, each of which is discussed in more detail below. A new federal climate information agency would have strengths and limitations, according various studies, interviews with officials from countries with climate information systems, and interviews with knowledgeable stakeholders. Strengths of a new agency include a focused mission and consolidated expertise gathered from agencies across the federal government. One stakeholder noted that a new agency would have authority, a direct mandate, and clarity of mission. Other stakeholders said a new agency would be less likely to be pulled in multiple directions, could create a unified culture, and would be relatively easy to manage. Limitations identified by stakeholders include the potential for “turf” conflicts with existing agencies, as many climate information efforts are currently under way across the federal government, and consolidated expertise would disrupt existing relationships. First, several stakeholders said that they believed that a new climate information agency would result in serious turf battles with existing agencies. For example, according to one stakeholder, a new agency would not be successful because existing agencies would resist losing their programs. Second, a new climate information agency would disrupt existing relationships, according to various reports reviewed and stakeholders interviewed. According to the 2010 National Research Council report, it is necessary to build upon existing relationships because no single government agency or centralized unit could perform all the functions required of a climate information system. In support of this view, one stakeholder stated that establishing a new federal agency is unrealistic because the new agency would have to develop new relationships with decision makers. Experiences in other countries with climate information systems provide insight about the merits of developing a new climate information agency. None of the climate information systems we reviewed—that is, those of Germany, the Netherlands, or the United Kingdom—relies upon a single new or existing national agency to provide the entire spectrum of climate information and translation services. For example, in the United Kingdom, climate information activities for adaptation are coordinated among four government entities and a range of nongovernment entities. Similarly, multiple government entities have roles in the climate information systems of Germany and the Netherlands. A federal climate information system led by a single existing agency would also have strengths and limitations, according to various studies, interviews with officials from countries with climate information systems, and interviews with knowledgeable stakeholders. Strengths of this option are similar to those for developing a new federal agency, with one key difference—the ability to build on existing relationships instead of starting over. As with a new agency, relying on an existing agency to provide decision makers with climate information would involve a single point of contact. According to a 2010 National Academy of Public Administration report, it would be extremely valuable to have one federal agency designated to aggregate climate information and provide the best available science to support public policy decision making. One stakeholder with experience coordinating federal climate information efforts stated that a single existing agency would have an established organizational structure, resources, and relationships with federal and nonfederal entities. Another stakeholder said that relying on an existing agency would allow the agency to hit the ground running and start up quickly compared with starting a new agency. The limitations of having an existing agency lead a federal climate information system are similar to the limitations of developing a new agency—especially turf conflicts with existing agencies. In addition, no single agency has all the necessary expertise. For example, according to a stakeholder with experience coordinating federal climate information efforts, a single agency would not have the breadth of expertise and knowledge needed for a functional climate information system. Further complicating matters, according to this stakeholder, every agency wants to lead, and no agency wants to support. A related limitation is that an existing agency would already have a mandate to do other tasks. It would have to balance its old mandate with its new one—which probably would not go well, according to certain federal officials who coordinate federal climate information programs. Experiences in other countries and a recent attempt by NOAA to establish a climate information system provide insights into the feasibility of having a single agency lead U.S. efforts. None of the climate information systems we reviewed in other countries relies on a single new or existing government agency to provide the entire spectrum of climate information and technical assistance. And, in 2011, NOAA attempted, through the budget process, to organize a Climate Service to coordinate federal climate information functions. Stakeholders we spoke with generally cited this effort as illustrative of the limitations of relying on a single existing federal agency to lead a climate information system in the United States. The option of having a nonprofit or FFRDC lead a federal climate information system would also have strengths and limitations, according to various studies, interviews with officials from countries with climate information systems, and interviews with knowledgeable stakeholders. For example, a strength identified by a NOAA report describing options to organize federal climate information was that a nonprofit could operate without the burden of complex rules and regulations. A stakeholder with experience coordinating federal climate information programs said that getting this activity out of the federal government would allow a climate information system to be nimble and efficient. Another strength identified by stakeholders is that nonprofits can be funded with both federal and nonfederal dollars. Specifically, according to one stakeholder, a nonprofit would be able to spend federal and nonfederal funds and address new challenges as they arise, while the federal government has limited flexibility for spending its funds. The nonprofit option also has limitations, according to stakeholders we interviewed, including its inability to coordinate federal activities and the inability to participate in federal budget discussions. According to staff from the Executive Office of the President, a nonprofit option may not have adequate authority to deliver climate information in an authoritative and coordinated way to decision makers. For example, it would lose the “federal government stamp,” which means it would be seen as less authoritative, according to these staff. Further, one stakeholder noted that a nonprofit would struggle to get federal agencies and other organizations to cooperate because it would lack the authority to require them to do so. Also, several stakeholders said nonprofit staff would be excluded from federal budget discussions, meaning agencies would not have an incentive to work with them, and they would not be able to advocate for federal funding. Climate information systems in Germany, the Netherlands, and the United Kingdom have components similar to U.S. nonprofits or FFRDCs. However, nonprofits in these countries do not play a lead role in any of these systems and primarily perform a technical assistance or facilitator role within a larger system. For example, Climate UK—a network of regionally based nonprofits—helps decision makers at the regional and local level incorporate climate information into their planning and connect with intermediaries such as private sector contractors with climate information expertise. Climate UK is partially supported by the UK Environment Agency and partially supported by other, nongovernment funds, but it does not play a lead role in the United Kingdom’s climate information system. A strengthened USGCRP—the interagency body that coordinates the climate science activities of 13 agencies—with independent funding and additional authority for its National Coordination Office to lead a U.S. climate information system would have strengths and limitations, according to various studies, interviews with officials from countries with climate information systems, and interviews with knowledgeable stakeholders. The strengths are that it employs existing relationships with other federal agencies and nonfederal entities and uses established federal coordination mechanisms. As stated by one stakeholder with extensive experience coordinating federal climate information efforts, having a strengthened USGCRP lead a climate information system is by far the easiest option to implement because the program has experience and existing networks with state and other nonfederal stakeholders. Other stakeholders noted that USGCRP has a history of convening agencies, has close connections with the Executive Office of the President, and can participate in budget discussions. A strengthened USGCRP National Coordination Office would also have limitations, primarily related to turf conflicts with agencies and few links to decision makers. For example, according to several stakeholders, some agencies see USGCRP as an operation they do not own, and strengthening USGCRP would be very difficult because of funding and territorial conflicts between member agencies. In addition, USGCRP has historically been a research—not operational—organization, according to stakeholders we interviewed. For example, according to one agency official, it is difficult for the USGCRP National Coordination Office to be the main point of contact for a climate information system because it has not historically focused on providing information directly to decision makers. Climate information systems in other countries provide few insights as to whether a strengthened USGCRP could lead a U.S. climate information system. Germany has an interministerial working group composed of several federal ministries, but none of the international systems we reviewed supports an organization like USGCRP. Strengthening OSTP or creating a new entity within the Executive Office of the President to lead a U.S. climate information system would have strengths and limitations, according to various studies, interviews with officials from countries with climate information systems, and interviews with knowledgeable stakeholders. The primary strength of this option is that it is housed within the Executive Office of the President. For example, according to one academic stakeholder, a strengthened OSTP would provide political power and authority to a climate information system. Other stakeholders said this option would be directly connected to the President, would provide a strategic vision, and could ensure the vision’s implementation. Key limitations of a strengthened OSTP or new entity within the Executive Office of the President are the lack of long-term continuity and operational capabilities, according to stakeholders we interviewed. One stakeholder with extensive experience coordinating federal climate information activities said a strengthened OSTP is the worst option because it is too political, and changes in administrations could disrupt the continuity needed to build a sustainable system. A stakeholder from academia said this is the most worrisome option because it could lack long-term continuity and be vulnerable to disruption or dismantlement. A strengthened OSTP or new entity within the Executive Office of the President also would lack operational capabilities, according to several stakeholders. For example, one private sector stakeholder stated that OSTP staff are not with the office long enough to be effective at running long-term projects. Another stakeholder also cited low staff numbers and high turnover that make an Executive Office of the President option unsuitable for a large effort like a climate information system. Climate information systems in other countries provide few insights as to whether a strengthened OSTP or new Executive Office of the President entity could lead a U.S. climate information system. Climate information systems in Germany, the Netherlands, and the United Kingdom generally divide tasks among specific agencies or nongovernment entities and do not consolidate power in a single executive-level entity. Using the federal government to periodically convene and finance a network of nonfederal regional organizations to provide climate information to decision makers also would have strengths and limitations, according to various studies, interviews with officials from countries with climate information systems, and interviews with knowledgeable stakeholders. This option, according to the 2010 National Research Council report, is an intermediate approach, with decentralized planning and actions, but a significant role for the federal government as a catalyst and coordinator, providing information and technical resources at a national level. A key strength of this approach is the ability to connect and actively engage a broad range of decision makers, according to a 2009 report by the NOAA Science Advisory Board. For example, according to one stakeholder, this option could more easily present climate information in an appropriate context for decision makers because providers of technical assistance at the regional level would be more aware of and responsive to decision makers’ needs. Limitations of the federally coordinated network of regional organizations option include potentially inconsistent use of climate information. Specifically, decision makers in different regions may use climate information of varying quality because of the decentralized nature of this type of system, according to various documents and stakeholders we interviewed. For example, according to the 2009 NOAA Science Advisory Board report, the voice and vision of a federally coordinated network may not be coherent if regionally distributed. Further, according to this report, climate information provided through distributed partners may not be viewed as authoritative. Climate information systems in Germany, the Netherlands, and the United Kingdom all rely on some elements of a federally coordinated network of regional organizations, employing multiple entities to provide and translate climate information to different decision makers. However, Germany’s climate information system most closely resembles the federated option described here because of the sheer number of regional climate information providers. As described by one German official, the best description of the German system is a confederation of partners designed to convince decision makers to take action and facilitate implementation. Germany’s system is very decentralized with a national framework and heterogeneous local implementation, according to this official. Several German officials stated that Germany’s decentralized structure enhances the ability for scientists to communicate with local decision makers, and another said that the resulting competition is often positive, but others said it resulted in overlapping roles, coordination problems, competition, and decision-maker confusion. A national climate information system with defined roles for federal agencies and nonfederal entities could incorporate the best features and address the limitations of different options to provide climate information to decision makers, according to various studies we reviewed and interviews we conducted with knowledgeable stakeholders. These studies and stakeholders generally recognized the need to combine elements of the different options to provide climate information to decision makers— as each has relative advantages—and they called for a national climate information system with (1) federal leadership, (2) authoritative federal data and federal quality assurance guidelines, and (3) nonfederal technical assistance. Federal leadership for climate information could emphasize the ability of the strengthened OSTP option to coordinate federal activities while deemphasizing the lack of such ability and potential for turf conflicts evident in many of the other options. Based on our review of studies, international climate information systems, and interviews with stakeholders, the main approaches for motivating decision makers to use climate information are statutory requirements and strategic plans— distinctly federal actions. With respect to statutory requirements, officials within the Executive Office of the President said that a mandate is necessary for a climate information system to be successful because certain agencies would not otherwise be able to participate in climate information activities due to laws authorizing or funding their work. Likewise, some German and United Kingdom officials said that strong leadership and a mandate are necessary to make a climate information system happen. A specific law requiring various actions related to climate change—the Climate Change Act of 2008— facilitated the creation of the United Kingdom’s climate information system and provided the justification to sustain it over time, according to United Kingdom officials. Strategic plans can motivate decision makers to use climate information. In 2009, we recommended that the appropriate entities within the Executive Office of the President, in consultation with relevant federal agencies, state and local governments, and key congressional committees of jurisdiction, develop a strategic plan to guide the nation’s efforts to adapt to climate change. This plan would include the establishment of clear roles, responsibilities, and working relationships among federal, state, and local governments. Similarly, in 2010, the National Research Council recommended that the Executive Branch initiate development of a collaborative national adaptation strategy, which might take the form of a national adaptation plan. As of October 2015, the federal government had yet to develop a strategic plan for adaptation or a national adaptation strategy. In comparison, the climate information systems in Germany, the Netherlands, and the United Kingdom all have national climate adaptation plans that describe government-wide climate information for adaptation priorities. For example, according to certain German officials, the German National Adaptation Strategy provides a framework and clear forward-looking goals for the German climate information system. The German National Adaptation Strategy emphasizes how using climate information in planning processes makes sense and saves money. According to German officials, this encourages decision makers to adapt by showing them why an action makes sense, instead of focusing solely on required actions. Paired together, authoritative federal data and federal quality assurance guidelines emphasize the strengths of the New Federal Agency, Single Existing Agency, and Strengthened USGCRP and OSTP options by using existing coordination mechanisms and organizational functions and focusing on a specific mission while deemphasizing the limitations of inconsistent use of available data inherent in the Federally Coordinated Network of Regional Organizations option. The federal government should be responsible for maintaining the nation’s official climate records as part of a climate information system, according to the National Research Council. Certain federal, nonprofit, academic, and private sector stakeholders also identified this role for the federal government. For example, one stakeholder we interviewed said that the federal government is the only entity with sufficient resources to ensure the provision of a full suite of forecasting, modeling, observations, and other information. In addition, a federal role would increase the certainty that decision makers are using the best available information and eliminate a disincentive for action, according to stakeholders from a nonprofit entity that produces climate information. A stakeholder from academia noted that the federal government is good at developing and providing access to various types of climate information but does not do nearly as well integrating information into decision making. A private sector stakeholder was more specific, stating that the federal government should provide a range of acceptable scenarios—defined high, low, and medium scenarios—so decision makers can prepare accordingly depending upon their risk tolerance. In 2009, we recommended that the federal government develop a national strategic plan to guide the nation’s effort to adapt to a changing climate that, among other things, identified mechanisms to incorporate climate information into federal, state, local, and private sector decision making. Further, in 2013, we recommended that a federal entity designated by the Executive Office of the President work with agencies to identify the best available climate-related information for infrastructure planning and to update this information over time for local infrastructure decision makers. Although the federal government has made progress, as of October 2015, the Executive Office of the President had not fully addressed these recommendations. The climate information systems in the Netherlands and United Kingdom rely on authoritative climate data provided by national-level agencies. For example, in the Netherlands, KNMI develops authoritative national, regional, and local-scale projections and scenarios that are used across the country, by other government agencies, and by organizations that translate climate information to something more useful for decision makers. Similarly, within the UK government, the Met Office Hadley Centre—a government-funded climate research center—develops authoritative national, regional, and local-scale projections and scenarios for the UK climate information system. Through UKCP09, the Met Office provides a single set of projections with High, Medium, and Low emissions scenarios so decision makers have the flexibility to use any scenario based on risk tolerance. Germany relies on several different regional models, reflecting its federated structure. Federal quality assurance guidelines are also important to preserve the integrity of federal data in a national climate information system. To inform and be effective, a climate information system needs a clear set of principles to guide products and activities, according to the 2010 National Research Council report. The federal government should make developing quality assurance standards a priority to ensure that data used for providing climate services are reliable and that contractors and agencies are playing by the same rules, according to officials at a nonprofit entity that produces and translates climate information. Another stakeholder stated that the primary climate information role of the federal government should be to develop observation systems to meet basic foundational research needs while maintaining rigorous data quality so nonfederal actors can provide services with more flexible mechanisms. The climate information systems we reviewed in other countries generally do not have quality assurance guidelines for how decision makers use their authoritative climate data. However, officials we interviewed in the United Kingdom and Germany told us that they recognize the need to produce such guidelines. For example, United Kingdom officials said they recognized the need to develop a quality assurance process because the government could be blamed if a contractor misuses government data. Guidelines would help protect the integrity of government data by clearly stating acceptable procedures and methods for using government climate data. Another United Kingdom official noted that if you are to have a one- stop-shop for climate services, quality assurance and quality control will have to be a key part of the system. German officials similarly noted the need to move toward standardized quality assurance and quality control processes to ensure the quality and consistency of climate information for decision makers. A nonfederal entity would be better positioned to provide technical assistance in a national climate information system, according to various studies we reviewed and interviews we conducted with knowledgeable stakeholders. Nonfederal technical assistance would emphasize the strengths of many of the options by being nimble and flexible, employing existing relationships, and engaging a broad range of stakeholders. Nonfederal technical assistance would also minimize the limitations of no single agency having all necessary expertise, few links to on-the-ground decision makers, and turf battles between existing agencies. The federal government cannot take on the climate services role, according to officials within the Executive Office of the President, because it does not have the resources to do the task, and there is no way that the federal government can work with every decision maker. The federal government also does not have the presence at the local level, or trust of communities, to play this direct role, according to these officials. Similarly, a stakeholder with experience coordinating federal climate information issues stated that the federal government has to be a part of whatever system is put in place—particularly from a leadership perspective—but there is a false assumption that the federal government should do it all and be all things to all people. It cannot, according to this stakeholder, because it is too hard to match the rigor required of the federal government with the flexibility needed to make the information relevant to decision makers. A nonfederal entity would be better positioned to interact with existing networks of decision makers and to facilitate connections between decision makers and intermediaries with specialized expertise, according to various stakeholders. For example, according to some federal officials who manage climate information programs, a nonfederal organization to teach, promote, and transfer climate information would likely be more effective than government agencies. Officials within the Executive Office of the President made a similar point, noting that there needs to be an intermediary or intermediaries—for example, nonprofits, the private sector, or academic institutions—to perform the technical assistance role for the federal government. A nonfederal entity could facilitate connections between decision makers and intermediaries while employing existing networks of climate information expertise. Opinions varied on how a nonfederal entity or entities could provide the technical assistance component of a U.S. national climate information system, but certain stakeholders we interviewed called for a central hub where decision makers could access technical assistance. Two of the other countries with climate information systems have central hubs. For example, the United Kingdom’s Climate Ready Support Service leads efforts to assist decision makers in using climate information. This service provides tools, information, and practical advice to help businesses and other organizations adapt to the effects of climate change and operates a help desk to answer questions from the public or decision makers about how to use climate information. A similar entity exists in the Netherlands with more of a role for academia. Germany’s system has multiple points of contact for decision makers, reflecting its federated structure. While climate information systems in the United Kingdom and the Netherlands have central hubs, these systems also interact with decision makers at multiple points by reflecting the value of existing networks and established decision-making processes. Even if a nonfederal entity acts as the central hub for a national system, this does not preclude the federal government from providing technical assistance to decision makers. Programs like NOAA’s National Integrated Drought Information System already serve existing networks of decision makers and will provide key information resources however a national system is organized. Even if a nonfederal entity was designated as the central hub in a national system, federal efforts would remain part of the larger network providing technical assistance to decision makers. In addition, according to several stakeholders, federal adaptation science programs could continue to provide support to federal and nonfederal technical assistance efforts, focusing on problems that affect all climate information users and providers such as how to evaluate the effectiveness of adaptation actions. The federal government has begun to address its large and growing fiscal exposure to changes in the climate. These exposures are partly driven by state, local, and private sector decision makers responsible for planning, constructing, and maintaining certain types of vulnerable infrastructure paid for with federal funds, insured by federal programs, or eligible for federal disaster assistance. However, because federal climate information efforts are fragmented, these decision makers generally do not understand how to access and use the best available authoritative information they need to account for climate risk in planning processes, according to principles of risk management. Germany, the Netherlands, and the United Kingdom provide examples of how national climate information systems can be structured with defined roles for federal and nonfederal entities. Options to provide climate information to U.S. decision makers have strengths and limitations, according to various studies we reviewed and interviews we conducted with knowledgeable stakeholders. A national climate information system with defined roles for federal agencies and nonfederal entities could incorporate the best features and address the limitations of different options to provide climate information to decision makers. Specifically, a national climate information system with federal leadership, authoritative federal data and quality assurance guidelines, and a nonfederal provider of technical assistance may make it easier for federal, state, local, and private sector decision makers to justify the costs of incorporating climate change information into planning efforts, thereby reducing long-term federal fiscal exposure. To help federal, state, local, and private sector decision makers access and use the best available climate information, we recommend that the Executive Office of the President designate a federal entity to take the following two actions: develop and periodically update a set of authoritative climate change observations and projections for use in federal decision making, which state, local, and private sector decision makers could also access to obtain the best available climate information; and create a national climate information system with defined roles for federal agencies and nonfederal entities with existing statutory authority. We provided a draft of this report for review and comment to the Director of the Office of Science and Technology Policy and the Managing Director (Acting Chair) of the Council on Environmental Quality. They did not provide official written comments, but did provide technical comments, which we incorporated as appropriate. As agreed with your offices, unless you publicly announce the contents of this report earlier, we plan no further distribution until 30 days from the report date. At that time, we will send copies of the report to the appropriate congressional committees; the Director of OSTP and the Managing Director (Acting Chair) of CEQ; and other interested parties. In addition, this report will be available at no charge on the GAO website at http://www.gao.gov. If you or your staff members have questions about this report, please contact me at (202) 512-3841 or [email protected]. Contact points for our Offices of Congressional Relations and Public Affairs may be found on the last page of this report. GAO staff who made contributions to this report are listed in appendix I. In addition to the individual named above, Janet Frisch (Assistant Director), Cheryl Arvidson, John Barrett, Christine Broderick, Frederick K. Childers, Christopher Currie, Cindy Gilbert, Kathryn Godfrey, Elias Harpst, Richard Johnson, Karen Keegan, Brian Lepore, Alison O’Neill, Susan Offutt, Diane Raynes, Patricia Roy, Dan Royer, Stephen Sanford, Jeanette Soares, Kiki Theodoropoulos, Joseph Dean Thompson, Chris Turner, and Sarah Veale made key contributions to this report. | Over the last decade, the federal government incurred over $300 billion in costs due to extreme weather and fire, according to the President's 2016 budget request. Costs are expected to grow as rare events become more common and intense due to climate change, according to the National Academies. State, local, and private sector decision makers also drive fiscal exposures, as they are responsible for infrastructure paid for with federal funds or eligible for disaster aid. GAO's 2015 High-Risk update prioritized improving federal efforts to provide the best available climate information and technical assistance to help decision makers use the information to build resilience in up front. This report examines (1) the extent to which federal efforts meet the climate information needs of decision makers; (2) examples of how other countries organized climate information systems; (3) whether and how federal efforts could be improved; and (4) the strengths and limitations of different options to provide climate information. GAO analyzed reports; reviewed systems in three other countries; and interviewed stakeholders with knowledge of climate information. Many federal efforts are under way, but the climate information needs of federal, state, local, and private sector decision makers are not being fully met, according to recent GAO reports, National Academies and other studies, and interviews with stakeholders. The November 2013 Executive Order 13653 on Preparing the United States for the Impacts of Climate Change calls on certain federal agencies to work together to provide authoritative information on climate preparedness and resilience. However, the federal government's own climate data—composed of observational records from satellites and weather stations and projections from climate models—are fragmented across individual agencies that use the information in different ways to meet their missions. GAO's February 2015 High-Risk update found that federal, state, local, and private sector decision makers may be unaware that climate information exists or be unable to use what is available. Germany, the Netherlands, and the United Kingdom have well-established climate information systems, although each country's system is organized somewhat differently. In each, the government provides direction and funding, and entities within and outside the government provide technical assistance to help decision makers understand how to use climate information in planning. Federal climate information efforts could be improved by incorporating key organizational and data elements, according to GAO reports, studies by the National Academies and other organizations, site visits to three countries with climate information systems, and interviews with stakeholders. Specifically, the key elements are (1) a focused and accountable organization, (2) authoritative data that define the best available information for decision makers, and (3) technical assistance to help decision makers access, translate, and use climate information in planning. Authoritative locally-focused information is crucial because it defines a common starting point for decision makers, and most decisions are made at the local level. Options to provide climate information and technical assistance to decision makers have strengths and limitations, according to studies, international site visits, and interviews with stakeholders. For example, a new federal agency would have a focused mission but could face turf conflicts with existing programs at other agencies. On the other hand, a national climate information system could be developed that would incorporate the best features and address the limitations of these options. Similar to the programs in Germany, the Netherlands, and the United Kingdom, a national system to provide climate information to U.S. decision makers could have roles for federal and nonfederal entities. Based on GAO's review of systems in other countries, studies, and interviews with stakeholders, a key federal role in a national climate information system would be to provide authoritative data and quality assurance guidelines for how to use the data. A nonfederal entity would be better positioned to provide on-the-ground technical assistance and facilitate connections between decision makers and intermediaries with expertise. GAO recommends that the Executive Office of the President (EOP) direct a federal entity to develop a set of authoritative climate change projections and observations and create a national climate information system with defined roles for federal agencies and nonfederal entities. Relevant EOP entities provided only technical comments, which GAO incorporated as appropriate. |
Although reserve personnel have been used for contingency and emergency operations through the involuntary “Presidential Reserve Call- up” and “Partial Mobilization” authorities, a significant number of reserve personnel on active duty for these and other missions have been provided on a voluntary basis. Agency officials stated that these volunteer reservists’ roles could include filling in for an existing active duty mission temporarily (such as an infantryman or pilot), providing needed special skills (civil affairs or engineer), or participating in training exercises that result in support to active duty missions. Legislation has evolved since 1980 to provide DOD with more flexibility in managing these volunteer reservists. The Defense Officer Personnel Management Act was passed in 1980 to amend Title 10 of the U.S. Code. The act required that Congress annually authorize total strength levels for each military service for active duty personnel, with some exceptions. The act also established the 180-day rule for reserve members serving on active duty for special work. Reserve members on active duty who performed special work for 180 days or fewer were excluded from being counted against active duty personnel end-strengths. Title 10 of the U.S. Code at Section 115, which governs personnel strengths for the military, gave authority to the Secretary of Defense to vary active duty and Selected Reserve end-strengths above the level authorized by Congress. Prior to October 2004, the Secretary of Defense could increase active duty end strength paid by active duty funds by up to 3 percent, increase the end strength for active duty and National Guard paid by reserve funds by up to 2 percent, and vary the end strength authorized for the Selected Reserve by up to 2 percent. On October 28, 2004, the NDAA for Fiscal Year 2005 was enacted. The act amended 10 U.S.C. § 115 by establishing an annual authorization requirement for the maximum number of reserve personnel authorized to be on active duty for operational support, thus creating a new accounting category. It also added a provision that allows the Secretary of Defense to increase the maximum strength authorized for certain reservists voluntarily on active duty to perform operational support by up to 10 percent. DOD’s estimates for the maximum number of volunteer reservists authorized to be on active duty for operational support increased between fiscal year 2005 and fiscal year 2006 as a result of two key factors. First, DOD developed its fiscal year 2005 estimates using inaccurate data from a data source that could not distinguish volunteer reservists on active duty for missions that would be considered operational support from other reservists. Second, DOD did not formally define operational support prior to establishment of its fiscal year 2005 maximum authorized levels and did not release a definition of operational support until 6 months after the maximum authorized levels were passed under the NDAA. DOD increased its estimates for fiscal year 2006 after the reserve components reviewed historical numbers of these reservists based on the published operational support definition. For the fiscal year 2007 estimates, the reserve components submitted the same maximum levels as fiscal year 2006 because there were no substantial increases or decreases in their numbers, according to DOD officials. One key factor that contributed to the increase in authorization levels requested for fiscal year 2006 was that DOD’s initial request for fiscal year 2005 was not developed using data that accurately reflected the maximum number of reservists on voluntary active duty for operational support. In developing the estimate submitted for the fiscal year 2005 NDAA, DOD used data that was provided by the reserve components for other purposes. DOD derived its estimates from an annual data call where reserve components provide information about reservists’ activities throughout the year. These data identified reservists involved in such missions as domestic emergencies, counter-drug activities, major exercises, and mobilizations. According to a DOD official, they compiled the estimates from various categories that represented what they considered operational support. They automatically eliminated some categories from their count, such as some counter-drug activities and mobilizations, because they assumed that the reported data in these categories only included involuntary active duty reservists. DOD informally provided the estimates to the reserve components for their review, but had to submit the estimates before some reserve components could respond. After the authorized levels were approved by Congress in the fiscal year 2005 NDAA and communicated throughout the reserve components, reserve officials with greater insight over the reservists serving in an operational support role realized that the estimates did not reflect the actual numbers of reservists serving in this capacity. Officials from the reserve components informed DOD that the maximum numbers requested were too low for force requirements. According to a DOD official, they scrutinized their initial data review and found that the information extracted from the data did not distinguish involuntarily activated reservists from voluntarily activated reservists. Once they realized that the data did not separate out voluntary and involuntary reservists, they recognized that some of the data from categories that had been excluded, such as mobilizations, should not have been completely excluded since it contained some volunteers. DOD’s lack of formal coordination with the reserve components and its reliance upon existing data that did not specifically identify volunteer reservists on active duty for operational support contributed to DOD submitting a low estimate for fiscal year 2005. Another key factor that contributed to the increase in DOD’s fiscal year 2006 estimate for the maximum number of reservists authorized was that DOD did not have a definition of operational support prior to its initial estimate for fiscal year 2005. When the fiscal year 2005 NDAA was enacted on October 28, 2004, the act did not provide a definition for operational support to apply to the maximum authorization levels, but instead required the Secretary of Defense to prescribe by regulation the meaning of the term operational support. After the fiscal year 2005 NDAA was enacted, DOD met with reserve component officials in response to their concerns about the low authorization levels and also to develop a definition for operational support. In collaboration with the components, DOD established a definition for operational support, and on April 26, 2005—approximately 6 months after the fiscal year 2005 authorization levels for reserve personnel were made law—released the official definition with some accounting and reporting guidelines. DOD defined operational support as: active duty, other than mobilized active guard and reserve duty, voluntarily performed by reservists; full-time duty, other than mobilized active guard and reserve duty, voluntarily performed by National Guard members; and active duty for training performed at the request of an operational commander, or as the result of reimbursable funding. The definition of operational support included active duty for special work, active duty and active duty for training performed as the result of reimbursable funding, funeral honors duty performed not in an inactive duty status, voluntary active duty performed by recall reserve retirees not receiving regular retired pay, and active duty training performed as a result of a request of an operational commander to provide support. The guidelines created a requirement for components to report to DOD the highest number of operational support reservists each month. Once the definition for operational support was established, reserve component officials that had direct responsibility for monitoring reserve personnel end strength reviewed historical data from their internal systems on the number of volunteer reservists serving in the areas included under the definition. The components determined that the numbers that were in fiscal year 2005 NDAA did not accurately reflect the number of reservists performing operational support. Most of the reserve components then submitted higher estimates for the maximum authorized levels in the fiscal year 2006 NDAA. Table 1 shows that five out of six reserve components provided larger maximum levels for fiscal year 2006, and the total authorization level nearly doubled compared to the fiscal year 2005 authorization level. For its fiscal year 2007 estimates, DOD submitted a request for the same maximum levels as in fiscal year 2006. The reserve components reviewed their historical data as they did for the fiscal year 2006 estimates and updated them with data from fiscal year 2006. The reserve components found that there were no substantial increases or decreases in their fiscal year 2006 numbers that required changes in their estimated maximum levels for fiscal year 2007. The reserve components have not been consistently identifying the number of reservists serving in an operational support capacity since this requirement was adopted in fiscal year 2005. In its April 2005 memorandum that provided a definition for operational support, DOD directed the components to report the highest number of volunteer reservists serving in an operational support capacity each month so that DOD could monitor the amounts to ensure that components did not exceed the maximum levels authorized. On the basis of our analyses, we found that the reserve components inconsistently include various categories of personnel in their reported numbers because the components have different interpretations about what is included under DOD’s operational support definition and how it applies to their existing categories. For example, the Army Reserve and the Army National Guard do not include voluntary active duty performed by recalled retired reservists in their accounting amounts, even though this is one of the five categories listed under DOD’s definition of operational support. According to Army personnel, the Army Reserve and the Army National Guard do not include these reservists because they consider them active duty and include them in their active duty end strength numbers. In addition, the reserve components are inconsistent on whether they include volunteer reservists serving on extended active duty in their reported operational support numbers. The definition of operational support provided by DOD does not specifically address extended active duty reservists. We found that three of the six reserve components—Navy Reserve, Air Force Reserve, and Army National Guard—include extended active duty reservists in their reported operational support numbers, although the Navy and Air Force define the length of service for extended active duty reservists differently. The Navy Reserve defines them as voluntary recall reservists on 2 to 5 year tours. The Air Force considers them to be reservists volunteering to fill an existing, funded active duty position for 3 years or less. The Army Reserve, Marine Corps Reserve, and Air National Guard do not include extended active duty reservists in their reported operational support numbers because they are currently being accounted for under active duty end-strengths. In addition to these inconsistencies, we also found that one component’s monthly reports of volunteer reservists serving on active duty for operational support have not provided DOD with an accurate accounting of the number of these individuals due to errors in the numbers reported. We found that in each month from January through June 2006, the Navy Reserve erroneously reported to DOD cumulative totals instead of the highest number of reservists in each month. A Navy Reserve official stated that they did not have complete access to personnel data during these months because they had to relocate their personnel database after Hurricane Katrina. As a result, the Navy Reserve appeared to exceed its maximum authorized level for 3 months—in January, February, and June 2006. The Navy Reserve did not discover this error until late July 2006, at which time they retroactively corrected the erroneously reported amounts. To help address these inconsistencies and errors, the Defense Manpower and Data Center (DMDC) is in the process of implementing a system change that would allow DOD to have automated access to the number of volunteer operational support reservists. We reported in September 2006 that DMDC can extract some reserve personnel data, such as a reservist’s number of deployments and citizenship, but it could not provide data specifically on volunteer status from all six reserve components. According to a DMDC official, the proposed change would only provide information from systems already aligned with DMDC that can distinguish volunteer reservists for operational support. DMDC also does not have the authority to direct the services to correct data errors and inconsistencies. As of early October 2006, we found that each reserve component collected its operational support numbers from accounting systems that did not provide all this information to DMDC. For example, the Navy Reserve obtained its reported numbers from the Navy Reserve Order Writing System, which currently feeds into DMDC, but this system does not distinguish the highest amount of volunteer reservists each month. The Marine Corps Reserve’s systems can provide volunteer information to DMDC, but it reported end of the month numbers, not the highest number of reservists during the month. The Army Reserve, Air Force Reserve, and Air National Guard each pull key data from external databases managed by the Defense Finance and Accounting System, but the Army Reserve’s database did not provide the monthly highest number of volunteers. The Army National Guard compiles its number of volunteer reservists from its own systems and the Army Human Resource Command, which do not provide this information on volunteers. The DMDC official stated that the effectiveness of the proposed change to automate reporting on volunteer operational support reservists still depends on the components, which are responsible for aligning their policies and systems to provide the appropriate information according to changes in data reporting requirements. As a result, we do not believe that this system change will provide DOD with accurate information about the peak monthly number of volunteer reservists serving in an operational support capacity, unless the components align their policies and systems to conform to reporting requirements. We found that DOD and the reserve components have not updated and aligned their guidance to clearly and consistently articulate and define what categories of reservists to include in accounting for and reporting on operational support levels. DOD released preliminary guidance in its April 2005 memorandum that defined the five categories of reservists that comprise operational support; however, they have not yet updated their instruction that governs the use of and accounting for reservists. DOD is in the process of developing an instruction on accounting and reporting procedures in the new DOD Instruction 1215.6, which it plans to officially release in late October 2006. Even though DOD has not released its updated instruction, the Army National Guard published updated guidance based on DOD’s April 2005 memorandum that provides examples of missions specific to the Army National Guard that are considered operational support. Another three components—the Army Reserve, Air Force Reserve, and Air National Guard—have plans in place to update their guidance to reflect operational support reporting requirements. The Department of the Army expects to release its updated guidance for the Army Reserve within the year. The Air Force Reserve plans to update its implementing regulations in March or April 2007 and, in the interim, has issued a policy memorandum that applies operational support requirements to its policies. The Air National Guard expects to update its guidance in the near future, and has an interim policy that addresses operational support similar to the Air Force Reserve. The two remaining components—the Marine Corps Reserve and Navy Reserve—have not updated their existing guidance to incorporate operational support accounting and reporting and do not appear to have immediate plans to do so until DOD releases new guidance. Until DOD and all of the reserve components update and uniformly align their implementing guidance, inconsistencies and errors in the reporting of the number of operational support reservists may continue. As a result, DOD and the components cannot ensure that they will not exceed the maximum authorized levels, which may impair the ability of DOD and Congress to oversee the use of volunteer reservists serving on active duty in an operational support capacity. With DOD’s growing demand for reserve personnel to augment its active duty forces to accomplish its missions overseas and at home, stress on the reserve force is a significant issue. Reservists have been serving on increasingly longer and more frequent tours of duty. However, reserve personnel are a part-time force and DOD must take care in managing the frequency with which it uses the reserves to complete its missions. It is critical that DOD and Congress have oversight over DOD’s forces to ensure that its citizen-soldiers are not overextended. In eliminating the 180-day rule, Congress gave DOD flexibility in managing its volunteer reservists to serve in a variety of missions, without limiting volunteerism and continuity of service. However, the reserve components continue to struggle with accurately and consistently identifying these reservists each month. Updated guidance that clearly articulates what should be included and excluded from this accounting would help the components eliminate the inconsistent interpretations that currently exist. Until DOD and all of the reserve components update their implementing guidance in a uniform manner, inconsistencies and errors in the reporting of the number may continue and DOD will be unable to ensure that reported numbers are accurate and that maximum levels are not being exceeded. Lack of an accurate accounting of the number of voluntary reserve personnel serving in an operational support capacity defeats the purpose for establishing the reporting requirement, which in turn hampers DOD’s ability to manage its forces and to minimize lengthy activations and stress on the reserve forces. This lack of visibility also limits Congress’s oversight over the use, availability, and readiness of the reserve force to ensure that its citizen-soldiers are not overextended. To ensure that the components can report accurate and consistent information about the number of reservists serving in an operational support capacity, we recommend that the Secretary of Defense direct the Under Secretary of Defense for Personnel and Readiness and the reserve components to develop guidance to clarify and consistently define the categories of operational support that should be included in the reported numbers. The Assistant Secretary of Defense (Reserve Affairs) provided written comments on a draft of this report. The department concurred with the recommendation. DOD stated that it will develop guidance that specifically addresses what is to be included when accounting for operational support. The department’s comments are reprinted in their entirety in appendix II. In addition, the department provided technical comments, which we incorporated as appropriate. We are sending copies of this report to the Chairmen and Ranking Minority Members of the House and Senate Committees on Armed Services. We are also sending copies to the Secretary of Defense; the Secretaries of the Army, the Navy, and the Air Force; and the Commandant of the Marine Corps. We will also make copies available to others upon request. In addition, the report will be available at no charge on the GAO Web site at http://www.gao.gov. If you or your staff have any questions concerning this report, please contact me at (202) 512-5559 or [email protected]. Contact points for our Offices of Congressional Relations and Public Affairs may be found on the last page of this report. Others making significant contributions to this report are included in appendix III. To determine the factors leading to the increase in the maximum number of reserve personnel authorized to be on active duty for operational support from fiscal year 2005 to fiscal year 2006, we reviewed and analyzed the authorization levels for fiscal years 2005 and 2006, and the requested authorization levels for fiscal year 2007. We also obtained documentation of the highest number of reservists each month that is reported to DOD and analyzed figures to identify any trends or patterns of change. To determine what categories of reservists should be represented by the numbers of reservists serving on operational support, we obtained documentation on the definition of operational support given to the components. We also interviewed DOD and reserve officials to gain an understanding of their roles and effectiveness in implementing Sections 415 and 416 of the National Defense Authorization Act (NDAA) for Fiscal Year 2005. We interviewed officials from DOD Reserve Affairs, Army Reserve, Army National Guard, Air Force Reserve, Air National Guard, Navy Reserve, and Marine Corps Reserve. To determine DOD’s authority and role in management of the reservists under the NDAA, we reviewed legislation and the history of relevant provisions of the law. To determine the reliability of the estimates for the maximum authorization levels for the reserve components, we gathered reserve component officials’ perspectives on their data systems in the collecting and reporting of reserve strength to DOD. To determine the extent to which the reserve components have consistently reported the number of reservists serving in an operational support capacity, we obtained DOD’s memorandums, implementing guidance, and regulations. We obtained documentation from DOD and reserve components to determine the categories included and excluded from operational support. We interviewed DOD officials to determine its definition for operational support, how DOD intended its implementing guidelines to be applied, and to determine its interpretation of relevant legislation. We also interviewed officials to determine the consistency in application of the guidelines. From our interviews, we obtained information on categories of reservists that were being excluded from operational support. We reviewed and analyzed legislation to determine what was required to be included in operational support. Officials also provided information on the structure of their data systems and the process for collecting and recording the numbers of reservists. The components and DOD also provided the highest number of reservists each month that was reported to DOD. Due to definitional problems of categories of reservists to be included in reported numbers, we found some inaccuracies and inconsistencies in the data, which produced data that we believe are not sufficiently reliable. As a result, we make a recommendation for executive action to improve the accuracy and consistency of reported monthly information. We conducted our review from June 2006 through September 2006, in accordance with generally accepted government auditing standards. In addition to the contact named above, Geraldine Beard, Renee Brown, Tracy Burney, Pawnee Davis, Laura Durland, Meredith Georges, George Poindexter, Terry Richardson, Gina Ruidera, and Karen Thornton made significant contributions to the report. | The Department of Defense (DOD) and Congress have expressed concern with the frequency and length of time that volunteer reservists serve on active duty. In fiscal year 2006, DOD nearly doubled its fiscal year 2005 estimate for the total maximum levels of reservists volunteering to be on active duty for operational support. Congress required GAO to review the reasons behind the increases and expressed an interest in understanding which reservists were being included or excluded from these numbers. In this report, GAO (1) identified the factors that led to the increase in DOD's requests for the maximum number of volunteer reserve personnel authorized to be on active duty for operational support since DOD's initial request in fiscal year 2005 and (2) assessed the extent to which the reserve components have consistently reported the number of reservists serving in an operational support capacity since 2005. In conducting this review, GAO analyzed agency documents and interviewed DOD officials. DOD's requested authorization levels for reserve personnel voluntarily on active duty for operational support grew substantially between fiscal years 2005 and 2006 for two reasons. First, when developing its fiscal year 2005 estimate, DOD used data reported annually that excluded some reservists serving in operational support capacities. Second, the definition of operational support was not included with the legislation and DOD did not distribute an official definition until 6 months after the fiscal year 2005 authorized levels were in place. Based on the published definition and greater outreach to personnel responsible for monitoring the number of volunteers for this type of active duty, most reserve components submitted higher estimates for maximum levels for fiscal year 2006. DOD submitted the same estimates in fiscal year 2007 as fiscal year 2006 because the number of volunteers did not change greatly. The reserve components have not been consistently identifying the number of reservists serving in an operational support capacity since this monthly reporting requirement was adopted in fiscal year 2005. The reserve components are inconsistently including certain categories of personnel in their reported numbers. For example, two of the six reserve components do not include personnel serving as voluntarily recalled retired reservists in their reported totals, even though this category is listed in DOD's definition of operational support. In addition, only three of the six components include reservists serving on extended active duty missions in their reported numbers. GAO also found that the Navy Reserve erroneously submitted cumulative amounts instead of the highest amount of volunteer reservists each month for 6 months, so that it appeared to exceed its maximum authorized level three times. DOD is implementing a change to its Defense Manpower and Data Center to systematically generate the highest count of reservists each month, but the effectiveness of this change depends on whether the components update and align their policies and systems to provide these data. DOD is in the process of developing an instruction and only four of the reserve components have updated or have plans to update their guidance to clarify and consistently define what categories to include when accounting for these operational support reservists. Without updating and aligning their guidance, inconsistencies and errors in the reported numbers of operational support reservists may continue. |
The UI program was established by Title III of the Social Security Act in 1935 and is a key component in ensuring the financial security of America’s workforce. The program serves two primary objectives: (1) to temporarily replace a portion of earnings for workers who become unemployed through no fault of their own and (2) to help stabilize the economy during recessions by providing an infusion of consumer dollars into the economy. UI is made up of 53 state-administered programs that are subject to broad federal guidelines and oversight. In fiscal year 2004, these programs covered about 129 million wage and salary workers and paid benefits totaling $41.3 billion to about 8.8 million workers. Federal law provides minimum guidelines for state programs and authorizes grants to states for program administration. States design their own programs, within the guidelines of federal law, and determine key elements of these programs, including who is eligible to receive state UI benefits, how much they receive, and the amount of taxes that employers must pay to help provide these benefits. State unemployment tax revenues are held in trust by the federal government and are used by the states to pay for regular weekly UI benefits, which typically can be received for up to 26 weeks. To receive UI benefits, an unemployed worker must file a claim and satisfy the eligibility requirements of the state in which the worker’s wages were paid. Generally, states require that workers must have a minimum amount of wages and employment over a defined base period, typically about a year before becoming unemployed, and have not already exhausted the maximum amount of benefits or benefit weeks to which they would be entitled because of other recent unemployment. In addition workers must have become unemployed for reasons other than quitting a job or being fired for work-related misconduct, and be able and available to work. In order to demonstrate that they are able to work and available for work and are still unemployed, claimants must submit a certification of continuing eligibility—by mail, telephone, or Internet, depending on the state— throughout the benefit period. This practice is usually done weekly or biweekly. States may continue to monitor claimant eligibility through an eligibility review program, in which certain claimants are periodically contacted to review their eligibility for benefits, work search activities, and reemployment needs. Labor has the responsibility under Title III of the Social Security Act for ensuring that states operate effective and efficient UI programs. Various provisions of federal law require that certain UI activities be performed promptly and accurately. Section 303(a)(1) of the Social Security Act requires, as a condition of a state’s receiving UI administrative grants, “such methods of administration . . . as are found by the Secretary of Labor to be reasonably calculated to insure full payment of unemployment compensation when due.” Labor uses various administrative data to provide information on the functioning of all UI program activities. Labor divides the measures into two categories: core measures, which entail oversight on key performance areas representative of the UI program, and management information measures, which facilitate the analysis of performance and to assist in planning corrective activities when necessary. One of Labor’s performance measurement efforts is the Benefit Accuracy Measurement (BAM) program, which is designed to determine the accuracy of paid and denied claims in the UI program. It does this by reconstructing the UI claims process from samples of weekly payments and denied claims using data verified by trained investigators. For claims that were overpaid, underpaid, or improperly denied, the BAM program determines the cause of and the party responsible for the error, the point in the UI claims process at which the error was detected, and actions taken by the agency and employers prior to the error. For erroneously paid claims, the BAM program determines the amount of benefits the claimants should have received, which becomes the basis for subsequent recovery efforts. BAM provides two rates of improper payments. The first, the Annual Report Overpayment Rate, includes estimates of nearly every divergence from what state law and policy dictate the payment should have been. The second rate, the Operational Overpayment Rate, includes only recoverable overpayments states are most likely to detect through ordinary overpayment detection and recovery procedures. Operational overpayments are the most likely to be detected and established for eventual recovery and return to the UI Trust Fund. Since UI was established, there have been two major changes in the nation’s workforce development system that have directly affected states’ UI programs. Specifically, in November 1993, Congress enacted legislation amending the Social Security Act to require that each state establish a Worker Profiling and Reemployment Services (WPRS) system and implement a process typically referred to as claimant profiling. The claimant profiling process uses a statistical model or characteristics screen to identify claimants who are likely to exhaust their UI benefits before finding work. Claimants identified through this process are then referred to reemployment services while they are still early in their claim. For profiled claimants, participation in designated reemployment services becomes an additional requirement for continuing eligibility for UI benefits. The second major change was the enactment of the Workforce Investment Act of 1998, which requires states and localities to bring together about 17 federally funded employment and training services into a single system—the one-stop system. State UI programs are mandatory partners in the one-stop system. Another mandatory partner is the federal Employment Service, established by the Wagner-Peyser Act in 1933 to link job seekers with job opportunities. The Employment Service (ES) has historically been collocated with state UI offices to facilitate UI claimants’ access to federally funded labor exchanges, job search assistance, job referral, placement assistance, assessment, counseling, and testing. For UI, Labor’s fiscal year 2007 budget includes a request for $2.7 billion. This amount is about $101 million higher than the fiscal year 2006 enacted level. This request, according to Labor’s budget overview, funds projected workloads and includes several UI program increases. First, Labor is proposing a $30 million increase in fiscal year 2007 for the amount available to states to conduct reemployment and eligibility reviews. Labor notes that the reviews—which entail in-person interviews with claimants at one-stop centers—can reduce overpayments as well as speed reemployment. Second, Labor is proposing a $10 million UI program increase to prevent and detect fraudulent claims due to identify theft. Labor proposes to use the new funding for staff to investigate and reconcile potential identity theft identified through data cross-matching. Labor estimates that about $3.4 billion in UI benefits was overpaid nationwide in calendar year 2004, but is taking actions to help states improve their ability to detect and prevent overpayments. According to Labor’s Benefit Accuracy Measurement program, in 2004 (the most recent year for which we could obtain specific data) claimants were responsible for a majority of the overpayments. Claimants may fail to report their work as required, or may use Social Security numbers (SSN) that did not exist or that belonged to other individuals to fraudulently obtain UI benefits, resulting in overpayments. State agencies may also contribute to overpayments if they fail to properly record eligibility information. In addition, employers may contribute to UI overpayments if they fail to report required information to states in a timely manner. Labor has introduced a number of initiatives to help states improve their ability to detect and prevent overpayments, including new computer matches with federal databases, a new core performance measure intended to provide states with added incentives for detecting and preventing overpayments, and additional funding for states’ overpayment detection efforts. Labor’s budget request for fiscal year 2007 includes funding to continue some of these efforts. Of the $3.4 billion in overpayments identified nationwide by the BAM program in calendar year 2004, almost $2 billion (58 percent) was attributable to UI claimants alone, while state agency errors and employers were responsible for overpayments by others (see fig. 1). With respect to claimants, overpayments may occur because individuals work while receiving benefits, fail to register with employment services (as required in most states), fail to look for a new job, or misrepresent their identity. In calendar year 2004, the most common cause of overpayments was unreported or erroneously reported earnings and income, accounting for almost 28 percent of overpayments in that year. The second-leading cause of overpayments—constituting 21 percent of all overpayments—was payments to individuals who are not entitled to UI benefits because of the circumstances under which they became unemployed (separation issues). Other sources of overpayments were attributable to individuals who failed to look for work (16 percent) and individuals who did not register for employment services (10 percent). Federal and state officials have reported that some types of overpayments are more difficult to detect than others. For example, in a prior report, some officials told us that it could be difficult for states to accurately determine, in a cost-effective manner, if a claimant was actively searching for work (an eligibility requirement in some states). Other sources of overpayments include state agency errors and inaccurate or untimely information provided by employers. Labor’s BAM program shows that state agency errors, such as failing to properly record important eligibility information such as wages, accounted for about 15 percent of all estimated overpayments in 2004. Employers accounted for about 6 percent of the total estimated overpayments in 2004. Employers and their agents do not always comply in a timely manner with state requests for information needed to determine a claimant’s eligibility for benefits. For example, one Labor OIG audit found that $17 million in overpayments occurred in four states because employers did not respond to the states’ request for wage information. Our work suggests that employers may resist requests to fill out paperwork from states because they view the process as time-consuming and cumbersome. In addition, because employers are unlikely to experience an immediate increase in the UI taxes they pay to the state as a direct result of overpayments, they do not see the benefit in complying with states’ requests for wage data in a timely manner. Our prior work and work by Labor’s OIG also shows that some UI overpayments result from identity-related violations. For example, our prior work shows that in 2001, Labor identified about $1.4 million in UI overpayments resulting from Social Security violations. Labor determined these overpayments to be the result of fraud. More recently, in its fiscal year 2007 budget justification, Labor estimated that approximately $313 million in overpayments results from identity theft each year. Labor’s OIG has documented identity theft schemes as a major management challenge. For example, in its semiannual report to Congress, the OIG reported on a case in which individuals used more than 200 stolen identities to file 222 UI claims and obtain more than $693,000 in UI benefits from February 2001 through February 2005. Labor has introduced several initiatives to help states improve their ability to detect and prevent overpayments in the UI program. First, Labor has initiated a pilot using the National Directory of New Hires (NDNH) to further assist in identifying and preventing improper payments, including overpayments. The NDNH is a database, maintained by the Department of Health and Human Services’ Office of Child Support Enforcement, that contains information on all newly hired employees, quarterly wage reports for all employees, and UI claims nationwide. The NDNH enhances states’ ability to detect unreported work violations by UI claimants working in other states or for certain employers that operate in multiple states. In addition, the NDNH can help improve the accuracy of Labor’s error estimates. Information from the NDNH cross-match can be readily integrated into Labor’s BAM program by cross-matching the SSNs of the claimants against the NDNH. In fiscal year 2005, three states (Texas, Utah, and Virginia) participated in the pilot. According to Labor, initial results of the pilot show that overpayment detections increased 114 percent in Texas, 41 percent in Utah, and 73 percent in Virginia. The Texas Workforce Commission also reported that using the national cross-match in combination with the existing statewide cross-match helped detect 50 percent more cases of potential fraud in one quarter than it would have detected otherwise. In addition, on the basis of its NDNH pilot results, Labor reported in its fiscal year 2005 performance and accountability report that a substantial amount of additional overpayments could be detected using the database. Labor reported that it is moving ahead with full implementation of the NDNH cross-match with 5 states (Connecticut, Texas, Utah, Virginia, and Washington), and expects 29 states to use the NDNH by the end of fiscal year 2006. In addition to its NDNH pilot, Labor is also pursuing the use of other data sources to improve UI program integrity. In particular, Labor continues to promote states’ data sharing with other agencies, such as the Social Security Administration (SSA), to identify and prevent overpayments. According to Labor’s fiscal year 2005 performance and accountability report, the department has funded states to exchange data with SSA on a real-time basis, giving states the ability to verify claimants’ identity and prevent most overpayments due to fraudulent or mistaken use of SSNs. Labor’s fiscal year 2007 budget request includes $10 million in funding to detect and prevent fraudulent UI benefit claims that use personal information stolen from workers. Labor estimates that the requested funds could generate savings of at least $77 million to the UI Trust Fund by preventing erroneous payments caused by the use of stolen identities. Along with efforts to enhance states’ use of data sharing to detect and prevent overpayments, Labor has taken other steps to enhance UI program integrity, including the development of a new core performance measure for overpayment detection at the state level. More specifically, Labor has announced that states will be given an additional incentive to prevent and detect overpayments by implementing core measures in states’ performance budget plans based on the level of overpayments the states have detected. While Labor has established overpayment detection as one of its core measures, it has not yet specified the level of performance that states will be required to meet under this measure. In addition, Labor’s fiscal year 2006 budget request contained a legislative proposal designed to give states the means to obtain funding for program integrity activities, including additional staff to enhance recoveries and prevent overpayments. Moreover, to reduce overpayments, Labor awarded Reemployment and Eligibility Assessments grants to 21 states during fiscal year 2005. The grants have been used to conduct in-person claimant interviews to assess claimants’ continued eligibility for benefits and to ensure that individuals understand that they must stop claiming benefits upon their return to work. Labor’s fiscal year 2007 budget request includes $30 million in additional funding to continue this effort. Labor estimates that these funds could be used to conduct an additional 539,000 interviews and could save the UI Trust Fund as much as $151 million by reducing the average duration of UI benefits for claimants who are interviewed. In addition to the initiatives contained in its budget request, Labor plans to submit a legislative proposal in the near future that includes several initiatives to further help states detect and recover overpayments. Among other things, this proposal may include suggestions to allow the Department of the Treasury to garnish federal income tax refunds to recover UI overpayments as a means of improving overpayment recoveries. The proposal may also allow states to use a small percentage of recovered overpayments to fund their benefit payment control and program integrity activities as an incentive to focus their efforts on those activities. In addition, the proposal may seek to provide employers with a stronger incentive to inform the state when inappropriate UI claims are made. More specifically, the proposal could require states to charge employers a higher UI tax rate when claimants are overpaid, if it is determined that the overpayment was the employer’s fault (such as when an employer fails to provide wage information to the state in a timely manner). Such additional charges could lead to an increase in the UI tax rate for affected employers. In our review of states’ efforts to help UI claimants quickly return to work, we found that states most often make use of federal UI program requirements to help connect claimants with reemployment services at various points in their claims, usually beginning at the time their initial claim is filed. All federally approved state UI programs must include able- to-work and available-for-work requirements that claimants must meet in order to receive benefits. In many states, these requirements also serve to link claimants to reemployment opportunities and services. In addition, states provide targeted reemployment services to particular groups of UI claimants. The federal requirement of claimant profiling is typically the primary mechanism for targeting reemployment services to specific claimants. Despite states’ efforts to design systems that link UI claimants to reemployment services, few data are available to gauge the extent to which their efforts are having the intended result. Moreover, Labor’s fiscal year 2007 budget request does not include funding specifically designated for conducting evaluations of federally required efforts to target reemployment services. Although all UI claimants can access the range of reemployment services through the one-stop system at any time, UI program requirements often provide the context for states’ efforts to link claimants to reemployment services. Specifically, all federally approved state UI programs require that claimants be able and available to work. To meet these conditions, 44 states require that UI claimants register with the state’s labor exchange— that is, job-matching services provided through the Wagner-Peyser-funded Employment Service—in order to be eligible for UI benefits. In addition, 49 states impose a work search requirement as a condition for continuing UI eligibility, and claimants must document that they are meeting their state’s work search requirement in a number of ways. Most commonly, claimants are required to keep a log of work search activities that may be subject to review, or they must certify that they are able and available to work through the process of filing for a continuing claim. These work registration and work search requirements often serve to link claimants to reemployment services. The process of registering for work with the state’s labor exchange, for example, may bring claimants into an Employment Service office or one-stop center where reemployment services are delivered. Some states also use their processes for monitoring compliance with the work search requirement to direct claimants to reemployment services. Officials in 39 of the 49 states that require claimants to actively seek employment told us that telephone or in-person interviews with claimants may be used to monitor compliance with this requirement. In over two- thirds of these states, officials told us that some information on job search strategies or reemployment services is provided during the interview. States also engage some claimants in reemployment services directly through programs that identify certain groups for more targeted assistance. States primarily target reemployment services to claimants identified through federally required claimant-profiling systems—a process that uses a statistical model or characteristics screen to identify claimants who are most likely to exhaust their UI benefits before finding work. While claimants identified and referred to services through profiling can access the services available to all job seekers through the one-stop system, participation in the services they are referred to—most often orientation and assessment services—is mandatory for profiled claimants. In addition, many officials told us that the services profiled claimants received depended on their individual needs following an assessment, the development of an individual plan, or the guidance of staff at a one-stop center. While failure to report to required reemployment services can result in benefits being denied, states vary in the conditions that prompt denying benefits. Maryland, for example, targets reemployment services to profiled claimants through its Early Intervention program. This program, which began in 1994, offers an interactive, 2-day workshop, addressing self- assessment, job search resources, resume writing and interviewing skills, and other community resources available to job seekers. Profiled claimants selected for the workshop who fail to attend are given one opportunity to reschedule; after that, their failure to participate is reported to the UI program and their benefits may be suspended. When claimants complete the workshop, they are registered with the Maryland Job Service, they receive an individual employment plan, and the workshop facilitator may refer them to additional services. Officials told us that although they currently do not have data to show the impact of this program, they have received very positive feedback about the quality and effectiveness of the workshops. Some states have developed additional methods to target reemployment services to particular groups of UI claimants. For example, one-stop staff in Washington have the ability to identify various subgroups of claimants using a tracking device called the Claimant Progress Tool. Officials told us that one-stop staff typically use this tool to identify claimants who are about 100 days into their claim, and then contact them for targeted job search assistance and job referrals. This process was developed to help the state achieve a goal of reducing the portion of its UI benefits that unemployed workers claim. Georgia’s state-funded Claimant Assistance Program identifies claimants who are seen to be ready for employment and requires them to participate in the same services required of profiled claimants. This program is designed to help the state achieve its goal of generating savings for the UI Trust Fund. During fiscal years 2001 through 2005, states often made use of Labor’s Reemployment Services Grants—totaling $35 million per year—to fund some of the targeted services. Officials in the majority of the states we interviewed told us their states had used the Reemployment Services Grant funds to hire staff to provide reemployment services to UI claimants. For example, Maryland state officials said they used their funds to hire staff for the Early Intervention program, enabling them to run more workshops in areas that needed them and to make further improvements in the program. Some states also used these grants to direct reemployment services to claimants beyond those who have been profiled and to support other enhancements in the provision of reemployment services to claimants. For example, Washington state officials told us they used funds from these grants to support the development of the Claimant Progress Tool. Beginning in fiscal year 2005, Labor began shifting its focus away from these grants that funded direct reemployment services for UI claimants toward the Reemployment and Eligibility Assessment Grants. These new grants focus states’ efforts on providing face-to-face eligibility interviews with claimants as a way to ensure compliance with work search requirements. As part of these interviews, eligibility workers may refer claimants to reemployment services funded by Employment Services, the Workforce Investment Act (WIA), or the Trade Adjustment Assistance (TAA) program. Despite states’ efforts to design systems that link UI claimants to reemployment services, little is known about the extent to which claimants receive reemployment services or about the outcomes they achieve. Although states must meet a number of federal reporting requirements for their UI and employment and training programs, including reporting on the outcomes of profiled claimants, none of these reports provide a complete picture of the services received or the outcomes obtained by UI claimants. Labor only recently began to require that states provide information on the reemployment outcomes of UI claimants, and the ongoing evaluations of claimant profiling are limited. States must track and report annually on several performance measures considered key indicators of UI program performance, but these measures largely focus on benefit and tax accuracy, quality, and timeliness. In addition, states must also report to Labor on their claimant-profiling process, but information in these reports represent only a portion of all UI claimants the state has served, a proportion that can vary from place to place and from month to month depending on available resources. UI claimants may access other federally funded reemployment assistance through the Wagner-Peyser Employment Service, WIA Adult or Dislocated Worker programs, and, if they are laid off because of trade, the Trade Adjustment Assistance program. To monitor the performance of these programs, Labor requires states to meet a number of reporting requirements, but these reports are submitted on a program-by-program basis, and none provide a complete picture of the services received or the outcomes obtained by all UI claimants. Having data that show the degree to which reemployment services are reaching UI claimants is key to good program management and provides a first step toward understanding the impact of these programs. However, knowing how many claimants may be accessing reemployment services and the type of outcomes they may be achieving has proven difficult for state and local officials. We found that only 14 states go beyond the federal reporting requirements to routinely track the extent to which UI claimants receive services from the broad array of federally funded programs that are designed to assist them, and only 6 states routinely monitor outcomes for UI claimants who receive reemployment services. States most often told us that tracking claimant services across multiple programs was made difficult by the fact that reemployment services and UI claimant data were maintained in separate data systems—systems that were either incompatible or difficult to link. Labor has some initiatives that may begin to shed light on claimant outcomes, but these efforts may not go far enough. Labor recently modified its UI performance measures to require states to track a reemployment rate for their UI claimants—defined as the percentage of UI claimants who are reemployed within the quarter following their first UI payment. This change will help focus efforts on speeding reemployment and will improve the understanding of how many UI claimants are quickly reemployed nationwide, but it will not allow for an assessment of the outcomes of claimants who access reemployment services compared to those who do not. Furthermore, states must meet federal requirements to target reemployment services using the claimant-profiling process, but little is known about the effectiveness of their efforts. Labor funded an evaluation of the claimant profiling system in 8 states beginning in 1996, including an assessment of UI benefit duration, employment, and earnings. The current evaluation of the profiling process focuses exclusively on how well the models are able to predict whether a claimant will exhaust UI benefits, not on whether the process results in shorter benefit duration or better employment outcomes for claimants. Budget authority to conduct the current evaluation expires at the end of fiscal year 2006, and no additional funds have been requested in the fiscal year 2007 budget specifically to conduct further evaluations on profiling. Labor is also developing a system to consolidate performance reporting for Labor’s Employment and Training Administration (ETA) programs. This system—ETA’s Management Information and Longitudinal Evaluation (EMILE) system—would consolidate reporting across a range of Labor programs including WIA, Employment Service, and TAA. Current plans do not include incorporating UI reporting into EMILE. Last year, we recommended that Labor work with states to explore the feasibility of collecting more comprehensive information on UI claimants’ services and outcomes. Although Labor generally agreed with our findings, Labor commented that current and planned data collection efforts would provide sufficient information to policy makers. While Labor’s new initiatives, in combination with current reporting requirements, will provide valuable information on the reemployment activities of some UI claimants, these efforts will not allow for a comprehensive, nationwide understanding of claimants’ participation in the broad range of reemployment services designed to assist them. Furthermore, these efforts will not move states in the direction of having the data they need to better manage their systems. UI’s size and importance make it critical that the program is performing at a peak level. With annual overpayments reaching the billions, it will be important for federal and state stakeholders to take the necessary action to address this issue. Labor’s current initiatives and its proposed action contained in the fiscal year 2007 budget request could help, but work remains. In the long run, program performance can be enhanced by avoiding improper payments rather than trying to detect and collect them. Labor’s initiatives to help states detect and prevent overpayments represent a positive step toward improving UI program integrity. In particular, Labor’s initiative to promote states’ use of the NDNH database and its continued effort to encourage states’ use of SSA’s data for verifying the identity of claimants appear promising. However, to maximize the effectiveness of these initiatives, it is important for as many states as possible to participate. In addition, while Labor’s development of a new core performance measure on payment accuracy has the potential to facilitate states’ focus on detecting and preventing overpayments, it is premature to evaluate the effectiveness of this effort. Moreover, although Labor continues to fund grants for states to conduct in-person reemployment and eligibility assessments, more time is needed to fully assess how effective these initiatives will ultimately be. Finally, while Labor’s June 2005 legislative proposal to charge employers for UI payments to ineligible individuals could result in UI tax rate increases for those employers, such a change merits further consideration. To help claimants get the reemployment services they need, states have often designed their processes to make use of federal UI program requirements in linking claimants with services. However, knowing whether their efforts are actually resulting in better employment outcomes and reduced UI benefit payments has proven difficult for federal, state, and local officials. Findings from evaluations are limited, and most states lack much of this information, arguably critical for good program management—often because data reside in separate systems that cannot be easily linked. In the new environment created under the Workforce Investment Act, where claimants may be served by a range of programs that go beyond UI and ES, it becomes increasingly important to find new ways to link program data across a broader range of programs. Doing so is an essential step in understanding what’s working and what’s not. Labor’s current and planned initiatives may help fill the information gap, but they fall short of providing a comprehensive understanding of services and outcomes for UI claimants. Mr. Chairman, this completes my prepared statement. I would be happy to respond to any questions you or other members of the subcommittee may have at this time. For information regarding this testimony, please contact Sigurd R. Nilsen, Director, Education, Workforce, and Income Security Issues, at (202) 512- 7215. Individuals who made key contributions to this testimony include Dianne Blank, Jeremy Cox, Brett Fallavollita, Michael Hartnett, Margaret A. Holmes, and Carla Lewis. Improper Payments: Federal and State Coordination Needed to Report National Improper Payment Estimates on Federal Programs. GAO-06- 347. Washington, D.C.: April 14, 2006. Financial Management: Challenges Continue in Meeting Requirements of the Improper Payments Information Act. GAO-06-581T. Washington, D.C.: April 5, 2006. Unemployment Insurance: Factors Associated with Benefit Receipt. GAO-06-341. Washington, D.C.: March 7, 2006. Trade Adjustment Assistance: Most Workers in Five Layoffs Received Services, but Better Outreach Needed on New Benefits. GAO-06-43. Washington, D.C.: January 31, 2006. Workforce Investment Act: Labor and States Have Taken Actions to Improve Data Quality, but Additional Steps Are Needed. GAO-06-82. Washington, D.C.: November 14, 2005. Unemployment Insurance: Better Data Needed to Assess Reemployment Services to Claimants. GAO-05-413. Washington, D.C.: June 24, 2005. Unemployment Insurance: Information on Benefit Receipt. GAO-05-291. Washington, D.C.: March 17, 2005. Trade Adjustment Assistance: Reforms Have Accelerated Training Enrollment, but Implementation Challenges Remain. GAO-04-1012. Washington, D.C.: September 22, 2004. Workforce Investment Act: States and Local Areas Have Developed Strategies to Assess Performance, but Labor Could Do More to Help. GAO-04-657. Washington, D.C.: June 1, 2004. Financial Management: Fiscal Year 2003 Performance and Accountability Reports Provide Limited Information on Governmentwide Improper Payments. GAO-04-631T. Washington, D.C.: April 15, 2004. Workforce Training: Almost Half of States Fund Employment Placement and Training through Employer Taxes and Most Coordinate with Federally Funded Programs. GAO-04-282. Washington, D.C.: February 13, 2004. Workforce Investment Act: One-Stop Centers Implemented Strategies to Strengthen Services and Partnerships, but More Research and Information Sharing Is Needed. GAO-03-725. Washington D.C.: June 18, 2003. Multiple Employment and Training Programs: Funding and Performance Measures for Major Programs. GAO-03-589. Washington, D.C.: April 18, 2003. Unemployment Insurance: Increased Focus on Program Integrity Could Reduce Billions in Overpayments, GAO-02-697 Washington, D.C.: July 12, 2002. Unemployment Insurance: Role as Safety Net for Low-Wage Workers Is Limited. GAO-01-181. Washington, D.C.: December 29, 2000. This is a work of the U.S. government and is not subject to copyright protection in the United States. It may be reproduced and distributed in its entirety without further permission from GAO. However, because this work may contain copyrighted images or other material, permission from the copyright holder may be necessary if you wish to reproduce this material separately. | Unemployment Insurance (UI) has been a key component in ensuring the financial security of America's workforce for over 70 years. In fiscal year 2004, UI covered about 129 million wage and salary workers and paid about $41 billion in benefits to nearly 9 million workers who lost their jobs. The Department of Labor (Labor) and states have a shared responsibility to enhance UI program performance by ensuring that only eligible individuals receive benefits while on the UI rolls and fostering reemployment. Labor's Office of Inspector General and others have found that aspects of UI may be vulnerable to fraud and improper payments, and despite the size and scope of UI, there has been little national information to fully assess states' efforts to foster reemployment. This testimony draws upon results of several GAO reports on (1) Labor's efforts to identify, estimate, and prevent improper benefit payments and (2) federal and state efforts to help speed UI claimants' return to work. We are not making new recommendations at this time. Labor generally agreed with the UI findings in our referenced reports, but took issue with our recommendation that the Secretary work with states to consider collecting more comprehensive information on UI claimants' services and outcomes. We continue to believe this information is needed. Labor estimates that about $3.4 billion in UI benefits was overpaid nationwide in calendar year 2004, but is taking actions to help states improve their ability to detect and prevent overpayments. According to Labor's Benefit Accuracy Measurement program, in 2004 claimants were responsible for a majority of the overpayments. Claimants may fail to report their work as required, or may use Social Security numbers that did not exist or belonged to other individuals to fraudulently obtain UI benefits, resulting in overpayments. Actions by state agencies and employers may also contribute to overpayments. Labor has introduced a number of initiatives to help states improve their ability to detect and prevent overpayments, including new computer matches with federal databases, a new core performance measure intended to provide states with added incentives for detecting and preventing overpayments, and additional funding for states' overpayment detection efforts. Labor's budget request for fiscal year 2007 includes funding to continue some of these efforts. In our review of states' efforts to help UI claimants quickly return to work, we found that states most often made use of federal UI program requirements to help connect claimants with reemployment. All federally approved state UI programs must include able-to-work and available-for-work requirements that claimants must meet in order to receive benefits. In many states, these requirements also serve to link claimants to reemployment opportunities and services. In addition, states provide targeted reemployment services to particular groups of UI claimants, most often through federally required claimant profiling. However, despite states' efforts to design systems that link UI claimants to reemployment services, few data are available to gauge whether or not their efforts are having the intended result. Labor has some initiatives that may begin to shed light on claimant outcomes, but they fall short of providing a comprehensive understanding of services and outcomes for UI claimants. Labor's fiscal year 2007 budget request does not include funding for additional evaluations on federally required efforts to target reemployment services. |
One of IRS’ strategic goals is to provide top-quality service to all taxpayers through fair and uniform application of the law. The Commissioner of Internal Revenue has stated that measuring voluntary compliance is essential for determining IRS’ progress in meeting this goal. However, IRS’ last measure of voluntary reporting compliance was done on tax year 1988 returns, where an estimated 8 percent of taxes owed were underreported on individual tax returns. This measure was developed from data obtained under IRS’ 1988 Taxpayer Compliance Measurement Program (TCMP), which audited a random sample of about 50,000 individual taxpayers. IRS is concerned that these data are too old to be meaningful. IRS last planned to measure voluntary reporting compliance for tax year 1994 returns under TCMP. The 1994 TCMP was an ambitious effort, with IRS planning to audit over 150,000 randomly selected tax returns of individuals, corporations, partnerships, and S-corporations. Over 92,000 of these audits were to be conducted on individuals (including sole proprietors and farmers) filing the Form 1040. Before beginning the audit process, however, IRS canceled TCMP because it was too costly. Also contributing to the project’s cancellation was criticism from Congress, the media, tax community, and taxpayers, because the sample was considered too large and the audits too burdensome on taxpayers. We have previously reported that the results of TCMP studies provided more than just an indicator of compliance status. (See app. III for a list of the reports we have issued on TCMP studies.) The information generated from TCMP surveys was used to help IRS identify compliance trends, and it allowed IRS to suggest changes in tax laws and regulations to improve voluntary reporting compliance. TCMP results were also used to develop formulas that helped IRS more effectively identify noncompliant taxpayers for operational audits. The formulas developed from TCMP data help IRS identify tax returns with a high probability that an audit would detect changes to tax liability. The lower the numbers of returns with no change to tax liability the better the formulas are as predictors of audit opportunity. According to IRS, since return selection formulas were first developed from TCMP data and used to select 1968 tax returns for audit, the number of audits that result in no change to tax liability have been reduced from about 46 percent in the year before the use of formulas to about 19 percent in fiscal year 1994. Starting in fiscal year 1995, however, the number of audits where there was no-change to tax liability after an audit began to increase, and it was 24 percent in fiscal year 1998, raising IRS’ concerns about increasing the burden on compliant taxpayers. TCMP data also enabled IRS to estimate the tax gap, which is the difference between the amount of tax owed and the amount of tax voluntarily paid. The last tax gap estimate was made using 1985 and 1988 TCMP data, in which IRS projected that the individual tax gap for 1992 would be over $93.2 billion. TCMP data were also used by congressional tax writing committees, the Department of Commerce, Department of the Treasury’s Office of Tax Analysis, and state governments. These uses included estimating revenue impacts of new legislation; making adjustments to the national income accounts, such as gross domestic product; and researching tax noncompliance. Some states have also used compliance measurement data to help them develop state compliance programs. In May 2000, IRS established a NRP Program Office to develop an approach for measuring voluntary compliance. While IRS has not finalized its plans for how to measure voluntary reporting compliance as of March 2001, some steps have been taken. The staff has established study objectives and developed a set of guiding principles that are to be adhered to when conducting the study. As of March 2001, IRS had a draft business plan that contained information on four different approaches for measuring voluntary reporting compliance, including two that use random audits. Also, in the event that IRS decides to use audits to measure compliance, the staff plans to use existing data collection software and has started developing database software to organize the data and make it more accessible to staff in the operating divisions. Given the importance of these systems to the program, IRS plans to conduct a comprehensive test of all the software. NRP is IRS’ effort to measure its progress in meeting its strategic goal of providing top-quality service to all taxpayers through fair and uniform application of the law. The NRP Office has developed objectives and established several guiding principles to direct its efforts to plan and implement this program. Table 1 outlines these objectives and guiding principles. The objectives for NRP cover a wide range of uses for compliance data. In addition to the objective of determining the voluntary reporting compliance rate, IRS expects the approved measurement approach to produce data that can be used to update return selection criteria so that it can better detect noncompliance, thus reducing the number of compliant taxpayers selected for operational audits. Similarly, NRP is intended to obtain data that can be used to improve IRS’ operations by providing specific information about noncompliance, allowing IRS to make operational changes that could improve compliance. For example, TCMP data indicated that many taxpayers erroneously claimed dependents on their tax returns. IRS subsequently recommended that Congress require taxpayers to include the dependent’s social security number on their returns. Taxpayers claimed 7 million fewer dependents on their 1987 tax returns, the first year dependent social security numbers were required. The guiding principles represent the conditions under which the study will be conducted to meet the objectives. According to IRS, these principles were developed in response to certain real and perceived deficiencies with prior TCMP studies. For example, IRS recognized the need to limit the burden imposed on taxpayers by measuring their compliance. In 1994, taxpayer burden was one of the key criticisms of doing TCMP audits. Although the current plans for measuring voluntary reporting compliance are not complete, some proposed actions seem likely to reduce the burden imposed on taxpayers if IRS determines that random audits are necessary. These include (1) using a dedicated cadre of auditors for NRP audits, which IRS believes will reduce the time needed for an audit; (2) building a comprehensive preaudit case file for the taxpayers being audited, which will reduce the amount of information auditors must request from the taxpayer; (3) limiting the number of lines audited on some returns; and (4) minimizing the sample size, resulting in fewer taxpayers being inconvenienced by audits. To avoid criticism like that received on its plan for the tax year 1994 TCMP, IRS planned to contact external stakeholders and solicit their ideas and support before making a decision on the final measurement approach. For example, at the time of our review, NRP staff had contacted officials at Treasury to begin discussing any concerns they might have with the study. The Commissioner indicated that he would be contacting interested congressional officials directly. Finally, NRP staff planned to contact members of the tax community, such as tax preparers and accountants. According to NRP staff, other stakeholders would be included as they are identified. To ensure that the measurement approach meets the needs of the operating divisions, NRP officials have begun a dialogue with operating division staff. This process began when NRP staff briefed senior operating division managers on the program’s status. Also, IRS has established an executive steering committee, chaired by the NRP Director, with representatives from the Commissioner’s office, each of the operating divisions, and other potential stakeholders, to ensure high-level, oversight over the study. As of March 2001, the NRP Office had developed a preliminary draft business plan, providing information on how IRS intends to develop a measure of voluntary reporting compliance around the framework of the guiding principles. The plan also shows how IRS intends to determine the most appropriate method for meeting NRP objectives. The plan discusses the pros and cons of four approaches for measuring reporting compliance and how they align with the program’s objectives. These approaches are (1) do not measure voluntary reporting compliance, (2) use operational audit data (i.e., results of IRS’ day-to-day regular audit program), (3) conduct annual random audits of a small sample of taxpayers, or (4) conduct audits of a larger sample once every 3 years. NRP staff has not yet completed their study of the costs and benefits of the various approaches. However, the alternative with a larger sample conducted once every three years is currently the recommended approach. The draft business plan analysis of the approach to stick with the status quo and do nothing points out that this approach would not add to taxpayer burden, but also that it would not meet study objectives. The draft business plan analysis for the approach using operational data, while incomplete, suggests that it may be possible to measure voluntary reporting compliance in this manner. However, the plan notes that although statistical methods exist for using nonrepresentative data to project to an entire population, the methods may not be well suited to analyzing the operational audit data available to IRS. According to NRP officials, more detailed analysis is being done on this approach. As part of its analysis of the two approaches using random samples, IRS plans to minimize the sample size to address the concerns raised about the proposed tax year 1994 TCMP sample being too large. IRS proposes to limit the sample size by reducing the number of groups it plans to analyze. The sample size may also be reduced because IRS does not plan to update the operational audit selection criteria for most nonbusiness taxpayers.Finally, in previous compliance measurement studies, every line of a selected tax return was audited. In keeping with the guiding principle of reducing taxpayer burden, the draft business plan indicates that IRS does not intend to audit each line of every return selected for audit. According to NRP officials, criteria for when to audit a line on the tax return and how to analyze lines that were not audited have not been determined. IRS also intends to include in its NRP business plan a detailed data analysis plan that will show how the information gathered in the study is to be used to meet the study objectives. In the past, we have emphasized the importance of having an analysis plan to show how the data are to be used. Also, such a plan is important to ensure that institutional systems and staff are in place to quickly and efficiently analyze the data and get the results into the hands of managers who can make appropriate changes. NRP officials told us that they are working on these plans with operating division staff and that analysis plans will be included in the final business plan. If either of the two random audit approaches or the use of operational audits is deemed the appropriate method for meeting NRP objectives, IRS plans to use existing reporting and data gathering systems to collect the data. NRP officials believe that using these existing systems—the Report Generating System and the Examination Operational Automation Database—will reduce the time needed to complete data entry. They also believe that using the existing software to collect NRP data will result in more accurate data being added to the database because audit information will be directly entered by auditors in an electronic format, with no need to transcribe it after the audit. IRS is also developing database prototype software that is to interface with the existing systems. IRS officials indicated that when the database program is completed, they plan to conduct an operational test of the combined systems to ensure that they are operating efficiently and will provide the services required for NRP. The six federal programs we studied, like IRS’ TCMP studies, randomly sample their clients to measure compliance with the rules and regulations covering their programs and services. Agencies responsible for these six programs measure compliance to conform to the Government Performance and Results Act (GPRA) of 1993, which required that agencies establish measures to determine the results of agency activities.In general, the agencies use random sampling to reduce the cost and burden of collecting this information. Each of the six programs we studied conducted compliance reviews differently, gathering different amounts and types of information with varying amounts of time required for the review. Table 2 summarizes the characteristics of the random samples used to measure compliance for each of the six programs. While none of the agencies’ mission or responsibilities is exactly like IRS’, there are similarities in how they and IRS treat compliance with the laws and regulations governing their programs. For example, the agencies and IRS try to ensure compliance through efforts that apply to all their clients. Similarly, each agency uses random samples to measure the effectiveness of these efforts and to determine how well they are accomplishing their mission objectives. Another similarity, is that most of the agencies, when measuring compliance, contact clients in person. Finally, the agencies statistically project sample results to the entire client population. Officials in each of the agencies we contacted indicated that the results of random sampling were used to measure progress against the agency’s strategic goals. Most of the agencies also used the data to help make decisions about operational changes that could improve compliance. For example, HCFA used its compliance measurement data to track claims through the processing system and record their disposition so that it could identify areas of concern and develop corrective actions to improve the efficiency and accuracy of the claims processing system. Also, HCFA officials considered the analysis of data generated from compliance measurement to be a tool for assessing the validity of complaints received from health care providers as well as a method for evaluating the contractors providing payment services to the Medicare Program. INS officials told us that they may be able to use compliance measurement data to identify areas where additional training was needed for their inspection staff. Finally, Customs officials indicated that compliance reviews using random samples allow them to make estimates of how much contraband they fail to interdict on the primary inspections. According to these officials, without some secondary review using random sampling, they would only be able to provide Congress with data on the amount and number of illegal imports they were able to identify in their primary inspections. (A more detailed discussion of each agency’s compliance review program can be found in app. IV.) By using statistically valid random samples, agencies can obtain compliance information from a small fraction of the program’s population. For example, as shown in table 2, 55,000 food stamp recipients are sampled out of 7.9 million total recipients. Random sampling allows state and federal officials to obtain data on overall compliance, but burden less than 1 percent of the program’s population. We obtained written comments on this report in a June 11, 2001, letter from the Commissioner of Internal Revenue (see app. IV). In his letter, the Commissioner noted that our report recognizes IRS’ need to measure compliance and develop approaches to effectively identify noncompliance. He further noted that the NRP approach is continuing to evolve and has been somewhat modified to shift more of the burden away from taxpayers and onto IRS. In his letter, the Commissioner stated that the approach currently being considered maximizes the use of data available to IRS and further reduces the need to conduct traditional face-to-face audits. The Commissioner emphasized that the success of NRP is dependent on the acceptance and support of the methodology by stakeholders. He noted that IRS is beginning to get external stakeholders involved in refining the NPR design and that the process will not in any way be considered final until this step is complete. We are sending copies of this report to the Chairman and Ranking Minority Member, Subcommittee on Oversight, House Committee on Ways and Means; the Secretary of the Treasury; and the Commissioner of Internal Revenue. The report is also available at www.gao.gov. If you or your staff have any questions, please contact Ralph Block at (415) 904-2150 or me at (202) 512-9110. Key contributors to this assignment were Lou Roberts and Kathleen Seymour. We initiated this assignment as part of our effort to monitor IRS’ activities related to its reorganization, implementation of its new strategic goals, and development of measures to assess its progress in meeting these goals. Also, we wanted to explore how other agencies assessed compliance with their rules and regulations and measured progress against their strategic goals. Our objective was to determine the status of IRS’ plans to measure voluntary reporting compliance. In addition, we looked at how compliance is measured in six other federal programs. To determine the status of IRS’ efforts to measure voluntary compliance, we reviewed available planning documents, including a preliminary draft of the business plan. We discussed potential methodologies IRS might use to measure voluntary compliance with NRP officials. We also discussed potential sampling methodologies with various officials from IRS’ Research Division as well as NRP officials. We reviewed preliminary documents related to the random sampling methodologies, including an assessment of IRS’ documentation for the additional cases that would be required to update return selection formulas. We talked to officials responsible for developing and managing the data gathering and report writing systems IRS plans to use during its study. Additionally, we reviewed documentation for these systems. We did not evaluate IRS’ overall efforts to measure voluntary compliance because parts of the business plan had not yet been completed. We plan to continue to monitor and report on IRS’ efforts to develop an acceptable approach for measuring voluntary compliance. To describe how other agencies measure compliance, we reviewed information available at federal agency Web sites and identified five agencies and six programs where random sampling was used to determine compliance. We contacted officials from these agencies and reviewed information from the random sampling programs. Table 3 lists the agencies and the programs they administer. At each agency, we obtained documentation about the random sampling efforts and discussed random sampling procedures with agency officials. We also discussed how the data from the random samples were used and how agency operations had been changed based on these data. Our work on the six programs was descriptive, and we did not attempt to assess the effectiveness of the random sampling programs. The following table summarizes IRS’ efforts to measure voluntary compliance using the TCMP surveys between 1963 and 1988. Tax Compliance: Status of the Tax Year 1994 Compliance Measurement Program (GAO/GGD-95-39, Dec. 30, 1994) Tax Compliance: 1994 Taxpayer Compliance Measurement Program (GAO/T-GGD-95-207, July 18, 1995) Letter to the Commissioner on TCMP Errors (GAO/GGD-95- 199R, July 19, 1995) Tax Administration: Information on IRS’ Taxpayer Compliance Measurement Program (GAO/GGD-96-21, Oct. 6, 1995) Tax Administration: Alternative Strategies to Obtain Compliance Data (GAO/GGD-96-89. Apr. 26, 1996) Summary Summarizes uses of TCMP data and outlines who uses the data. Identifies weaknesses of proposed changes and establishes criteria for evaluating proposed changes to measures of voluntary compliance. Summarizes IRS’ plans for the 1994 TCMP and discusses promising changes. Identifies several weaknesses in the plan that IRS needs to fix before implementing the project. Testimony on 1994 TCMP before the Subcommittee on Oversight, Committee on Ways and Means. Discusses uses of TCMP data and status of planned 1994 TCMP effort. Discusses some of the criticisms of TCMP. Identifies GAO reports where TCMP data were used. Summarizes errors in audits for 1988 TCMP and suggests changes to codes to be used to categorize the cause of noncompliance for the planned 1994 TCMP project. Follow-up on issues raised in our December 1994 report concerning timeliness and the types of data IRS planned to gather for TCMP audits. Also, briefly discusses other sources of data on voluntary compliance and the relevance of TCMP data for alternative tax system proposals. Indicates how IRS responded to our recommendations. Summarizes the problems caused by cancellation of the 1994 TCMP project. This report also identifies sampling strategies that will reduce the sample size and still provide some data. Similar to IRS’ prior studies on measuring taxpayer compliance, some federal agencies randomly sample their clients to measure compliance with the rules and regulations covering their programs and services. In general, agencies use random samples to reduce the cost and burden of collecting information on how well the agency is performing its functions. We tried to focus on the following six areas, when the data were available: (1) sample population from which the sample is drawn; (2) sample size; (3) methodology used to select the sample; (4) what data were collected and how they were used; (5) length of time to conduct the case reviews; and (6) cost of the reviews. The agencies we contacted have augmented their efforts to measure compliance since passage of the Government Performance and Results Act (GPRA), which required that agencies establish measures to determine the results of agency activities. GPRA seeks to shift the focus of government decision-making and accountability away from a preoccupation with the activities that are undertaken—such as grants dispensed or inspections made—to focus on the results of those activities, such as real gains in employability, safety, responsiveness, or program quality. GPRA also requires federal agencies to set goals, measure performance, and report on their accomplishments. Measuring compliance is not the same thing as ensuring compliance. Agencies use various processes, including verification of submitted information, in an effort to ensure that all clients are in compliance with the rules and regulations governing the programs. For example, in the Food Stamp program, states verify income and household circumstances during the application process. In contrast, agencies measure compliance to determine the effectiveness of these efforts to ensure compliance. A key difference between efforts to assure compliance and efforts to measure compliance is that assurance generally applies to every client the agency serves while measurements are generally based on a random sample of a small portion of the clientele. The following sections describe the steps five agencies are taking to measure compliance with the laws and regulations governing the six programs we reviewed. The Health Care Financing Administration, part of the Department of Health and Human Services, administers the Medicare Program. Medicare annually pays more than $200 billion to 1 million health care providers for services provided to nearly 40 million seniors and disabled Americans. In August 2000, HCFA developed and began to implement a new measure that looks at the accuracy and documentation for payments to providers. This new compliance measure, called the Comprehensive Error Rate Testing (CERT) Program, is designed to assess how accurately providers bill the Medicare Program and improve on the accuracy and usefulness of existing studies. HCFA has contracted the CERT Program functions to an independent third party that provides the sampled claims database, medical claim reviewers, and various management reports. The annual cost of this contract is $4.1 million. Over the course of each year, a random sample of 120,000 claims is chosen from the over 900 million Medicare claims received. Analysts randomly select 2,000 claims from each of 60 contractors who process Medicare claims—allowing HCFA to make contractor-specific compliance estimates. Medical records for the sampled claims are requested from the provider, and medical professionals independent of HCFA review the records for appropriateness of treatment and accuracy of billing. If necessary, the provider may be contacted and asked to explain items on the claim and related medical records. HCFA is phasing in the CERT project, starting with durable medical equipment claims. It plans to have a baseline error rate for the entire program by December 2002. Subsequently, the error rate will be updated annually. According to HCFA officials, a primary use of the CERT data will be to measure how well they meet the goals established for GPRA. HCFA officials also noted that the data would be used to determine how well contractors were fulfilling their processing functions. Finally, HCFA officials told us that they believe that CERT data can be used to identify problems with the program, such as assertions by providers that claims they submit are often lost or misplaced by HCFA contractors. The Food Stamp Program is the largest of the domestic food and nutrition assistance programs. Administered by the U.S. Department of Agriculture’s Food and Nutrition Service, food stamps worth $16.9 billion were issued to an average of 19.8 million persons per month for fiscal year 1998. Each year, states identify a random sample of individuals receiving food stamps; the sample totals about 50,000 nationwide. States are responsible for conducting eligibility determinations for this sample of households, and certifying the correctness of these eligibility determinations. For example, the state of California had 865,632 food stamp recipients for which the state completed 1,103 reviews for fiscal year 1998. After the state reviews, the quality control group in the Food and Nutrition Service selects a subsample of cases reviewed by the states in order to assess the accuracy of these certification actions. These subsamples are also used to identify the state’s error rate, which affects the amount of funding the state receives for administering the program. In 1998, the Food and Nutrition Service quality control sample ranged from 150 to about 400 cases per state, depending on the state’s level of program participation. For example, 377 cases were sampled from California. State reviews consist of face-to-face interviews with food stamp recipients to determine eligibility and whether they are receiving the proper amount of food stamps. Interviews are conducted at the client’s home, or workplace. The client must provide documentation of their household circumstances, including information on each household member, their income, and the household’s income. State reviewers also obtain information from external databases and other third parties. The interview generally lasts from 30 to 40 minutes. Data are collected on a 16-page data collection instrument. These data are aggregated, and a statewide error rate is calculated. The Food and Nutrition Service validates this process. Food and Nutrition Service officials estimate that the entire compliance and quality control program costs about $72 million annually. According to agency officials, these reviews are used to determine the quality of the states’ efforts to screen applicants for food stamps and to determine how enhanced funding is awarded and liabilities are assessed. These reviews are also used to determine how effectively the program is meeting its goal of improving the accuracy of eligibility determinations and food stamp allotment amounts. The Social Security Administration (SSA) administers the Old Age, Survivors, and Disability Insurance (OASDI) Program, commonly known as Social Security. In fiscal year 1999, SSA made payments of over $382 billion to more than 44 million claimants of retirement and disability insurance payments. With payments this large, even very small payment discrepancies can result in the loss of very large amounts of money. Given the potential magnitude of even small payment discrepancies and the need to protect the Social Security Trust Fund, SSA has made improving payment accuracy a key strategic goal. The payment accuracy rate is determined through an annual review of statistically valid samples in both the old age and disability programs. For the old age program, SSA randomly selects 80 cases per month (960 per year) for review of payment accuracy. In the disability program, 40 cases per month are selected (480 per year). According to SSA officials, these are statistically valid samples from which payment accuracy estimates can be made for the entire program population. SSA reviews the case file and also contacts the claimant either in person or by telephone. Information is obtained from review of SSA files and from the claimant to assess the accuracy of payments. Claimant data are summarized on a 16-page questionnaire. Data obtained from the claimant include other names and social security numbers used in reporting earnings, marital history, disability information, and information on military service. SSA officials told us that the samples and reviews are conducted primarily to measure how well the agency is meeting its objectives of improving payment accuracy. According to SSA officials, however, information from these samples is also used to identify problems with processes related to payment accuracy. The SSI Program is the nation’s largest federally funded cash assistance program for the poor. The program is administered by SSA, and in 1999, paid about $28 billion in benefits to 6.6 million recipients. SSI is a means- tested program designed to provide or supplement the income of aged, blind, or disabled individuals with limited income and resources. SSA’s Office of Quality Assurance and Performance Assessment annually assesses payment accuracy in the SSI Program using a random sample of program participants. SSA selects about 580 SSI recipients a month— almost 7,000 per year—to assess payment accuracy. The only requirement for selection in this review is that the recipient has received a SSI payment during the selection month. SSA uses a 26-page case analysis worksheet to collect information on each of the selected SSI recipients. In each case, SSA conducts a desk review and also contacts the SSI recipient either face-to-face in their homes or over the telephone. During recipient contacts, SSA obtains demographic information, documentation of marital status, work history, income information, and changes in living arrangements, including household composition and expenses. According to SSA officials, this worksheet requires about 1 hour to administer. SSA uses the data obtained from these SSI reviews to calculate a payment accuracy estimate. This estimate is used to assess how effectively and efficiently SSA performs its day-to-day business processes and service delivery functions. These reviews provide the basis for reports to Congress and other monitoring authorities and measure payment accuracy for the SSI Program. Customs is responsible for ensuring that all goods entering and exiting the United States do so in compliance with all U.S. laws and regulations. Customs inspects goods and persons arriving by land, sea, and air at over 300 ports of entry. During fiscal year 2000, Customs processed about 482 million passengers arriving at land and airport ports of entry. Customs conducts several types of random audits as part of its management and quality control efforts. The largest of these random inspection programs is conducted at U.S. land border crossings, where during fiscal year 2000, Customs randomly selected over 326,000 privately owned vehicles entering the country for a detailed secondary inspection. In these inspections, Customs looks for illegal contraband, such as drugs, and other goods that were not declared. Similar random inspections are conducted at the top 20 commercial air passenger ports of entry, where in fiscal year 2000, over 232,000 passengers were randomly selected for detailed secondary inspections. According to Customs officials, these secondary inspections range from 5 minutes to 20 minutes. Longer inspection times occur at land ports of entry, where the inspector must conduct a comprehensive inspection of vehicles. A shorter period is needed at airports, where inspectors generally only look at the contents of baggage. Inspectors complete a one-page data collection instrument, obtaining information such as country of origin, passport information, and other demographic data. Customs also uses a law enforcement network as a data resource for determining criminal activities. Customs uses the information from these secondary inspections to provide an estimate of the number of violators and the effectiveness of its primary inspection process. These inspections also serve as a measure of how well Customs is meeting the goals it established to comply with GPRA. Results of primary inspections only provide data on the number of interdictions made--and not the number that are missed. Customs officials indicated that using random sampling for secondary inspections better meets GPRA goals because the secondary inspections allow them to estimate how much contraband they failed to interdict on the primary inspections. Consequently, using random samples helps them provide Congress with better inspection data overall. Customs officials indicated that the information gathered from these secondary inspections is used to develop training programs for inspectors and to indicate where changes in inspection programs are needed. The mission of the Immigration and Naturalization Service is to ensure that individuals seeking entry to the United States are legally entitled to do so. Economic, demographic, and political pressures worldwide have resulted in continued growth in the number of international migrants seeking to come to the United States, both legally and illegally. INS conducted over 497 million primary inspections in fiscal year 1999 at more than 300 ports of entry. Each year since fiscal year 1999, as part of a pilot program, INS conducts about 17,000 secondary inspections on randomly selected travelers entering the country through 22 of the ports of entry selected for analysis. These inspections are rigorous, supplementary inspections of travelers who have already been cleared through primary inspection. INS is currently evaluating this pilot program. INS officials indicated that, under the pilot program, inspectors personally interview the traveler and review his or her passport and any other documents needed to legally enter the country. INS inspectors complete a one-page data collection instrument and collect data such as citizenship status, date of birth, country of residence, gender, and factors that led to a determination of inadmissible status (if appropriate). INS also conducts physical inspections of personal items, such as contents of luggage, pockets, wallets, and vehicles. Like Customs, INS also uses a law enforcement network as a data resource for determining criminal activities. According to INS officials, each of these inspections, on average, requires an additional 11 minutes for each traveler. INS officials said that primary inspections take less than one minute. According to INS officials, the primary purpose of this pilot program is to determine whether or not these inspections provide a statistically valid performance measure to identify the extent to which noncitizens are being incorrectly admitted to the United States at these 22 sites. This information could also be used to train agents and modify procedures to improve operations. INS officials also noted that the pilot was used to measure the results of agency operations in accordance with GPRA. No data were available on the cost of these activities. | The U.S. tax system is based on voluntary reporting. The Internal Revenue Service (IRS) reviews all tax returns after they are filed to ensure compliance with tax laws governing this voluntary system. Despite these efforts, each year billions of dollars in taxes owed are not voluntarily reported and paid, which could result in reduced revenue to fund federal programs, higher tax rates, or both. There are three types of voluntary compliance measures: filing compliance, which measures the percent of taxpayers who file returns in a timely manner; payment compliance, which measures the percent of tax payments that are paid in a timely manner; and reporting compliance, which measures the percent of actual tax liability that is reported accurately on returns. This report reviews the status of IRS' plans to measure voluntary reporting compliance as well as six other federal programs that currently measure voluntary compliance. GAO found that IRS has tried to develop an approach for measuring voluntary compliance. It has established objectives and guiding principles for developing this measure as well as developed database software to collect and analyze data. As of March 2001, IRS' preliminary draft plan included four alternatives for measuring voluntary reporting compliance. GAO found that each of the six programs measure compliance by gathering different types and amounts of information from a random sample of clients. Sample sizes range from about 1,400 to more than 500,000 annually. In all but one program, clients are randomly selected and interviewed in person. |
Share-in-savings contracts fall under the umbrella of performance-based contracting, in which a federal agency specifies the outcome or result it desires and lets the contractor decide how best to achieve the desired outcome. In theory, share-in-savings contracting can provide a number of potential benefits to both an agency and its contractor. For example, an agency can ask a contractor to provide up-front funding, in which case most of the financial risk of the project shifts from the government to the contractor. The agency also can leverage the contractor’s stake in the success of a project since the contractor receives payment only after demonstrating that the project—a new or upgraded information technology system, for example—saves the agency money. Unexpected problems, such as a delay in system installation, could erase some of the projected savings, so the contractor has an incentive to effectively manage overall costs, schedule, and performance. In short, the contractor is paid for results, not just for effort. Because of the increased financial risk a contractor assumes, a contractor can earn a greater return with a share-in- savings contract compared to the return on a traditional contract. In 1996, the Clinger-Cohen Act authorized limited pilot programs to test the feasibility of share-in-savings contracts for information technology. In 2002, the E-Government Act expanded authority to award share-in-savings contracts in fiscal years 2003 through 2005 to acquire information technology solutions and provided incentives for agencies to enter into such contracts. For example, agencies are allowed to retain, in their information technology accounts, any savings above amounts paid to their contractors. The act required the OMB to report to Congress on the number of share-in-savings contracts entered into under this initiative. In December 2004, the OMB reported that no contracts for information technology projects had been awarded. In 2003, we issued two reports related to the use of share-in-savings contracts. Our January 2003 report, which focused on commercial use of share-in-savings contracting, found that this approach can be an effective technique to motivate contractors to generate savings and revenues for clients. To be successful, though, clients and contractors need to agree on goals and objectives and how to achieve them. Our March 2003 correspondence to OMB addressed the need for OMB’s Office of Federal Procurement Policy to ensure that members of the federal acquisition workforce understand and appropriately apply the authority of the E-Government Act of 2002. The Department of Energy has used share-in-savings contracting for technology solutions to reduce energy consumption. Congress authorized the department, among other federal agencies, to use a type of share-in- savings contract for private financing of energy-efficiency improvements in federal facilities. Rather than use up-front appropriations from Congress, the department asked energy service contractors to contribute the up-front costs for identifying a federal facility’s energy needs as well as buying, installing, operating, and maintaining energy-efficient equipment to reduce energy bills. In return, the contractors get a share of the energy savings generated by the improvements. We have found that agencies that have used energy savings performance contracts have reduced their energy consumption and achieved other goals. We have raised questions, however, about the use of share-in-savings contracts for energy-efficiency improvements. For example, a number of factors may cause third-party financing of long-term capital improvement projects to be more expensive than the direct use of available appropriated funds. This is so because the interest rate paid by a contractor for needed capital typically would be higher than if the improvements were funded through appropriations. Inevitably, by opting to use a share-in-savings contract, the federal agency would have to take into account the contractor’s higher cost of financing than if the agency had funded the project itself. Another area of concern is how share-in- savings contracts should be reflected in the federal budget, an issue about which federal budget agencies disagree. On the one hand, OMB believes that share-in-savings budget authority, contract obligations, and outlays should be recognized on a year-to-year basis. In other words, only the first year’s costs, not the cumulative annual costs of energy share-in-savings contracts, would need to be reflected in the agency’s budget in the year the contract is awarded. On the other hand, the Congressional Budget Office believes that the budget should reflect long term share-in-savings contract commitments as new obligations at the time the contract is signed, consistent with government accounting principles. In a recent report, we raised similar concerns. Finally, the extent to which energy savings cover costs remains uncertain, and we have recommended more oversight of energy savings performance contracts and other steps to ensure cost-effectiveness. Final regulations to implement the share-in-savings authority in the E-Government Act of 2002 have yet to be published. Additional guidance on the use of this method also lags behind the progress made in establishing a share-in-savings program office and providing agencies with some share-in-savings tools and related training. The E-Government Act required that the Federal Acquisition Regulation (FAR) be revised by mid-September 2003 to implement the share-in- savings authority contained in the act. It was not until July 2004, however, that a proposed revision to the FAR was published in the Federal Register for public comment. As of July 2005, the final FAR rule was still awaiting approval by OMB’s Office of Federal Procurement Policy. The act also required the OMB to develop guidance for techniques to permit agencies to retain a portion of resulting financial savings after payment of the contractor’s share of the savings. OMB officials told us they plan to develop a broader policy memorandum providing agencies with additional guidelines to ensure share-in-savings contracting success. As of July 2005, the policy memorandum had not been issued. OMB officials indicated, however, that implementing regulations and share-in-savings guidance would be completed in the near future. The act assigned GSA responsibility for helping federal agencies identify information technology projects as potential share-in-savings candidates and for providing guidance on determining share ratios and baselines from which savings may be measured. GSA established a share-in-savings program office in February 2003, and in July of that year launched two Web-based tools to help agencies identify and evaluate share-in-savings opportunities. The Business Case Decision Tool is designed to assist agencies in developing business cases on the basis of realistic baseline costs to ensure that use of share-in-savings contracts would be cost- effective. The Proposal Evaluation Tool is used to evaluate the merits of contractor share-in-savings proposals. According to the program office director, agencies started using the Business Case Decision Tool in September 2003. As of March 2005, various agencies have used the tool to conduct 219 analyses, resulting in the identification of 15 information technology projects as potential share-in-savings candidates. Although some of these 15 potential projects are still under consideration, various steps remain to be completed, and none has yet resulted in a share-in- savings contract award. GSA hired a contractor to train agencies in identifying suitable share-in- savings projects, structuring solicitations, and analyzing proposals. The training, which has been available to agencies since July 2004, is a 2-day course and costs $650 per student. As of March 21, 2005, a total of 21 federal acquisition employees from six agencies had taken the training. The same training is now being offered by the Federal Acquisition Institute, an entity within OMB charged with developing the curriculum needed to train the civilian agency workforce. Two classes have been scheduled, one in June 2005, and the other before the E-Government Act’s authority expires in September 2005. The Federal Acquisition Institute may exercise an option to provide five additional share-in-savings training classes in fiscal year 2006. Finally, in July 2004, GSA established blanket purchase agreements with six contractors; each of which is a major information technology solution provider with commercial share-in-savings contracting experience. A blanket purchase agreement is a simplified method of filling the government’s anticipated repetitive needs for supplies or services by establishing charge accounts with qualified sources of supply. The agreements may subsequently be used by agencies to procure specific goods or services. As of June 2005, however, since no share-in-savings project is ready for the contracting phase, no agencies have used the blanket purchase agreements. Officials from 11 agencies cited several reasons the share-in-savings contracting authority for information technology has not led to the award of share-in-savings contracts. Reasons include a lack of final implementing regulations and OMB guidance on how to budget and account for retained savings and the difficulty of determining baseline costs. Some officials said contractors are reluctant to get involved in share-in-savings contracts because the return on investment is believed to be too low. In addition, officials told us that even though contractors would provide up-front funding for a share-in-savings contract, some amount of appropriated funds would still be required. Officials also said that too few acquisition personnel have been trained to use this innovative contracting technique. Agency officials told us they are reluctant to use share-in-savings contracting until the FAR implementing regulations are finalized. Because share-in-savings contracting is considered innovative within the federal government, agency officials said they need clear regulations to understand when and how to use this technique. We also highlighted the need for guidance in our March 2003 correspondence to OMB’s Office of Federal Procurement Policy. Given the federal government’s limited experience with share-in-savings contracting, as well as limited understanding of the conditions that foster successful implementation in commercial share-in-savings contracts, we reported that members of the federal acquisition workforce need to understand and appropriately apply the E-Government Act’s new authority. Toward that end, we recommended that OMB develop the necessary guidance. To date, OMB has not responded to our recommendation. While GSA’s guidance may be helpful in identifying potential candidates, additional guidance is still needed from OMB on accounting for savings in excess of amounts paid to the contractor and developing sound business cases with firm baselines. Another reason agency officials say they have not used share-in-savings contracting is the difficulty in determining a baseline cost. A baseline cost is the cost of current operations. Without an accurate baseline, agreed to by the agency as well as the contractor, savings cannot be correctly measured, leaving both the agency and the contractor at risk of not receiving their fair share of savings, if any are generated. The contractor cannot determine with any certainty that the savings would cover its costs, let alone result in a profit. Our past work on commercial use of share-in- savings contracts suggests that the business process and administrative cost information necessary to calculate a baseline may not be available in some cases. Agency officials told us that in the information technology area, calculating a baseline can be very complicated. It can be difficult, for example, to isolate the direct savings from a reduction in the time an employee spends on a new task as a result of a new, automated information system replacing one or more old tasks. Further, in our past financial reporting, we have described the type of systemic challenges agencies face in accurately determining the baseline costs of programs, which could impede agencies’ use of share-in-savings contracting. For example, we reported in the 2004 Financial Report of the United States Government that the federal government’s ability to reliably measure the full costs of certain programs is hampered by a significant number of material weaknesses related to financial systems, fundamental recordkeeping, financial reporting, and incomplete documentation. Even if a baseline could be established, most agency officials we interviewed said an obstacle to using share-in-savings contracting would be not having a potential savings pool large enough to provide contractors an appealing return on investment. The GSA share-in-savings program office and the Office of the Secretary of Defense’s Business Initiative Council determined that a successful share-in-savings business case requires a savings-to-investment ratio of at least 3 to 1. However, a business case review in 2004 by the Defense Commissary Agency illustrates the potential difficulty in meeting that target. Last year, that agency determined that an inadequate return on investment was a primary reason a share-in-savings contract would not be used to buy a replacement retail transaction system for its hundreds of commissaries. On two occasions, the agency requested information from contractors on installing a replacement retail transaction system under a share-in-savings contract. Concerns about fewer commissaries in the future, as a result of anticipated military base closures, and other cost uncertainties led contractors to request a guaranteed minimum number of system replacements to protect profit margins associated with their initial investments. The agency did not provide minimum guarantees, and a share-in-savings contract was not awarded. Another reason, according to officials, agencies may not have used share- in-savings contracting to acquire information technology solutions is that the E-Government Act requires funds to be available for the first year of the contract. Even though the contractor pays the up-front costs, the agency still needs appropriated funds to cover cancellation and termination liability, in the event the government ends the project. However, agency officials advised that these funds can represent a significant share of the total cost of an information technology project. Accordingly, so that any savings would stay with the government, agency officials said they are motivated to use appropriated funds for information technology projects and to award traditional contracts. This is the reason that the Internal Revenue Service decided not to award a share-in-savings contract to modernize its taxpayer identification system for non-U.S. citizens. In the past, when we interviewed Department of Energy officials about using share-in-savings contracts for energy-efficiency improvements, they said this contracting technique is best used to finance projects when federal funding is thought to be unavailable. According to Department of Energy officials, they would prefer the agency pay for the entire project, because all of the savings would stay with the government. We have previously reported that training on the E-Government Act’s share-in-savings acquisition initiative would be essential to its effective implementation. However, few acquisition personnel have been trained on when and how to use share-in-savings contracting. As of March 21, 2005, only 21 federal acquisition employees had received share-in-savings training from GSA’s share-in-savings training contractor. The training developed by the contractor addresses the technical and organizational share-in-savings issues needed to be understood for successful contracts. For example, negotiating a share-in-savings contract can be a highly technical and time-consuming process and requires a certain level of business acumen. As covered in the training, the use of share-in-savings contracting demands a good understanding of requirements; agreement on baseline costs, use of metrics to measure savings, confidence in savings- share ratios; and the identification and mitigation of risks. With only a few months remaining before authority for the initiative is due to expire, no federal agencies have used the share-in-savings authority provided by the E-Government Act to award contracts. Therefore, neither OMB nor we has a basis for assessing the effectiveness of share-in-savings contracts for information technology to improve agencies’ mission-related or administrative processes. Agencies’ limited exposure to share-in-savings contracting for information technology has not extended much beyond the initial steps of analyzing potential business cases. As a result, the act’s authority has not actually been tested. Since OMB expects the implementing regulations and share-in-savings guidance to be issued soon, at least some of the reasons agencies cited for not using the share-in-savings contracting authority for information technology soon could be addressed. Although it is too early to know whether or not other reasons can be overcome, the issuance of implementing regulations and OMB guidance may soon create better conditions under which to test the share-in-savings initiative. If Congress wants to test the effectiveness of share-in-savings contracts for information technology, Congress would need to extend the authority beyond the scheduled September 2005 expiration. We received comments on a draft of this report from OMB and GSA. Both agencies concurred with the report. In oral comments, OMB officials acknowledged that issuance of the share- in-savings implementing regulations and OMB guidance has been delayed longer than anticipated. The officials cited the need to ensure that the regulations and OMB guidance are clear on how to successfully manage share-in-savings complexities, such as establishing a baseline, determining a reasonable return on investment, and ultimately developing a sound business case. OMB officials commented that shortly after enactment of the E-Government Act, the agency started efforts to develop the share-in- savings regulations and guidance and noted the October 2003 advanced notice of proposed rulemaking and the July 2004 publication of the proposed rule as examples of the results of such efforts. OMB officials also noted that the final rule was drafted in February 2005. However, OMB officials told us they continue to work with other agencies to ensure that the final policy is clear on how to successfully handle the complexities of the share-in-savings planning and budgeting processes. Although OMB officials could not tell us precisely when, they anticipate that the final rule and OMB guidance will be published in the near future. In e-mailed comments, GSA generally agreed with our report but believed the title of the report did not accurately describe the efforts taken to test share-in-savings. GSA commented that the report’s title implies that nothing has been done, despite the agency’s efforts in promoting the use of share-in-savings and that certain portions of the concept have been tested, although outside of the E-Government Act’s authority. We recognize that the government has used share-in-savings contracts under other authorities. However, the government has not awarded any share-in- savings contracts under the E-Government Act’s authority, and therefore, the authority has not been tested. We also recognize in the report the work GSA did to promote the use of share-in-savings contracting. To determine the regulations, guidance, and program-level support that exist to assist agencies in developing share-in-savings contracts, we interviewed officials and obtained documentation from OMB and GSA. We participated in a 1-day course adapted from GSA’s 2-day training course, which was led by the contractor, Beacon Associates Inc. of Bel Air, Maryland. To determine the reasons agencies have not entered into share-in-savings contracts, we interviewed officials from seven defense and civilian agencies that used contracting vehicles other than share-in-savings to award high dollar-value contracts for information technology in fiscal year 2003. We identified the agencies with high-dollar information technology spending by reviewing contract actions reported in the Federal Procurement Data System, the government’s repository for contracting data. Though that system has recognized limitations, it was sufficient for purposes of identifying a mix of defense and civilian agencies with high levels of spending on information technology. We interviewed agency officials who had shown an interest in using share- in-savings contracts to buy information technology. We identified these officials by reviewing their agencies’ Exhibit 300, an OMB budget justification and reporting requirements document that is required for the procurement of major information technology systems. We also contacted the GSA for help in identifying agencies that explored share-in-savings opportunities. Finally, we interviewed and obtained information from the Department of Defense’s Business Initiatives Council. The Department of Defense established the council to improve business operations by identifying and implementing business reforms, such as share-in-savings contracting for information technology. The agencies we obtained information from as to why they opted not to use the E-Government Act’s share-in-savings contracting authority are the Army, Navy, Air Force, and the Defense Commissary Agency in the Department of Defense; the Departments of Agriculture, Health and Human Services, Interior, and Justice; GSA; the Internal Revenue Service; and the Office of Personnel Management. We are sending copies of this report to interested congressional committees, the Director of OMB, the Administrator of General Services, and the chief acquisition officers at the 11 agencies from which we obtained information. We will also make copies available to others upon request. In addition, the report will be available at no charge on the GAO Web site at http://www.gao.gov. If you or your staff have any questions about this report, please contact me at (202) 512-4841 or [email protected]. Contact points for our Offices of Congressional Relations and Public Affairs may be found on the last page of this report. Major contributors to this report were Carolyn Kirby, Assistant Director; Daniel Hauser; Noah Bleicher; Lily Chin; Johnetta Gatlin-Brown; and Russell Reiter. | Federal agencies spend billions of dollars every year on information technology and are increasingly using performance-based contracting methods where agencies specify desired outcomes and allow contractors to design the best solutions to achieve those outcomes. Share-in-savings contracting is one such method under which a contractor provides funding for a project, and the agency compensates the contractor from any savings derived as a result of contract performance. The E-Government Act of 2002 authorized the use of share-in-savings contracting for information technology and required implementing regulations by mid-September 2003. The Office of Management and Budget (OMB) reported in December 2004 that no share-in-savings contracts had been awarded. The act's authority expires in September 2005. The act required GAO to assess the effectiveness of share-in-savings contracts. Because no such contracts have been awarded, GAO cannot provide an assessment. Instead, GAO reviewed the status of regulations and tools available to agencies in developing these contracts and identified the reasons agencies have not used the authority provided by the act. OMB and the General Services Administration (GSA) generally agreed with GAO's report. More than 2 years after enactment of the E-Government Act of 2002, implementing regulations and OMB guidance for using share-in-savings contracts for information technology have yet to be issued. OMB officials indicate, however, that implementing regulations and share-in-savings guidance will be issued in the near future. GSA--which the act holds responsible for helping agencies identify share-in-savings opportunities, among other requirements--established a share-in-savings program office in February 2003. A few months later, GSA launched two Web-based tools, one of which is designed to assist agencies in identifying cost-effective uses for the share-in-savings approach and producing business cases for using share-in-savings for information technology projects. As of March 2005, this tool had been used more than 200 times. A total of 15 business cases were deemed potential share-in-savings candidates, however, none of these resulted in a contract award. GSA hired a contractor that developed a 2-day training course for share-in-savings contracting, but only 21 federal acquisition employees have taken the course. And even though GSA prequalified six contractors as viable information technology system solution providers with commercial share-in-savings experience, no agencies have taken advantage of these opportunities to award a share-in-savings contract. Officials from 11 agencies cited a number of reasons that the share-in-savings initiative has not resulted in the award of contracts for information technology projects. Reasons include lack of implementing regulations; difficulty determining baseline costs; a belief that the return on investment using share-in-savings contracts is insufficient; concerns among agency officials that they still would have to obtain funding for cancellation and termination liability, which can be a significant sum; and too few acquisition employees have been trained to use the share-in-savings contracting technique. Since OMB expects the implementing regulations and share-in-savings guidance to be issued soon, at least some of the reasons agencies cited for not using the share-in-savings contracting authority for information technology soon could be addressed. Whether or not other reasons can be overcome may not be known until the authority is tested. |
MPOs, representing local governments and working in coordination with state departments of transportation and major providers of transportation services, have responsibility for the regional transportation planning processes in urbanized areas. (See figure 2 for a summary of these processes.) A core function of MPOs is to establish and manage a fair and impartial setting for effective transportation decision making in an urbanized area. To receive federal transportation funding, any project in an urbanized area must emerge from the relevant MPO and state department of transportation planning process. MPOs, which generally have a governing policy board consisting of local elected officials and appropriate state and public transportation officials, facilitate decision making on regional transportation issues including major capital investment projects and priorities. MPOs also generally have a technical advisory committee (including engineers, planners, and other local staff); citizen’s advisory committee; and additional committees, such as a bicycle and pedestrian committee or a freight advisory committee. MPO staff assist the MPO board by preparing documents, fostering interagency coordination, facilitating public input and feedback, and managing the planning process. Staff may also provide committees with technical assessments and evaluations of proposed transportation initiatives. Created to carry out a federally mandated transportation planning process, MPOs’ core membership is spelled out in law, but the organizational structure and staff arrangements were designed to be determined by agreement between local officials and the state. The size of the populations represented by individual MPOs varies. For instance, about 52 percent of the 381 MPOs represent populations of fewer than 200,000 people; 36 percent of MPOs represent populations of 200,000 to 999,999 people; and 11 percent of MPOs represent populations of 1 million or more people. However, the largest MPOs—those representing more than 1 million people—represent about 49 percent of the country. (See figure 1 for a summary of MPO sizes.) All MPOs have the same basic planning requirements. Specifically, all MPOs are required to produce the following: long-range (20-year) transportation plans; short-range (4-year) Transportation Improvement Programs; annual statements of planning priorities and activities (generally called a Unified Planning Work Program or UPWP); and public participation plans. Transportation improvement programs (TIP), based on the long-range plan, should be designed to achieve the area’s transportation goals using spending, operating, management, and financial tools. The area’s transportation goals are determined by the MPO’s policy board, including representatives from relevant jurisdictions and transportation operators, through interactions between stakeholders and the public for the purpose of identifying visions for the community’s future. This process allows the region as a whole to determine how it should allocate its limited transportation resources among the various capital and operating needs of the area, based on local and regional priorities. Both the TIP and the long- range plan must be fiscally constrained—that is, the total estimated cost of the planned transportation improvements cannot exceed anticipated levels of funding. MPOs must develop these plans and programs in cooperation with their state department of transportation as well as local transit operators, land-use entities, and environmental resource agencies. Where they exist in their region, MPOs also consult with tribal governments, airports, Amtrak, or freight rail interests during the planning process. (See figure 2 for a summary of the role of the MPO, state, and federal government in developing the long-range plan and TIP.) Beyond the requirements common to all MPOs, some MPOs have additional planning requirements. For example, MPOs serving urbanized areas with populations of over 200,000 people, which are referred to as transportation management areas (TMA), are required to develop a Congestion Management Process (CMP) that identifies actions and strategies to reduce congestion. In addition, MPOs containing areas that do not conform to federal air quality standards (i.e., nonattainment areas) or areas that have recently come into conformance with the standards (i.e., maintenance areas) are required to ensure that planned transportation improvements will not cause new air quality violations, worsen existing violations, or delay timely attainment of the standards. To ensure that such plans will not negatively affect regional air quality, MPOs must conduct what is termed “conformity analysis” for proposed transportation improvements. To create these transportation plans and programs, MPOs consider a variety of factors, including local travel forecasts and federal considerations. For example, MPOs forecast future travel with the assistance of computerized travel-demand models. These models provide information on how urban growth and proposed facility and operational investments will affect the operation of the transportation system. Such models are complex and require as inputs extensive current information on roadway and transit system characteristics and operations, as well as current and forecast demographic information. Creating and operating the models requires a high degree of technical training and expertise. Additionally, when developing these plans and programs, MPOs must consider specific statutorily defined planning factors. These factors require that the metropolitan planning process provide for consideration of projects and strategies that will support the economic vitality of the metropolitan area, especially by enabling global competitiveness, productivity, and efficiency; increase the safety of the transportation system for motorized and nonmotorized users; increase the security of the transportation system for motorized and nonmotorized users; increase the accessibility and mobility of people and freight; protect and enhance the environment, promote energy conservation, improve the quality of life, and promote consistency between transportation improvements and state and local planned growth and economic development patterns; enhance the integration and connectivity of the transportation system, across and between modes, for people and freight; promote efficient system management and operation; and emphasize the preservation of the existing transportation system. To carry out this regional planning process, 1.25 percent of federal-aid highway funding from the Interstate Maintenance, National Highway System, Bridge, Surface Transportation Program, and Congestion Mitigation and Air Quality (CMAQ) programs is apportioned to the states as metropolitan planning funds. Federal legislation has maintained, and periodically increased, the funding for MPO activities over time. (See figure 3.) These federal funds are distributed to states based on population. Generally states then provide each of their MPOs with baseline funding and distribute any remaining balance according to a formula. While the states can use a range of factors in their formulas, such as congestion levels, they are required to take population into account. Federal planning dollars must also be matched by state and local governments. Specifically, state and local governments must provide at least 20 percent of metropolitan planning funds, although some state and local governments have to provide more than 20 percent in funding to perform all of their necessary planning activities. Federal and state governments oversee this regional planning process. At the federal level, FTA and FHWA work together to perform federal certification reviews—certifying that each TMA has carried out its planning according to the applicable federal statutes. More specifically, the certification review requires that the federal government assess TMAs every 4 years to determine how well they are working with the transportation-related organizations, local governments, public transportation operators, and citizens in their area, as well as with the state departments of transportation, to meet the many statutory and regulatory requirements applicable to the planning process. Additionally, the certification review assesses the quality of the required planning documents. The certification review includes a desk review of the MPO’s plans and a site visit, among other things. Additionally, all MPOs, including both TMAs and non-TMAs, must also self-certify that their planning process meets the federal requirements. States also participate in the regional planning process by, for example, reviewing and approving the MPO’s TIP. If the state approves the TIP, the state must incorporate the TIP, without change, into the statewide transportation improvement program (STIP). If the state does not approve the TIP, the MPO and the projects included in the TIP are not eligible for federal funding. This requirement compels states to coordinate with MPOs and vice versa. The staff size and structure of MPOs vary significantly. Some MPOs are supported by one or two staff, while a few have over 100 full or part-time staff. Most MPOs have a relatively small staff, with a median of four full- time staff per MPO, based on our survey. (See table 1 for a summary of the number of staff by size of MPO.) The type and structure of the organizations housing MPOs also vary across the country. The structure of an MPO is determined by agreement between relevant local governments and the state, and therefore the extent to which these local governments or other regional organizations support MPO activities varies. These organizations can support MPOs by housing staff within their organization, which can include providing the personnel and facilities necessary for MPO activities. Some MPOs are housed and staffed by a local jurisdiction (such as a city or county government) within its boundaries, others by a regional planning council, and still others operate independently. According to our survey respondents, 71 percent of MPOs are a part of agencies such as regional councils and city, county, or state governments. Eighteen percent of MPOs report that they operate independently. Beyond their staff and structure, MPOs also vary in terms of their funding sources and amounts. Federal planning funds—FHWA PL funds and FTA Section 5303 funds—generally make up a large portion of the MPO budget for conducting necessary studies and developing transportation plans, programs, and other documents. According to our survey respondents, about 80 percent of MPOs receive a majority of their planning funds from these federal sources. The amount of matching funds provided by state and local sources also varies considerably by MPO. For example, officials from one state department of transportation we spoke to said that the small MPOs receive considerably more than the required 20 percent of state and local matching funds for transportation planning. Officials from another state told us that although they only receive the required 20 percent match, they also provide technical support to some MPOs. In addition to federal planning funds and the required state and local match, some MPOs receive and use other funds, such as dedicated local taxes and transit fare box revenue. Finally, according to FTA, while most federal transit funds designated for urban areas are apportioned directly from FTA to the transit operator, some funds are apportioned to MPOs, which then allocate those funds themselves. The technical capacity of MPOs to develop travel demand forecasts—a crucial component of the long-range plans—also varies. Some MPOs— about 45 percent of all our survey respondents—use their own models to develop most, if not all, of their forecasts, while 51 percent rely on consultants or their state department of transportation to conduct their modeling. Small MPOs are less likely to conduct their own travel demand forecasts, with only 30 percent reporting that they have their own modeling, according to our survey. Further, the federal government gives local transportation planning agencies, including MPOs, the flexibility to choose their own transportation models without being subject to minimum standards or guidelines. As a result, the type of model used by MPOs also varies. Of the MPOs that reported in our survey that they use a model to conduct their travel demand forecasts, a large majority said that they use a four-step model, which uses survey and other data to estimate future trips and assign those trips to different modes. Seven survey respondents indicated that they use activity-based models, which are tied more closely to household and traveler characteristics and behavior and therefore should, in concept, permit MPOs to address policy questions that cannot be treated with the conventional four-step models. For example, four-step models are not suited to estimating the emissions effects of small transportation projects or linking these effects to air quality; more advanced modeling techniques, such as activity-based models, are needed to estimate such effects. The Transportation Research Board (TRB) also noted that although the four-step process is common, there are considerable variations in the completeness and complexity of the models and data employed. Further, they reported that MPOs vary significantly in the number of staff devoted to travel forecasting. Through our survey and interviews, we also found that many MPOs have additional responsibilities that are not federally required, many of which extend beyond transportation planning. For some MPOs, these additional responsibilities and activities are required by their state, while other MPOs have taken on these responsibilities over time, based on regional needs. Land-use planning. According to our survey respondents, many MPOs conduct all or a portion of their region’s land-use planning, and for some this is a state requirement. Specifically, 70 percent of MPOs have some land-use planning responsibilities, with the larger MPOs generally reporting that they have more of these planning responsibilities than small MPOs. Eleven percent of survey respondents specifically said that their land-use responsibilities are required by their state. In practice, some MPOs integrate land-use planning into their transportation planning process by considering potential land-use scenarios along with proposed projects. Some MPOs have also led public processes to develop an integrated transportation and land-use “vision” for a region and to evaluate future transportation and land-use scenarios. Similarly, for a number of MPOs, various forms of land-use models are now part of the process for analyzing the growth of the region and studying the land-use impacts of alternative transportation investment programs. Generally, though, MPOs do not have authority to make land-use decisions. Rather, local jurisdictions typically have the authority to make such zoning and other decisions. Project selection. By determining which projects are to be included in TIPs, all MPOs have a role in determining which projects will ultimately be funded. However, only certain MPOs have the authority to select—from a list of projects in an approved TIP—which projects are to be implemented in the most immediate time frame, using federal funds available to a metropolitan planning area. In areas designated as TMAs, the MPO, in consultation with the state and public transportation operators, selects from an approved TIP all projects that are to be implemented using funding under Title 23 or under Chapter 53 of Title 49 of the U.S. Code (excluding projects on the National Highway System and projects funded under the Bridge, Interstate Maintenance, and Federal Lands Highway programs). Furthermore, MPOs in air quality nonattainment areas also have the ability to use CMAQ funds. Additionally, in California, regional organizations have project selection authority for 75 percent of their region’s portion of the state’s TIP funds (which includes both federal and state highway money). Project implementation. Some MPOs also have the responsibility for implementing transportation projects. Generally, MPOs do not take the lead in implementing transportation projects; rather, they play a coordinating role in planning and programming funds for projects and operations. Usually, local jurisdictions, transit operators, or state governments take the lead in implementing projects. However, 37 percent of survey respondents—representing MPOs of all sizes—said that they implement projects. For example, one large MPO we spoke with utilizes its local, state, and federal funds to implement projects by leveraging this money with regional partners to construct large-scale transportation projects. Toward this end, the MPO established a program aimed at quickly reducing congestion in particular areas. This initiative uses small- scale projects, such as traffic signal optimization, for congested corridors—which can be implemented within 2 years and are largely funded and carried out by the MPO. Transit operations. Sixteen percent of MPOs responded in our survey that they have some responsibility for operating all or a portion of their regional transit system. For example, one western MPO is both the transit authority—providing mass transit that connects throughout the region— and the transportation-planning agency for the greater metropolitan area. Another MPO noted in our survey that rather than operating the transit system, it serves as the planning staff for both the region’s MPO and the transit agency. Environmental planning. Twenty-one percent of MPOs responding to our survey said that they conduct air quality or emissions analysis, beyond the federally required conformity process. Further, 32 percent of MPOs responding to our survey said that they conduct additional environmental or water quality planning. For example, one state we visited requires its MPOs to consider how their long-range transportation plan increases water and energy conservation and efficiency. MPOs we surveyed and interviewed cited several funding challenges that impact their ability to conduct transportation planning. About 85 percent of all MPOs responding to our survey cited the lack of transportation planning funding as a challenge to transportation planning. MPOs we surveyed and interviewed also cited challenges related to the lack of flexibility of transportation planning funds. Specifically, about half of all MPOs responding to our survey cited the lack of flexibility of funding as a challenge. While FTA allows planning funds to be used for a broad range of planning activities, FHWA is more prescriptive in how planning funds can be spent. For example, FHWA guidance precludes using planning funds for projects’ environmental analyses that definitively go beyond transportation planning. Furthermore, officials at a few MPOs we spoke with stated that it is unclear which activities can be undertaken with planning funds, particularly in terms of the FHWA planning funds, and that such definitions inhibit them from conducting comprehensive planning by not allowing them to use transportation planning dollars for other uses where necessary. DOT officials we spoke with agreed that the eligibility for FHWA planning funds is fairly narrow, but noted that Surface Transportation Program funds can be used for metropolitan planning and are more flexible. MPOs also cited a few other funding-related challenges. First, many MPOs reported having difficulty securing local matching funds for federal transportation planning dollars. About 66 percent of survey respondents overall cited this as a challenge. For example, one MPO we spoke with has been unable to utilize all of the federal planning funds it has been allocated because the MPO cannot meet its local matching requirements. As a result, the MPO has not been able to hire needed staff. Second, MPOs also had mixed opinions regarding the fiscal constraint requirement—that MPOs develop plans that correspond to reliable revenue projections. About 84 percent of survey respondents cited the fiscal constraint requirement as a challenge. One MPO official told us that this is a challenge because the MPO has to submit its TIP without full knowledge of the state’s available funding; this makes creating a realistic fiscally constrained TIP difficult. A previous GAO report found similar concerns. In particular, for MPOs in some urban areas, financially constraining the transportation improvement program meant abandoning proposed projects because of a lack of projected revenue. Although developing a fiscally constrained plan can be difficult, we have also previously reported that the fiscal constraint requirement has been largely beneficial to the planning process because it has led MPOs to obtain more reliable revenue projections from state departments of transportation and transit agencies and to exclude those projects that could not be financed within budget constraints. Third, beyond funding challenges related to planning, officials at a few small MPOs we spoke with often stated that their region had insufficient funding to keep pace with the transportation projects needed. In fact, at one small MPO, an official estimated that the region received about 10 percent of the funding needed to construct necessary projects. This lack of funding could potentially limit the effectiveness of MPO planning because fewer projects from the TIP can be implemented. MPOs also cited staffing constraints, to a lesser extent, as a challenge that impacts their ability to conduct transportation planning. Some MPOs stated that staffing affects their ability to fulfill its planning requirements. For example, one small MPO told us that with only one or two staff members, it is very difficult to satisfy all the federal requirements for MPOs such as creating and updating the TIP and long-range plan and holding public meetings. MPOs also mentioned a lack of trained staff as a challenge to transportation planning. About half of the survey respondents cited lack of trained staff as a challenge in carrying out the federal requirements for transportation planning. Lack of trained staff is also a challenge for small MPOs, according to our survey. For example, officials from several MPOs stated that retaining staff trained to conduct the travel forecasting is difficult because there are few people with the expertise to conduct such technical analyses and consulting firms can often pay modelers a higher salary than an MPO. In addition, officials from one MPO told us that the challenges of having limited staff resources is compounded by requirements to ensure public participation, noting that much of their time is spent carrying out the public participation requirements for the planning process relative to other activities. Concerns about meeting the public participation requirements were consistent across most of the MPOs we surveyed. In particular, 79 percent of survey respondents stated that they have difficulty obtaining the public participation needed to meet their transportation planning requirements. A few MPOs we interviewed stated that it was difficult to generate public participation in the planning process, in part because few people actually understand what an MPO is or what it does. Most MPOs function as part of another planning or governing body, such as a council of governments. According to a few MPOs we interviewed, this arrangement can address staffing and funding limitations by allowing an MPO the ability to cut costs by sharing resources such as a space in which to operate and, in some cases, facilitates coordination between the MPO and other planners or transportation stakeholders. However, this arrangement can also create some challenges. In particular, a few MPOs housed within city governments or other entities connected with a specific jurisdiction said that this arrangement causes them to be viewed as less impartial than MPOs that are stand-alone entities, and that these perceptions can affect their consensus-building efforts. Additionally, 71 percent of small MPO survey respondents cited competing priorities between transportation planning and other tasks related to the council of governments as a challenge. MPOs we surveyed and interviewed also cited the lack of authority as a challenge to effective transportation planning. About 80 percent of all MPOs responding to our survey indicated that the lack of authority to implement the plans they develop is a challenge. The majority of MPOs that responded to our survey do not implement any of the projects contained in the plans that they create. Rather, they rely on other agents such as cities, counties, and state departments of transportation to carry out their plans. Similarly, although many survey respondents reported that they conduct land-use planning for their region, MPOs generally lack the authority to make land-use decisions. Instead, this authority generally rests with state and local jurisdictions. As a result, MPOs indicated that they have difficulty anticipating and integrating land-use decisions into their transportation planning. For example, in one region we visited, local jurisdictions are often reluctant to make land-use planning decisions in-line with the MPO’s regional transportation plan. In part, the official stated that this occurs because local jurisdictions have a difficult time making land-use decisions that benefit the region as a whole as opposed to their individual community. If land-use decisions do not correspond with an MPO’s plans, the MPO’s proposed transportation improvements may not be as effective. Our past work has documented that integrating land- use and transportation investments—including accurately modeling future land-use changes—is important but challenging. MPOs we interviewed also cited their lack of authority in determining which projects will be implemented as a challenge. Although MPOs help determine which projects are eligible for funding and which ones have priority through the development of the TIP, whether a project will be funded and the amount of funds made available for the project are determined by federal, state, and local policymakers. Moreover, according to our survey, the availability of funding and public support are more important drivers of transportation investment decisions than the analysis conducted by MPOs. This is consistent with our previous work regarding transportation decision making, which indicated that even when economic analyses are performed, the results are not necessarily the most important factor considered in terms of which projects to fund; rather, a number of factors, such as public support or the availability of funding, drive transportation investment decisions. Although MPOs in the survey cited lack of authority as a challenge, the MPOs we interviewed had mixed opinions regarding the extent to which they felt being granted additional authority would improve transportation planning. Some of the MPOs we spoke with emphasized that having project implementation and land-use decision-making authority would improve transportation planning. For example, one large MPO told us that although they have developed a close working relationship over the years with transit operators and other transportation stakeholders to make their planning processes successful, they need land-use authority to more comprehensively address critical transportation issues. Another MPO we interviewed, however, suggested that giving MPOs project implementation or land-use authority may not improve transportation planning. Specifically, one MPO official stated that such additional authorities may actually hamper MPOs’ ability to conduct transportation planning, since some of their current ability to generate consensus results from the fact that they do not have a stake in building or operating the transportation plans. MPOs also face technical challenges, in part because the travel demand modeling required to forecast future growth and needs has become more complicated. MPOs today face a much broader and more complex set of requirements and needs in their travel modeling than they did in the 1960s and 1970s, when the primary concern was evaluating highway and transit system capacity expansions. New requirements—such as determining motor vehicle emissions and changes in land use—have created additional data needs to account for the increasing complexity of the transportation system. For example, about half of our survey respondents indicated that their MPOs include a nonattainment or maintenance area and, thus, are required to conduct air quality conformity analyses. An even larger percentage of medium- and large-sized MPOs—66 percent and 76 percent, respectively—indicated that they have such areas within their MPO boundaries. As planning organizations, much of the value of MPOs lies in their ability to forecast and analyze an increasingly complex and growing set of transportation needs. If MPOs’ technical capabilities cannot account for the increasing complexities facing regional transportation systems, MPOs’ contributions to transportation planning may be compromised, which could lead to planning failures and poor investment decisions. Although some MPOs are taking steps to meet the challenges presented by the increasing complexity of the transportation system, MPOs still face modeling challenges. About half of MPOs report that they face challenges related to their limited modeling capacity. Some MPOs have had success updating their travel forecasting techniques to accommodate new requirements. For example, officials at one MPO told us the transit agency in their region is developing a travel demand model specifically for transit, though it has not yet been incorporated into the MPO’s travel models. Some MPOs we interviewed, however, told us that they lack the resources to improve their modeling capabilities. In fact, MPO officials expressed concern in interviews that current models, including the four-step models most MPOs use, do not necessarily produce forecasts that can adequately account for the increasing complexities of transportation planning, such as predicting future land-use patterns and transit’s effect on travel behavior. TRB also found similar challenges—that is, they found inherent weaknesses in current models that are generally unable to address new policy concerns raised by the growing complexity of the transportation system. TRB notes that when the detail required to address a transportation issue increases, the complexity of the analytical techniques should increase as well. For example, a small metropolitan area experiencing minimal growth, with little transit and no air quality problems, will likely be able to use a simple model to determine the area’s needs. Thus no single approach is appropriate for all MPOs. Although modeling presents challenges, according to our survey, the most predominant technical challenge was related to acquiring quality data to use in planning models. Over 70 percent of survey respondents cited data limitations as a challenge. Data reflecting current travel patterns in a metropolitan area are important because models that are supplied with inaccurate or out-of-date data may produce inadequate forecasts that contribute to poor planning. In addition, having robust data to support proposed transportation plans helps to keep planning more objective and lends credibility to the plans developed by MPOs. However, conducting a household travel survey—a survey of random households in a metropolitan area that gathers trip-related data, such as mode of transportation, duration, distance and purpose of trip—to collect updated data is both expensive and time-consuming. For example, officials at one large MPO we interviewed stated that they need to update their household survey but are having difficulty finding the estimated $1.5 million needed to do so. As we mentioned earlier, funding shortages and the lack of staff trained with such technical expertise make increasing technical capacity a challenge for many MPOs, particularly small ones. TRB’s study also found that many MPOs had inadequate data to support their modeling processes. The federal certification review is an important mechanism that FTA and FHWA use to oversee the MPO planning process. Although all MPOs are required to self-certify that they have met the federal transportation planning requirements, SAFETEA-LU also requires DOT to certify the metropolitan planning process of the 155 TMAs every 4 years. To conduct a certification review, FTA and FHWA assemble a team which typically consists of FTA and FHWA field staff, but may also include FHWA or FTA headquarters community planners, EPA officials, other subject matter experts, or experts from DOT’s Volpe National Transportation Systems Center. FHWA division office personnel generally take the lead in these reviews, which typically take 6 to 9 months and include (1) an initial desk review, which includes verifying compliance with basic regulatory requirements, among other things; (2) an evaluation of the MPO’s written response to a series of questions; (3) a 2 to 4 day site visit during which the team gathers additional information; and (4) a meeting to inform the public about planning requirements and provide an opportunity for the public to express concerns about how the process is meeting the needs of the area. After the site visit, the team prepares a final report including review findings and recommendations, which incorporates public comments on the planning process. Consistent with federal law, the federal certification review is process- oriented and conducted without regard to transportation planning outcomes. Specifically, through certification reviews, DOT ensures that the metropolitan planning process of an MPO serving a TMA is carried out in accordance with applicable provisions of federal law—for example, by ascertaining whether or not the MPO has adhered to its public participation plan. Oversight also provides a mechanism through which the federal government can ensure that its funds are being used to achieve its intended goals. The current process-oriented approach toward certification generally focuses on procedural requirements as opposed to performance. FTA and FHWA can withhold apportioned federal highway and transit funds if they determine an MPO is in noncompliance with federal requirements. However, FTA and FHWA officials were unaware of any instance in which an MPO was not certified due to noncompliance during the last 10 years. Furthermore, FTA and FHWA officials noted that the process is meant to be collaborative in nature. Therefore, a finding of noncompliance is as much of a failure on the part of DOT as the MPO, according to a DOT official. Because the federal certification is focused on compliance, not outcomes, it is difficult to determine whether federal oversight is improving transportation planning. GAO has previously recommended to DOT, as well as to Congress, that adopting performance measures and goals for programs can aid in evaluating and measuring the success of the programs, which can lead to better decisions about transportation investments. The procedural focus of the federal certification, and the fact that, according to DOT officials’ knowledge, no MPO has failed to be certified as a result of a certification review also makes it difficult to use the certification results as a performance indicator for MPOs. According to FHWA and FTA officials, certification reviews examine the quality of the MPO planning process by, for example, identifying corrective actions where there is noncompliance with statute or regulations and recommendations for areas needing improvement. Corrective actions are set with milestone dates to rectify the noncompliance and require a status report and re-evaluation of the process. Commendations for the use of noteworthy practices are also identified. However, FTA and FHWA do not assess the progress of the MPO in achieving the goals outlined in the plans. According to FTA and FHWA officials, states may, but are not required to, monitor the progress of MPOs in meeting their goals. Furthermore, an FHWA official noted that the elements that are reviewed through certification serve as proxies for good planning—for example, the resulting plans will be better if the MPO is regularly soliciting and incorporating public input. Most MPOs we interviewed generally view the federal certification reviews as pro forma in nature and place a greater value on informal assistance from the federal government. Officials in one state said that the most important oversight is the “give and take” between agencies on the various transportation plans they create. This informal interaction allows the oversight agencies to identify issues prior to the formal reviews. Likewise, many federal officials with whom we spoke view informal interactions— such as regular meetings, technical assistance, and review of air quality conformity analyses—as an important aspect of oversight. One FHWA division official we interviewed stated that the benefit of ongoing communication is that problems are identified as they arise and can be addressed well before the certification review or self certification is conducted. MPOs also reported that the assistance provided by their states is more important than the federal certification reviews. Although the level of participation of states in the planning process varies, MPOs reported in our survey that state department of transportation officials generally play a greater oversight role than DOT for certain activities. For example, around 80 percent of survey respondents reported that state department of transportation officials are involved in MPO boards and committees, while over 55 percent and 70 percent reported similar participation from federal officials on MPO boards and committees, respectively. This may be due, in part, to the limited number of staff at FHWA and FTA. With the pending expiration of the current surface transportation authorizing legislation, MPO, government, and industry officials have developed various formal and informal proposals to improve or change the current transportation planning process. We reviewed proposals from AMPO, AASHTO, APTA, the Brookings Institution, the previous and current DOT administrations, and the June 2009 House Transportation and Infrastructure Committee blueprint for the surface transportation reauthorization. We also discussed suggestions for improving transportation planning with MPO, federal, and state officials. In reviewing these proposals or suggestions, we identified several recurring changes, or options, that could address some of the resource, authority, and technical challenges facing MPOs. Most of the options have both advantages and disadvantages, and implementing any of the options will require policy trade-offs. Creating an expanded or clarified definition of eligibility for the use of transportation planning funds could allow MPOs to utilize planning funds in ways that best meet the needs of the area. Most of the MPOs we surveyed and many of the MPOs we interviewed suggested that having additional flexibility regarding the types of activities that are eligible to be completed using planning funds would improve the planning process. Currently, FHWA guidance precludes using planning funds for projects’ environmental analyses that “clearly extends beyond transportation planning.” As we mentioned previously, officials at a few MPOs we spoke with stated that they are unclear about what environmental activities are eligible under that definition, which makes it difficult to conduct comprehensive transportation planning. According to many of the MPOs we interviewed and 90 percent of the MPOs responding to our survey, creating more flexibility in how the planning funds can be spent would improve the effectiveness of the planning process and allow MPOs to be more efficient by prioritizing their limited resources to the most critical planning activities. However, providing such flexibility in federal transportation funds could result in less transparency and accountability. In particular, when funds can be flexed across different activities, there is less ability to assess the impact of particular funding streams—such as transportation planning funds—on the achievement of key goals. A number of the proposals for improving the MPO planning process include creating further variation—in addition to the TMA and non-TMA distinction—in MPOs’ planning requirements and authority to account for the wide variation in capacity of MPOs across the country. For example, creating additional variations in MPOs’ planning requirements could include the development of abbreviated planning requirements for MPOs. SAFETEA-LU allows that the Secretary of Transportation may permit MPOs that are not designated as TMAs or are not in nonattainment for ozone or carbon monoxide to develop abbreviated metropolitan transportation plans or TIPs. In so doing, the Secretary must take into account the complexity of transportation problems in the area. MPOs in small metropolitan areas—where transportation needs are often less complex—could benefit from abbreviated planning requirements. To date, no MPOs have applied for the abbreviated planning requirements, according to DOT officials. Other proposals suggest that MPOs that have exhibited increased capacity—e.g., those that are conducting additional activities beyond the current planning requirements—could be allowed additional implementation authority to oversee the development of certain projects. Likewise, an MPO could be granted expanded authority to plan and fund a metropolitan area’s transportation projects—focusing available transportation funds on projects that will benefit a region the most, regardless of mode. A large majority of the survey respondents—79 percent—stated that additional project implementation authority would improve effectiveness of the MPO planning process. However, granting additional authorities to MPOs or reducing the requirements could result in some additional challenges for MPOs and DOT. Additional federal and state oversight may be needed for (1) MPOs that take on new, traditionally non-MPO responsibilities, such as project implementation or (2) MPOs that reduce their planning requirements in order to ensure that the abbreviated process adequately accounts for the transportation needs of the area. Additionally, over half of the survey respondents reported that they do not have the capacity to undertake additional project implementation authorities, despite the fact that a large majority of MPOs stated increased implementation authority would improve the effectiveness of their planning process. Other proposals include changing the legal definition of MPOs to realign the MPO planning process with current capacity and planning needs. In particular, one option calls for an increase in the population threshold for mandatory MPO creation. Requiring the formation of MPOs at a larger population threshold could ease the burden of the previously mentioned resource constraints affecting small MPOs, including funding and staffing shortages. Specifically, one of the state departments of transportation we interviewed—one that contains more rural areas—noted that the current population threshold of 50,000 can create a situation in which a relatively small, rural area with less complex transportation needs is given MPO responsibilities. In these situations, MPOs may have difficulty funding an adequate number of positions—or filling them with qualified individuals— to do the work needed to meet federal and state requirements. Raising the population threshold could raise the likelihood that MPO efforts are limited to urban areas with more advanced transportation needs. However, about 73 percent of survey respondents from small MPOs reported that raising the threshold would not be an appropriate way to improve the planning process. An official from a small MPO we interviewed noted that any reduction in responsibilities for small MPOs must be a contextual decision based on the complexity of the transportation needs in the area, such as proximity to a large metropolitan area that is expected to grow in the future. With regard to technical constraints, improving technical capabilities across MPOs will likely require additional investment in modeling, data gathering, or both. As noted previously, current models are not well suited to representing travelers’ responses to the complex range of policies such as freight movement and motor vehicle emissions. Of particular concern is that many MPOs have inadequate data to support their modeling processes, even for traditional travel demand forecasts. Eighty-seven percent of MPOs surveyed said that greater federal support for transportation research and data would improve their effectiveness. Moreover, many of the MPOs we interviewed agreed that federal government investment in modeling and data gathering is necessary to ensure greater reliability in travel demand forecasting across MPOs and to help account for the increasing complexity of transportation forecasting and data needs in urban areas. Furthermore, without such an investment, policymakers may lack the information needed to make informed decisions on investments related to the transportation system. Toward this end, TRB’s Special Report 288 recommended the development and implementation of new modeling approaches to travel demand forecasting that are better suited to providing reliable information. These new modeling approaches include such applications as multimodal investment analyses, environmental assessments, evaluations of a wide range of policy alternatives, and meeting federal and state regulatory requirements. TRB also made various recommendations for improvements, including increasing DOT support and funding for incremental improvements to models in settings appropriate for their use, and the continued development, demonstration, and implementation of advanced modeling approaches. Additionally, TRB encouraged DOT collaboration with MPOs and states to examine data collection needs, including data requirements for validating current travel forecasting models and meeting regulatory requirements. Most recently, in July 2009, when DOT announced its principles for an 18-month extension of federal highway, transit, and highway and trucking safety programs, it called for an investment of $300 million to build state and MPO planning capacity for the collection and analysis of data on transportation goals. Additionally, DOT’s 18-month extension proposal suggests an investment of $10 million to build MPOs’ informational and analytic capacity to refine assessment tools at the federal level, among other things. Currently there are no requirements to attain explicit performance thresholds, such as reducing congestion or improving highway safety, built into the federal planning requirements for MPOs. MPOs and industry representatives we interviewed recognized the value of making the planning process more performance-based, noting that focusing on outcomes could improve transportation investment decision making. In addition, DOT’s recently released principles for an 18-month extension of certain federal surface transportation programs also calls for stronger requirements for tracking and reporting on the projected and actual outcomes of transportation investments that use federal dollars. Using performance measures could help hold MPOs accountable for carrying out a 3-C transportation planning process that encourages and promotes a safe and efficient surface transportation system. According to our survey, most MPOs already report using performance measures to some extent to assess results achieved. However, MPOs generally reported using output- based measures, such as compliance with state and federal transportation planning rules, rather than outcome-based measures, such as improved safety. Further, some DOT officials we spoke with maintained that the wide variety of needs and capacities among regions would make it difficult to establish national performance measures. To overcome the challenge of creating such measures for all MPOs, some officials said that broader performance goals could be established at the national level, while more specific measures and targets could be left for states and regions to establish. Establishing outcome-based measures for all MPOs would also require DOT to expand its oversight so that it can assess the progress of MPOs in achieving specific results, rather than focusing on compliance with existing statutes and rules. However, a few MPOs and the DOT officials we spoke to noted that it would not be appropriate to hold MPOs accountable for specific outcomes because they do not have the authority to implement their plans. Indeed, it is often up to local jurisdictions and the state to carry out MPO plans, and they do not always have the same priorities and goals as the MPOs. Some MPO stakeholders we spoke to noted that reconciling the needs of the region with the priorities of individual jurisdictions is a significant challenge. Nevertheless, other officials we spoke to noted that the purpose of MPOs is to establish a consensus on a region’s long-term transportation goals and that it would be appropriate to link those goals with specific outcomes. Our survey shows a pattern of variations and challenges that could increasingly compromise the quality of regional transportation planning, potentially allowing transportation problems—such as increasing congestion—to inhibit economic activity in the United States. For example: MPOs’ roles and responsibilities are not commensurate with their requirements. Under the current system, a small MPO with a simple transportation mission and limited technical capacity is generally accountable to the same planning and program requirements and oversight as a large MPO with a complex, multimodal transportation system, raising questions as to whether the federal government is appropriately targeting its oversight resources. SAFETEA-LU allows MPOs to seek permission to use a more abbreviated planning process. MPOs may not be universally aware of this option since, to date, no MPOs have utilized it. The quality of MPOs’ computerized travel demand models and the data used to support the process is often insufficient or unreliable. As planning organizations, one of the important functions of MPOs is the ability to forecast and analyze an increasingly complex and growing set of environmental, transportation, and social trends. Thus if MPOs are not able to keep pace with the increasing complexity of this task, their contribution to transportation planning may be compromised. However, on a cautionary note, effective forecasting requires both quality computer models and accurate data, such that investing in one without improving the other may waste resources. DOT’s July 2009 18-month extension proposal calls for additional resources for the collection and analysis of data on transportation goals to help build transportation planning capacity. Adopting TRB’s modeling and data gathering recommendations is an example of how the additional resources could be invested. Finally, because the oversight mechanisms for MPOs are focused on process, rather than outcomes, it is unclear what impact regional transportation planning is having on transportation outcomes. Despite over 30 years of a federally mandated and funded transportation planning process and billions spent on roads, bridges, and transit projects, there is not enough information for policymakers to determine whether the planning process is addressing critical transportation challenges facing the United States. However, shifting to a more performance-based oversight approach will require legislative changes. Addressing these variations and challenges is particularly important given some proposed reforms that would increase the ability of metropolitan and local governments to access additional federal transportation funds. The upcoming reauthorization of federal surface transportation programs provides Congress and DOT an opportunity to address these challenges and enhance regional transportation planning. For example, Congress and DOT could examine what is being invested in the federal oversight process, what the return for this investment is, and how it may be improved. Congress should consider making MPO transportation planning more performance-based—for example, by identifying specific transportation outcomes for transportation planning and charging the U.S. Department of Transportation with assessing MPOs’ progress in achieving these outcomes in the certification review process. To improve the transportation planning process, we are recommending that the Secretary of Transportation take the following two actions: 1. Direct the Administrators of the Federal Highway Administration and the Federal Transit Administration to establish guidelines for MPOs to apply for, and implement, the abbreviated planning clause for small MPOs, and share these guidelines with existing MPOs. 2. Develop a strategy to improve data gathering and modeling efforts among MPOs, including establishing a timeline for implementing the modeling and data recommendations for the federal government in the Transportation Research Board’s Special Report 288. We provided a draft of this report to DOT for review and comment. DOT agreed to consider the report’s recommendations. DOT also provided technical comments, which we incorporated as appropriate. We are sending copies of this report to interested congressional committees and the Secretary of Transportation. In addition, this report will be available at no charge on GAO’s Web site at http://www.gao.gov. If you or your staff have any questions about this report, please contact me at (202) 512-2834 or [email protected]. Contact points for our Offices of Congressional Relations and Public Affairs may be found on the last page of this report. GAO staff who made major contributions to this report are listed in appendix II. To identify and assess the characteristics and responsibilities of metropolitan planning organizations (MPO) we reviewed current and previous federal statutes and regulations governing MPOs. We also reviewed relevant academic, industry association, GAO, and U.S. Department of Transportation (DOT) research and publications to understand MPOs’ transportation planning responsibilities, the ways MPOs vary, and the challenges MPOs face in carrying out their responsibilities. Additionally, we interviewed representatives from industry associations, as well as MPO, Federal Transit Administration (FTA), Federal Highway Administration (FHWA), and DOT officials to clarify MPO planning responsibilities, identify transportation planning challenges, and assess how DOT provides oversight for MPOs and the extent to which this improves transportation planning. To further examine the role of state departments of transportation in metropolitan planning and assess the potential impact of various changes to MPOs, we contacted 11 additional state departments of transportation by e-mail and received responses from 6. We also attended and observed a DOT on-site certification review in Savannah, Georgia, to further understand the federal oversight of transportation management areas (TMA). To determine the various options for improving regional transportation planning, we reviewed federal surface transportation program reauthorization proposals from the Association of Metropolitan Planning Organizations (AMPO), American Association of State Highway and Transportation officials, American Public Transportation Association, Brookings Institution, the previous and current DOT administrations, and the current House Transportation and Infrastructure Committee blueprint for reauthorization. We also discussed informal proposals or suggestions for improving the planning process with MPO, federal, and state officials. To gather in-depth information on the roles and responsibilities of MPOs, the extent to which federal oversight improves transportation planning, and possible ways to improve regional transportation planning, we conducted a Web-based survey of all 381 MPOs. This survey was conducted from February 3 to April 1, 2009. To prepare the questionnaire, we pretested potential questions with MPOs of different sizes and from different FTA regions to ensure that (1) the questions and possible responses were clear and thorough, (2) terminology was used correctly, (3) questions did not place an undue burden on the respondents, (4) the information was feasible to obtain, and (5) the questionnaire was comprehensive and unbiased. On the basis of feedback from the seven pretests we conducted, we made changes to the content and format of some survey questions. The results of our survey can be found at GAO-09-867SP. To identify MPOs to survey, we obtained MPO contact information from DOT and AMPO; any inconsistencies between the two lists were reconciled with phone calls to the relevant MPO. We also contacted all of the MPOs in advance, by e-mail, to ensure that we had identified the correct respondents and to request their completion of the questionnaire. After the survey had been available for 2 weeks, and again after 4 and 6 weeks, we used e-mail and telephone calls to contact MPOs who had not completed their questionnaires. Using these procedures, we obtained an 86 percent response rate. Because this was not a sample survey, there are no sampling errors. However, the practical difficulties of conducting any survey may introduce errors, commonly referred to as nonsampling errors. For example, difficulties in how a particular question is interpreted, in the sources of information that are available to respondents, or in how the data are entered into a database or were analyzed can introduce unwanted variability into the survey results. We took steps in the development of the questionnaire, the data collection, and the data analysis to minimize these nonsampling errors. For instance, a survey specialist designed the questionnaire in collaboration with GAO staff who have subject-matter expertise. Further, the draft questionnaire was pretested with a number of MPOs to ensure that the questions were relevant, clearly stated, and easy to comprehend. When the data were analyzed, a second, independent analyst checked all computer programs. Finally, nonresponding MPOs were distributed among different states and sizes of MPOs in a way that did not show evidence of bias. To gather additional information on the roles and responsibilities of MPOs, the extent to which federal oversight improves transportation planning, and possible ways to improve regional transportation planning, we conducted case studies in eight metropolitan areas. Each case study involved interviews with the designated MPO for that metropolitan area, as well as the state department of transportation, transit operators, and other relevant regional organizations. We selected MPOs to visit and examine based on the following criteria: population (based on whether or not the MPO is in a designated TMA); location (based on the FTA region); air quality (based on whether the MPO is located in an air quality structure of the MPO (based on whether the MPO is an independent agency or housed within another organization or jurisdiction); and recommendations from internal stakeholders, experts, associations, and federal DOT officials we consulted. Although using these criteria allowed us, in our view, to obtain information from a diverse mix of MPOs, the findings from our case studies cannot be generalized to all MPOs because they were selected as part of a nonprobability sample. Table 2 lists the region and relevant MPOs where we conducted case studies. In addition to the contact named above, A. Nicole Clowers, Acting Director; Kyle Browning; F. Chase Cook; Kathleen Gilhooly; Cathy Hurley; Stu Kaufman; Sara Ann Moessbaeur; Josh Ormond; Stephanie Purcell; Amy Rosewarne; Jay Smale; and Susan Zimmerman made key contributions to this report. | Metropolitan planning organizations (MPO) are responsible for transportation planning in metropolitan areas; however, little is known about what has been achieved by the planning efforts. This congressionally requested report describes (1) the characteristics and responsibilities of MPOs, (2) the challenges that MPOs face in carrying out their responsibilities, (3) how the U.S. Department of Transportation (DOT) provides oversight for MPOs and the extent to which this improves transportation planning, and (4) the options that have been proposed to enhance transportation planning. To address these objectives, GAO surveyed all 381 MPOs (with an 86 percent response rate) and conducted case studies of eight metropolitan areas and conducted a survey of program managers. MPOs vary greatly in terms of capacity and responsibilities. Some MPOs are supported by one or two staff, while others have over 100 staff. While half of MPOs represent populations of less than 200,000, some represent millions. MPOs are typically housed within a regional planning council or a city or county government agency, but also may operate as independent agencies. Most MPOs receive the majority of their planning funds from federal sources, but also receive funds from other sources such as states or localities. The technical capacity of MPOs also varies significantly, both in terms of the type of model used to develop travel demand forecasts and the number of staff available to perform such forecasts. Some MPOs have acquired additional responsibilities, such as project implementation, beyond federal requirements. MPOs cited many challenges in our survey and interviews, primarily related to funding and staffing, authority, and technical capacity. About 85 percent of all MPOs responding to our survey cited the lack of transportation planning funding as a challenge to transportation planning. About half of our survey respondents stated that the lack of flexibility for using federal planning funds inhibits them from conducting comprehensive transportation planning. Staffing constraints, such as limited number of staff and lack of trained staff, also impact MPOs' ability to conduct transportation planning. Finally, according to our survey and interviews, some MPOs lack the technical capacity and data necessary to conduct the type of complex transportation modeling required to meet their planning needs. DOT's Federal Transit Administration (FTA) and Federal Highway Administration (FHWA) work together to oversee MPOs, but given the process-oriented approach of the oversight, it is difficult to determine whether their oversight is improving transportation planning. MPOs representing more than 200,000 in population are subject to federal certification reviews. The certification reviews focus on procedural compliance with planning requirements, not transportation outcomes. MPOs generally view this federal process as pro forma in nature and place a greater value on informal assistance provided by both federal and state governments. Several proposals have been developed by government and industry associations that could address some of the resource, authority, and technical challenges facing MPOs. For example, (1) allowing the use of transportation planning funds for more activities could better meet the needs of some metropolitan areas; (2) varying MPOs' planning requirements and authority or changing the legal definition of MPOs could address varying capacity and planning needs; (3) increasing federal investment in modeling and data gathering could improve the technical capability of MPOs and bring a greater degree of reliability and consistency across MPOs to travel demand forecasting; and (4) making the planning process more performance-based could allow FTA and FHWA to better assess MPOs' progress in achieving specific results. |
Since the onset of OIF and OEF, over 1 million servicemembers have been deployed. As of the end of June 2005, more than 393,000 active duty, Reserve, and National Guard servicemembers from OIF and OEF have separated from active duty. Of these, over 100,000 have sought health care services from VA, including over 2,400 who received inpatient care at VA medical centers. The Reserves and National Guard account for about 54,000 of those servicemembers who sought health care services from VA. The three most common health problems have been musculoskeletal ailments (primarily joint and back disorders), dental problems, and mental health disorders. Servicemembers injured during OIF and OEF are surviving injuries that would have been fatal in past conflicts. In World War II, 30 percent of Americans injured in combat died; this proportion dropped to 24 percent for those injured in the Vietnam War and further dropped to about 10 percent for those injured in OIF and OEF. Many of the injured OIF and OEF servicemembers are returning with severe disabilities, including traumatic brain injuries and missing limbs. About 65 percent of OIF and OEF combat injuries are from improvised explosive devices, blasts, landmines, and fragments. Of those injured personnel, about 60 percent have some degree of traumatic brain injury and may require comprehensive inpatient rehabilitation services to address complex cognitive, physical, and mental health issues resulting from trauma. Traumatic brain injuries may cause problems with cognition (concentration, memory, judgment, and mood), movement (strength, coordination, and balance), sensation (tactile sensation and vision), and emotion (instability and impulsivity). The Department of Health and Human Services’ Centers for Disease Control and Prevention reports that an estimated 15 percent of persons who sustain a mild brain injury continue to experience symptoms 1 year after injury. Initially, most severely injured servicemembers, including Reserve and National Guard members, are brought to Landstuhl Regional Medical Center in Germany for treatment. From there, they are transported to appropriate U.S. military medical facilities, with most of the seriously injured admitted to Walter Reed Army Medical Center or the National Naval Medical Center, both located in the Washington, D.C., area. Once these servicemembers are medically stabilized, many are relocated closer to their homes or military commands and continue recovering either on an inpatient or outpatient basis at a VA medical facility, a DOD military treatment facility (MTF), or DOD civilian provider. Those who have served, or are now serving, in OIF and OEF may receive care from VA for conditions that are or may be related to their combat services for a 2-year period following the date of their separation from active duty without copayment requirements. Following this 2-year period, they may continue to receive VA care but may be subject to a copayment for their health care. To ensure that servicemembers engaged in conflicts receive the health care services they need, Congress passed legislation in May 1982 that authorized VA to provide medical services to members of the armed forces during and immediately following wartime or national emergencies involving the armed forces in armed conflict. The law authorized the Secretary of VA to give servicemembers responding to or involved in a war or national emergency a higher priority for medical services than all veterans, except those with a service-connected disability. VA has established an enrollment system to manage veterans’ access to care. This system includes eight priority categories for enrollment, with higher priority given to veterans with service-connected disabilities, lower incomes, or other recognized statuses such as former prisoners of war. Separation from the military and return to civilian life may entail the exchange of individually identifiable health information between DOD and VA. The exchange of this information must comply with the Health Insurance Portability and Accountability Act of 1996 (HIPAA) and the HIPAA Privacy Rule, which became effective April 14, 2001. The HIPAA Privacy Rule permits DOD and VA to share servicemembers’ health information under certain circumstances, such as for continuity of health care treatment or if the individual signs a proper authorization. VA has taken several steps to provide OIF and OEF servicemembers with timely access to health care and information on health care services. These steps include setting policies and developing outreach efforts targeting OIF and OEF servicemembers. Since 2002, VA has issued a memorandum and four directives addressing eligibility criteria and the health care needs of recently discharged servicemembers. A September 2002 directive established policies and procedures for offering hospital care, medical services, and nursing home care to recently discharged servicemembers for a 2-year period, beginning on their discharge date, for any illness, without requiring proof of its link to military service. Under this directive, these veterans are enrolled in the lowest priority category for service-connected veterans. In April 2003, when the President declared a national emergency with respect to the conflict in Iraq, the Secretary of VA issued a memorandum authorizing VA to give priority health care to servicemembers who sustained an injury, over veterans and others eligible for VA care, except those with service-connected disabilities. An October 2003 directive (1) provided instructions to VA employees for determining the eligibility of recent combat veterans to be enrolled for VA health care; (2) required each VA medical facility to designate a clinically trained combat case manager, usually a social worker or nurse, to coordinate all of the medical care and services provided to recent combat veterans by VA and non-VA agencies until the veterans no longer need care; and (3) required VA medical facilities to designate a point of contact—administrative staff, social worker, or nurse—to receive and expedite transfers of servicemembers from MTFs to VA medical facilities and coordinate with VA’s combat case managers. A June 2005 directive specified the dates of service and combat locations to determine whether recent combat veterans are eligible for health care services. Another June 2005 directive expanded the scope of care at VA’s four regional traumatic brain injury rehabilitation centers and redefined these facilities as polytrauma rehabilitation centers. These centers’ inclusion of psychological treatment for family members and rehabilitation services using high-technology prosthetics reflect VA’s intention to provide more coordinated care for patients, including the growing number of OIF and OEF servicemembers with severe and disabling trauma. The directive states that coordination of care, including intensive clinical and social work case management services, is essential in these severe trauma cases, as patients transition from acute hospitalization through acute rehabilitation and ultimately to their home communities. In addition to VA’s directives, a joint DOD and VA program was established in August 2003 to assign VA social workers to selected MTFs to coordinate patient transfers between MTFs and VA medical facilities. The social workers make appointments for care, ensure continuity of therapy and medications, and followup with patients to verify success of the discharge. By mid-July 2005, the social workers had received 3,907 requests for transfer of care—almost two-thirds of them had been transferred to VA facilities; the rest were pending. Further, VA benefits counselors work with the social workers to inform servicemembers about VA benefits and to initiate paperwork for disability compensation claims, vocational rehabilitation and employment assistance, and other VA benefits. Also in August 2003, VA created the Taskforce for the Seamless Transition of Returning Service Members. The taskforce, composed of senior VA leadership, focused on developing and implementing VA policies to improve the transition of injured servicemembers to civilian life. In January 2005, VA established the Seamless Transition Office to further improve coordination within the Veterans Benefits Administration and the Veterans Health Administration as well as between DOD and VA. The goals of the Seamless Transition Office include improving communication, coordination, and collaboration within VA and with DOD with respect to health care; educating VA staff about veteran’s health care and other needs; and ensuring that policies and procedures are in place to enhance the transition from servicemember to veteran. The Seamless Transition Office uses the taskforce in an advisory capacity. To help ensure that VA staff assisting OIF and OEF servicemembers can be responsive to their health care needs, the agency created an internal Web site to provide a single source of access to VA policies, procedures, and directives for wounded, ill, and seriously injured servicemembers and veterans. According to VA, the internal Web site also includes a list of the points of contact at medical facilities and articles about transition-related activities. VA has instituted several outreach strategies to provide information about the health care services available to OIF and OEF servicemembers who have been discharged. These include the use of newsletters, personal letters, an external Web site, counseling services, and briefings on VA benefits and services. Using DOD rosters of OIF and OEF servicemembers who have separated from active duty, VA sends newsletters and personal letters with pertinent information to these new veterans. VA has sent three newsletters since December 2003, with information on benefits and health issues specific to OIF and OEF veterans. In addition, the Secretary of VA sends these new veterans a letter thanking them for their service to the country and informing them about VA health care services and assistance to aid in their transition to civilian life. The letter includes a toll-free number for obtaining information on VA health care and two brochures on VA health care as well as benefit information, including disability compensation, education and training, vocational rehabilitation and employment, home loans, and life insurance. In addition, the Secretary of VA has sent letters to all the Adjutants General and Chiefs of the Reserves to inform them of VA services and benefits. VA has also sought to improve access to health care information. It created a Web site that provides information specific to those who served in OIF and OEF, such as information on VA health and medical services; dependents’ benefits and services; transition assistance; and benefits for active duty military, Reserve, and National Guard personnel. In addition, VA developed a wallet-sized card with relevant toll-free telephone numbers and Web site addresses. VA officials reported that the agency has distributed 1 million copies of this wallet card. VA has enhanced outreach to those who served in OIF and OEF and their families through its Vet Center Readjustment Counseling Service, consisting of 207 centers. Vet Centers function as community points of access by providing information and referrals to VA medical facilities. Additionally, they offer counseling, employment services, and a range of social services to assist individuals in readjusting from wartime military service to civilian life. VA reported that during 2004, it hired 50 peer counselors and placed them at Vet Centers where significant numbers of servicemembers were returning from OIF and OEF. According to a VA official, VA is in the process of hiring an additional 50 peer counselors. Briefings are another form of outreach used by VA to inform OIF and OEF servicemembers about health care services. From fiscal year 2001 through the third quarter of fiscal year 2005, VA held more than 30,800 briefings on VA benefits for more than 1.1 million servicemembers. These briefings include about 3,700 predeployment and postdeployment briefings for about 230,000 activated Reserve and National Guard servicemembers. For OIF and OEF servicemembers who may potentially use VA services, DOD and VA share some types of administrative data, such as individuals’ names and addresses; however, the sharing of health information between the two departments remains limited. VA could not report how many of these were OIF and OEF servicemembers. MOU for the sharing of individually identifiable health information. The MOU constitutes an agreement on the circumstances under which DOD and VA will exchange individually identifiable health information and includes references to provisions of the HIPAA Privacy Rule and applicable laws that permit sharing. The MOU does not specify particular types of individually identifiable heath information that will be exchanged and when the information will be shared. The absence of specific data sharing procedures continues to hinder VA’s efforts to obtain needed health information from DOD. For example, DOD does not have specific procedures to routinely provide VA with health information on servicemembers who have injuries or illnesses that preclude them from continuing on active duty and, as a result, are being evaluated by a DOD physical evaluation board (PEB) for separation from the military. According to VA officials, if a list of these individuals were transmitted routinely to VA, it would enable VA to contact the individuals to make the appropriate transfer of health care to a VA medical facility before the individuals are discharged from the military. Such information could reduce the potential for interruption to these individuals’ health care treatment plans. DOD officials told us that they are in the process of developing a policy directive that would establish procedures for sharing information with VA on servicemembers who are entering the PEB process, but they could not determine when this policy directive would become effective. Recent progress in VA and DOD data sharing involves a health assessment questionnaire that DOD requires servicemembers to complete following deployment. This document contains, among other things, self-reported information about a servicemember’s potential exposure to toxic substances and includes four questions that can be used to identify individuals at risk of developing post-traumatic stress disorder. In July 2005, DOD transmitted to VA postdeployment health assessment data for those individuals who have been discharged from the military. According to VA officials, DOD is expected to transmit these data monthly beginning in October 2005. For these individuals, VA clinicians will be able to access the data through VA’s computerized medical record system when the individuals seek VA health care services. However, according to VA officials, DOD is not providing health assessment information to VA for Reserve and National Guard members, who comprise 35 percent of the OIF and OEF forces. In addition to individual health information from the postdeployment questionnaire, VA officials state that the agency could use aggregate data from the questionnaire to plan for the needs of current servicemembers who may one day be eligible for health care and benefits from VA. This is consistent with an observation made by the President’s task force that comprehensive servicemember health data are essential for forecasting and preparing for changes in the demand for health care services. Currently, the data from the individual postdeployment assessments are not accessible in a format that can be aggregated and manipulated to provide the desired trend information. Mr. Chairman, this concludes my prepared remarks. I will be pleased to answer any questions you or other members of the committee may have. For further information regarding this testimony, please contact Cynthia A. Bascetta at (202) 512-7101 or [email protected]. Michael T. Blair, Jr., Assistant Director; Mary Ann Curran; Hannah Fein; Cynthia Forbes; Marcia Mann; Kevin Milne; and Cherie Starck also contributed to this statement. Military and Veterans’ Benefits: Improvements Needed in Transition Assistance Services for Reserves and National Guard. GAO-05-844T. Washington, D.C.: June 29, 2005. Military and Veterans’ Benefits: Enhanced Services Could Improve Transition Assistance for Reserves and National Guard. GAO-05-544. Washington, D.C.: May 20, 2005. DOD and VA: Systematic Data Sharing Would Help Expedite Servicemembers’ Transition to VA Services. GAO-05-722T. Washington, D.C.: May 19, 2005. Vocational Rehabilitation: VA Has Opportunities to Improve Services, but Faces Significant Challenges. GAO-05-572T. Washington, D.C.: April 20, 2005. VA Disability Benefits and Health Care: Providing Certain Services to the Seriously Injured Poses Challenges. GAO-05-444T. Washington, D.C.: March 17, 2005. Vocational Rehabilitation: More VA and DOD Collaboration Needed to Expedite Services for Severely Injured Servicemembers. GAO-05-167. Washington, D.C.: January 14, 2005. VA and Defense Health Care: More Information Needed to Determine if VA Can Meet an Increase in Demand for Post-Traumatic Stress Disorder Services. GAO-04-1069. Washington, D.C.: September 20, 2004. Major Management Challenges and Program Risks: Department of Veterans Affairs. GAO-03-110. Washington, D.C.: January 2003. This is a work of the U.S. government and is not subject to copyright protection in the United States. It may be reproduced and distributed in its entirety without further permission from GAO. However, because this work may contain copyrighted images or other material, permission from the copyright holder may be necessary if you wish to reproduce this material separately. | Operation Iraqi Freedom (OIF) and Operation Enduring Freedom (OEF) servicemembers and those who are discharged from military service may receive health care from the Department of Veterans Affairs (VA). Since the onset of OIF and OEF, the Department of Defense (DOD) has reported that more than 15,000 servicemembers have been wounded in combat. Those who are seriously injured require comprehensive health care services and may be treated at either DOD or VA medical facilities. Because VA is expected to provide health care to many of the injured OIF and OEF servicemembers, concerns have been raised about the ease with which these individuals and their health care information transition from DOD's to VA's health care system. This statement is based on GAO's preliminary work on "seamless transition" and focuses on (1) the policies and outreach efforts that VA has instituted to provide timely access to health care to OIF and OEF servicemembers and (2) the extent to which individually identifiable health information is shared systematically between DOD and VA. Since GAO's work is still in the early stages of review, the statement is limited to information gathered to date. Since 2002, VA has developed policies and procedures that direct its medical facilities to provide OIF and OEF servicemembers timely access to care. Most notably, VA assigned VA social workers to selected military treatment facilities in August 2003, directed VA facilities to designate combat case managers in October 2003, and directed the establishment of four VA polytrauma centers for OIF and OEF servicemembers in June 2005. In January 2005, VA established the Seamless Transition Office to further improve coordination within the Veterans Benefits Administration and the Veterans Health Administration as well as between DOD and VA. In addition, VA has increased outreach efforts by providing OIF and OEF servicemembers who have been discharged with personal letters and newsletters, a Web site for health information tailored to OIF and OEF servicemembers, counseling services, and briefings on available VA health care services. GAO is in the beginning stages of reviewing VA's efforts to provide a smooth transition from DOD health care and has not yet evaluated the effectiveness of VA's related policies, procedures, and outreach initiatives. An important issue associated with transitioning servicemembers to VA health care is the sharing of health care information between DOD and VA. The two departments have signed a memorandum of understanding for sharing individually identifiable health information, but the memorandum does not specify the particular types of individually identifiable health information that will be exchanged and when the information will be shared. The absence of specific procedures continues to hinder VA's efforts to obtain needed health information from DOD. Recently, DOD has begun to share certain health assessment information with VA on individuals who have been discharged from the military, and the transmitting of this information to VA on a routine basis is expected to occur in October 2005. However, according to VA officials, DOD is not providing health assessment information to VA for Reserve and National Guard members, who comprise 35 percent of the OIF and OEF forces. |
While LSC’s board and management have taken actions to improve its governance and accountability practices towards fully implementing the recommendations from our August 2007 report additional actions to fully implement the other key recommendations are needed. In August 2007 we reported, that since its inception over 30 years ago, LSC’s governance and accountability practices, including its financial reporting and internal control, had not kept pace with evolving governance and accountability practices and as a result, its practices had fallen behind those of federal agencies, U.S. government corporations, and other nonprofit corporations. LSC’s board and management agreed with all twelve of our recommendations in this area, the board has implemented corrective actions for three of the eight recommendations made to the board and management has implemented all four recommendations made to management. For instance, in response to one of our eight recommendations to the board, in March 2008 the board established an audit committee, which filled an oversight gap of LSC’s internal control, financial reporting and audit processes. However, another key recommendation directed at the board developing and implementing procedures to periodically evaluate key management processes, has yet to be developed and fully implemented. This recommendation is key in that it contributes to establishing an effective, supporting internal control environment at LSC as well as assists the board in fulfilling its oversight duties. As the board transitions to new board members, it will be important for the new board to provide priority focused attention on fully implementing the other five of our recommendations. In August 2007 we reported that the governance practices of LSC’s board fell short of the modern practices employed by boards of nonprofit corporations and public companies. Although the board members had demonstrated active involvement in LSC through their regular board meeting attendance and participation, we pointed out several areas where LSC’s governance practices could be strengthened. Those areas included a more comprehensive orientation program for new board members and an ongoing training program that enables board members to stay current on governance practices, the regulatory environment, and key management practices. Although the LSC board had four committees, including finance and operations and regulations, it did not have audit, ethics, or compensation committees’ functions, important governance mechanisms commonly used in corporate governance structures. The board had also not assessed the performance, collectively or individually, of its board members. Finally, the board had not implemented certain procedures that are key to helping it carry out its fiduciary duties for overseeing LSC, including evaluating key management processes, such as risk assessment, risk mitigation, internal controls and financial reporting. Our August 2007 report recommendations to improve and modernize the governance processes and structure of LSC along with our views on the status of LSC’s efforts to implement these recommendations (as of October 20, 2009) are summarized in table 1. LSC data we obtained and analyzed as part of our follow up work conducted between May 2009 and October 2009, showed that the board had fully implemented three of the eight recommendations, and had taken some action on the remaining five recommendations. But full implementation will be needed in order for the board’s actions to be fully effective. The following summary highlights LSC actions and work that remains to be done on the five recommendations that our analysis showed were partially implemented. In response to our recommendation that the board establish and implement a comprehensive orientation program, LSC created a “wiki,” which contains relevant information for LSC board members. However, LSC management informed us that they are waiting for the pending board member nominations to be confirmed by the U.S. Senate prior to holding a formal orientation program. In response to our recommendation that the board develop a plan for providing regular training. LSC’s management informed us there have been discussions about a training program and that the organizational updates for training the board occurs during the quarterly board meetings and that additional training needs of the board are determined by the self- assessments that the board members complete. LSC officials also stated that since this is an overall experienced board, the recent self-assessments did not indicate a need for training outside the organizational update. Officials told us that LSC management is currently documenting a training program, which we will evaluate when completed and implemented. We recommended that the board establish a compensation committee function to oversee compensation matters including LSC officers and LSC’s overall compensation structure. Currently, the board’s Governance and Performance Review Committee’s charter requires the committee to annually review and report on LSC’s president and inspector general performance and compensation. An LSC official told us that during the October board meeting the board will be discussing and voting on a new charter for the Governance and Performance Review Committee. In response to our recommendation that the board conduct a periodic self- assessment of the board’s, the committees’ and each member’s individual performance, the board has conducted and documented assessments for the board and individuals. According to an LSC official, the committee self-assessment process is still under discussion. We recommended that the board develop and implement procedures to periodically evaluate key management processes including at a minimum, processes for risk assessment and mitigation, internal control and financial reporting. The recently established audit committee’s charter provides the audit committee with responsibility over internal controls and therefore the evaluation of management’s processes. Although the audit committee was established in March 2008, it has not yet completed this key action. In August 2007, we reported that LSC’s management practices did not reflect current practices in the areas of risk assessment, internal control, and financial reporting. We pointed out areas where management’s practices could be strengthened. We found that management had not implemented a systematic or formal risk assessment that evaluated the risks the corporation faces from both external and internal sources. Such an assessment provides a structure for implementing internal control and other risk mitigation policies. In addition, senior management had not established comprehensive policies or procedures regarding conflicts of interest or other issues of ethical conduct. Without such policies and procedures, LSC was at risk of not identifying potential conflicts of interest and not taking appropriate actions to avoid potentially improper transactions or actions on the part of LSC personnel. Also, management had not conducted analysis of accounting standards to determine the most appropriate standards for LSC to follow. Our August 2007 report recommendations to improve and modernize key management processes at LSC, along with our views on the status of LSC’s efforts to implement those recommendations (as of October 20, 2009) are summarized in Table 2. While LSC has taken some actions with respect to our prior report’s grants management-related recommendations, LSC has only partially implemented some key recommendations in this area. LSC management fully implemented two of our December 2007 report recommendations, including following up on identified improper or potentially improper uses of grants funds. However, LSC has only partially implemented three key recommendations, including limited action on implementing an approach for selecting grantees for review using consistently applied, risk-based criteria. Full implementation of all of the remaining recommendations is needed in order to ensure that LSC management has effective control over its mission-critical grantees. Our December 2007 review of grants management and oversight at LSC identified weaknesses in LSC’s internal controls over grants management and oversight that negatively affected LSC’s ability to monitor and oversee grants and left grant funds vulnerable to misuse. At grantees we visited, we also found poor fiscal practices and improper or potentially improper expenditures that LSC could have identified with more effective oversight. Although LSC has taken action to address two of the four recommendations we made to management in our December 2007 report, it has not yet implemented the two recommendations focused on oversight of grantees use of funds. In order to strengthen the organizational structure and governance of grantee oversight and monitoring, we made a recommendation to the board to develop and implement policies that clearly delineate organizational roles and responsibilities. In December 2007 we reported on weakness in LSC’s control environment regarding the lack of a clear definition of the authority and responsibilities between two of the three organizational units that oversee the work of grantees. At the time of our review, LSC management shared fiscal oversight and monitoring of grantees with the OIG. Management’s oversight role was conducted through two offices—the Office of Program Performance (OPP) and the Office of Compliance and Enforcement (OCE). We found that the roles and the division of responsibilities were not clearly communicated between the OIG and OCE. The result was staff confusion about the types and scope of grantee fiscal reviews that LSC management could undertake on its initiative and strained relations between management and the OIG. In addition, communication and coordination between OCE and OPP was not sufficient to prevent gaps and unnecessary duplication between the offices’ respective oversight activities. Regarding its oversight of grantees, the scope of LSC’s control activities for monitoring grantee fiscal compliance was limited and feedback to grantees not timely. In determining the timing and scope of grantee oversight visits, LSC did not employ a structured or systematic approach for assessing the risk of noncompliance or financial control weaknesses across its 137 grantees. Without an analytically sound basis for assessing risk and distributing its oversight resources, LSC did not have a basis for knowing whether its oversight resources were being used effectively to mitigate and reduce risk among its grantees. LSC’s monitoring of grantee internal control systems needed to be strengthened, because the scope of work in OCE’s fiscal reviews was not sufficient in assessing grantee internal control and compliance for purposes of achieving effective oversight. In the OCE site visits we observed, staff did not follow up on questionable transactions and relied heavily on information obtained through interviews. LSC also was not timely in follow-up on an investigation into an alleged instance of noncompliance referred to it by the OIG. Feedback to grantees was often slow. As of September 2007, LSC had not yet issued reports to grantee management for almost 19 percent (10 out of 53) of the 2006 site visits. Without timely communications about the results of site visits, grantee management does not have information about deficiencies and the related corrective actions needed. In a grantee exit conference we observed, the LSC review team did not communicate a number of findings they had concluded were significant and in need of immediate attention. Effective grantee monitoring is especially important for LSC because LSC has limited options for sanctioning poorly performing grantees due to the recurring nature of many of its grants. In the limited reviews we performed at 14 grantees, we identified internal control weaknesses at 9 grantees that LSC could have identified with more effective oversight reviews. While control deficiencies at the grantees were the immediate cause of the improper expenditures we found, weaknesses in LSC’s controls over its oversight of grantees did not assure effective monitoring of grantee controls and compliance or prevent the improper expenditures. We also identified various weaknesses and improper expenditures at grantees we visited. These weaknesses and improper expenditures can result in a loss of credibility to the grantee and grantor and also allow instances of fraud to take place if not addressed. Our December 2007 report recommendations to improve its internal control and oversight of grantees, along with our views on the status of LSC’s efforts to implement those recommendations (as of October 20, 2009) are summarized in Table 3. As a result of our follow-up work conducted between May 2009 and October 2009, we determined that LSC management had fully implemented two of the four recommendations we made to management. The remaining two, as well as the recommendation to the board were partially implemented. Based on our evaluation, the following summary highlights LSC actions and work that remains to be done on the three recommendations that remain partially implemented. In response to our recommendation that LSC management use an approach for selecting grantees for internal control and compliance reviews that is founded on risk-based criteria and consistently applied, LSC revised its OPP and OCE manuals to include criteria for use in selecting grantees for reviews. Although LSC officials told us that the risk- based criteria was issued, they have not provided us with sufficient evidence to demonstrate that the criteria is consistently applied. We will evaluate LSC’s implementation as part of our current ongoing work. We recommended that LSC address three factors—revise current guidelines of fiscal compliance reviews to provide (1) a direct link of results of OPP reviews and other audit findings, (2) guidance for performing follow up responses during interviews, and (3) examples of fiscal and internal control review procedures relative to individual risk factors. LSC has updated its written guidelines for the fiscal component of OCE’s regulatory and compliance reviews; however, the updates do not include the three factors. LSC officials told us they will analyze their current manuals and incorporate interview guidelines and other information as needed. We will reevaluate this recommendation after LSC management completes its analysis. In response to our recommendation that the board develop and implement policies and procedures that clearly delineate organizational roles and responsibilities for grantee oversight and monitoring, the board-approved updated descriptions of organizational roles and responsibilities. However, internal controls discussed in the board approved descriptions are limited to fiscal internal controls and do not include operational or other internal controls that OPP and OCE are responsible for monitoring. According to LSC’s management, the board’s description combined with OPP and OCE manuals and documents address more than fiscal internal controls. We will reevaluate this recommendation after LSC management analyzes and gathers additional documentation to determine whether further actions are needed to ensure clear organizational roles and responsibilities. LSC’s Board of Directors and management have made progress on implementing our prior recommendations including fully implementing nine recommendations. The improvements that LSC has made in its governance and accountability provide a good foundation for completing implementation of the elements needed for a strong program of governance and internal controls. Although management has implemented the key recommendation of conducting and documenting a risk assessment, ongoing risk assessment and a robust risk management program is important to LSC’s overall internal control structure. Further, although the board has implemented the key recommendation of establishing an audit committee, the board must continue its efforts to implement another key recommendation of developing and implementing procedures to periodically evaluate management processes, including risk assessment, mitigation, internal control and financial reporting. It will also be important for the board to provide ongoing oversight of management’s risk assessment and risk management program. Periodically evaluating management will assist the board in fulfilling its oversight duty. Fully implementing the remaining recommendations, will enable the board and management to achieve the level of governance and internal control needed to provide adequate assurance that LSC’s governance and internal control structures are effective, and that grant funds are being used as intended and in accordance with laws and regulations. A strong governance structure and well established management practices and internal controls will be crucial for LSC to maintain stable operations during the upcoming board transition. Strong internal controls, with ongoing risk assessment, monitoring, and oversight will also be key to providing both the board and management with assurance that LSC funds are being used for their intended purposes, in accordance with laws and regulations and enable LSC to effectively adjust to evolving practices and risks. This concludes my prepared statement. For further information about this testimony, please contact Susan Ragland, Director, Financial Management and Assurance at (202) 512-8486, or [email protected]. Contact points for our offices of Congressional Relations and Public Affairs may be found on the last page of this testimony. Major contributors to this testimony included Kimberley McGatlin, Assistant Director; F. Abe Dymond, Assistant General Counsel; Lauren S. Fassler; Bernice M. Lemaire; Mitch Owings; and Carrie Wehrly. This is a work of the U.S. government and is not subject to copyright protection in the United States. The published product may be reproduced and distributed in its entirety without further permission from GAO. However, because this work may contain copyrighted images or other material, permission from the copyright holder may be necessary if you wish to reproduce this material separately. | In August 2007, GAO reported (GAO-07-993) that Legal Services Corporation (LSC) had not kept up with evolving reforms aimed at strengthening governance, accountability and internal controls. In December 2007, GAO reported (GAO-08-37) weaknesses in LSC's internal controls over grants management and oversight of grantees. GAO was asked to testify on the status of accountability practices of the LSC. GAO's testimony is primarily a summary of our prior reporting, but includes follow up work conducted between May and October 2009 to obtain information on the status of our prior recommendations. In August 2007, GAO reported that the governance practices of LSC's board fell short of the modern practices employed by other nonprofit corporations and public companies. Although the board members had demonstrated active involvement in LSC through regular board meeting attendance and participation, we pointed out several areas where LSC's governance practices could be strengthened. LSC's management practices had also not kept up with the current practices for key processes in risk assessment, internal control, and financial reporting. We pointed out certain areas where management's practices could be strengthened. GAO concluded that a properly implemented governance and accountability structure might have prevented incidents, such as compensation rates in excess of statutory caps, questionable expenditures, and potential conflicts of interest. GAO made 12 recommendations - 8 to the board and 4 to management. LSC's management has implemented all 4 recommendations to improve its management practices. The board has fully implemented 3 recommendations, but it needs to take additional actions to fully implement the other 5 recommendations. For example, LSC's board has fully implemented the key recommendation to establish an audit committee. However, another key recommendation for the board to implement procedures to periodically evaluate key management processes has not yet been fully implemented. LSC told GAO that it plans to take additional actions to more fully address the five recommendations. In December 2007, GAO reported weaknesses in LSC's internal controls over grants management and oversight of grantees that negatively affected LSC's ability to provide assurance that grant funds were being used for their intended purposes in compliance with applicable laws and regulations. Effective internal controls over grants and grantee oversight are critical to accomplishing LSC's mission because it relies extensively on grantees to provide legal services to individuals who otherwise could not afford to pay for legal counsel. GAO made 5 recommendations to address these issues. LSC management fully implemented two of our report recommendations, including following up on identified improper or potentially improper uses of grants funds. However, LSC has only partially implemented three key recommendations, including only limited action to implement an approach for selecting grantees for review using consistently applied, risk-based criteria. In order to improve LSC's board and management's ability to maintain accountability over LSC's mission, it will be critical for LSC's board and management to maintain priority focus on fully implementing all remaining GAO recommendations. |
Established in 1800, the Library of Congress is the world’s largest library and serves as the research arm of Congress. Its collections include more than 36 million books and other print materials, 3.5 million recordings, 13.7 million photographs, 5.5 million maps, 6.7 million pieces of sheet music, and 69 million manuscripts. The items in its collection are received through a variety of sources, including through the copyright registration process administered by the U.S. Copyright Office. Positioned within the legislative branch, the Library carries out its operations through a number of service and support units: The Office of the Librarian had overall management responsibility for the Library and carried out certain executive functions. The Congressional Research Service (CRS) is responsible for providing Congress with nonpartisan legislative research and analysis. The U.S. Copyright Office is responsible for administering the Copyright Act, including copyright registration, recordation, mandatory deposit, and certain statutory licenses. The Law Library provides Congress with ready access to reliable legal materials. Library Services develops and preserves the Library’s collections and also included the National Library Service for the Blind and Physically Handicapped (NLS), which directs the production of books and magazines in Braille and recorded formats. At the time of our review, the Office of Strategic Initiatives was responsible for the overall digital strategic planning for the Library and included the office of Information Technology Services (ITS), which was to support the Library’s IT systems and infrastructure. The head of the Office of Strategic Initiatives also served as the agency’s Chief Information Officer. The Office of Support Operations was to provide essential infrastructure services to the entire Library. Like other federal agencies, the Library relies on a host of IT systems to carry out its mission. These include standard hardware (e.g., desktop and laptop computers, printers, and servers) and software (e.g., e-mail, word processing and spreadsheet programs, and Internet resources), as well as administrative and business systems, such as accounting, financial planning and budgeting, and human resources systems. In addition, the Library’s service units use systems that support their specific missions. For example, NLS uses a system to manage the production, distribution, and maintenance of audiobooks, and CRS uses specialized software to develop its reports. At the time of our review, much of the responsibility for managing the Library’s IT rested with the Office of Strategic Initiatives. More specifically, ITS, a component of the office, was responsible for supporting the other service units by planning, designing, developing, and maintaining systems and their supporting infrastructure. As of September 2014, the Library had at least 380 staff across the various service units dedicated to IT functions. In addition, it obligated at least $119 million for IT during fiscal year 2014, with about $46 million for staff salaries and $73 million for goods and services, among other things. The Office of Strategic Initiatives accounted for about $72 million of the total IT obligations across the agency, with the rest allocated to the other service units, who also make their own investments in IT. The Copyright Office also relies extensively on IT to carry out its mission. It uses multiple systems to support its registration, recordation, and licensing functions. In particular, the office’s Electronic Copyright Office (eCO) system is used by members of the public (e.g., authors) to register claims to a copyright and by Copyright Office staff to manage this process. In March 2015, we reported that the Library had serious weaknesses in the management of IT across the organization. Specifically, the Library’s policies, procedures, and implementation in six IT management–related areas had significant weaknesses. These six areas were (1) strategic planning, (2) investment management, (3) acquisition, (4) information security and privacy, (5) service management, and (6) leadership of the Chief Information Officer (CIO) and other key officials. Strategic planning is essential for an organization to define what it seeks to accomplish, identify strategies to efficiently achieve results, and guide its efforts. For IT, key elements are an IT strategic plan and an enterprise architecture that, together, outline the agency’s IT goals, measures, and timelines. In addition, effective human capital management is critical to ensuring that an organization’s IT workforce has the necessary skills to support its goals. However, as we reported, the Library had not developed an IT strategic plan that was aligned with the agency’s overall strategic plan and included results-oriented goals and measures, strategies for achieving its goals, and descriptions of how projects fit together to support these goals. Specifically, the Library had drafted an IT strategic plan that addressed some, but not all, of these elements, but at the time of our review it had not been finalized. Thus, the Library lacked a clear vision of what it wants to accomplish with IT and strategies for achieving those results. Such a strategic approach is essential to the Library as information is increasingly created, shared, and preserved digitally. Regarding enterprise architecture, the Library had developed an architecture that described the current state of the Library’s IT systems and operations; however, the data supporting this effort were not gathered from management and validated by stakeholders, calling into question its reliability. Moreover, the architecture did not reflect the target state of the agency’s IT, the gaps between the current and target states, and specific steps the Library should take to move toward the target state. The Library also fell short in its approach to IT human capital management. Specifically, it had not assessed the gaps between the current skills of its workforce and those that would be needed in the future, and developed strategies to fill those gaps. While individual service units had undertaken their own skills gap analyses, the Library lacked an organization-wide perspective that would allow it to take a strategic approach to ensuring an adequate IT workforce. Recognized practices for managing the selection and oversight of IT investments, such as those outlined in our IT investment management framework, are critical to ensuring that an organization is prudently investing in the right mix of projects to support its mission. These practices include (1) instituting a board for making investment decisions, (2) selecting investments that meet business needs, (3) providing investment oversight, and (4) capturing accurate and comprehensive information on those investments and other IT assets. The Library had instituted an investment review board and established elements of a process for selecting investments; however, these were not always effective. Specifically, Library policy did not clearly define the responsibilities of its investment board by, for example, specifying when investment decisions should be made by the board and when they should be elevated to the Library’s Executive Committee. Further, since the Library did not have a fully developed IT strategic plan or enterprise architecture, its investment management process was not fully coordinated with these processes, limiting the agency’s ability to make investment decisions that effectively support its mission and goals. In addition, while the Library had developed a process for selecting investments for funding based on a balancing of risk factors and program benefits, it lacked policies or procedures for “re-selecting” investments for continued funding once they were operational. This is significant because operational investments accounted for the majority of the Library’s IT spending. Moreover, the Library had not integrated its investment selection and funding processes, meaning that decisions to fund projects were not informed by the evaluation of their relative risks and benefits. In some cases, individual service units secured funding for investments before bringing them to the investment review board—or the investments were not reviewed by the board at all. Regarding investment oversight, the Library conducted assessments of investments’ progress through reviews of variations from planned cost and schedule baselines and the management of risk, among other things. However, for three selected investments we reviewed, cost, schedule, and risk data were not always complete or reliable. This limited the Library’s awareness of potential problems and its ability to take corrective action. Further, the Library had not fully accounted for its IT-related expenditures but only collected that information for the subset of investments reviewed by the investment review board. Consequently, the Library did not know how much it spends on IT. Similarly, the Library’s primary inventory of IT assets (e.g., hardware such as personal computers) was highly inaccurate. For example, the inventory listed over 18,000 active personal computers, even though officials told us that fewer than 6,500 personal computers were actually in use. Also, the Library had conflicting inventories of information systems, which disagreed on the number of systems in the agency. Specifically, Library officials provided us with two lists of systems, one with 30 systems and one with 46. After we raised this discrepancy, we were provided with a revised list of 70 systems. In the absence of an accurate inventory, the Library may be unable to effectively prevent loss or theft of assets, and it may end up purchasing equipment that is duplicative of what it already has on hand. Proper implementation of key IT acquisition practices can significantly increase the likelihood of delivering promised system capabilities on time and within budget. These practices include, among others, risk management, requirements development, cost estimating, and scheduling. However, the Library had not developed organization-wide policies in any of these areas that fully address key practices. Partly as a result, these practices were not fully implemented for selected investments we reviewed. For example: Selected IT investments did not take such risk management measures as establishing a risk management strategy; evaluating, categorizing, and prioritizing risks; and developing risk mitigation strategies. Investments did not effectively manage requirements by eliciting stakeholder needs and prioritizing customer requirements. Cost estimates for selected investments did not sufficiently account for all costs, which is a foundational requirement for a reliable cost estimate. Schedules for the selected investments were not fully reliable because they did not logically sequence planned activities to provide straightforward paths of critical activities. Without establishing and implementing these key acquisition practices, investments may incur cost overruns and schedule slippages and fail to deliver capabilities needed to support the Library’s mission. Protecting its data and information systems is essential both to defend an agency’s assets against cyber attacks and to protect sensitive information entrusted to it by the public. To do this, agencies should establish information security and privacy programs and effectively implement technical security and privacy controls, such as those outlined by the National Institute of Standards and Technology (NIST). Consistent with NIST guidance, the Library had established security and privacy programs by delineating roles and responsibilities and developing policies and procedures. For example, it assigned security-related roles to appropriate officials, including the Librarian, Deputy Librarian, CIO, and Chief Information Security Officer. The Library also documented information security policies and procedures to safeguard its information and systems. Similarly, the Library developed policies to protect the privacy of data processed by its systems and designated the General Counsel as the agency’s Chief Privacy Officer, with responsibility for managing the protection of personally identifiable information maintained by Library systems. However, the Library had not fully implemented key elements of its information security and privacy programs. For example, while the Library did establish and implement a process for reporting and responding to security incidents, it had not always developed a complete and accurate inventory of systems that would allow it to ensure that appropriate security controls had been applied; documented key controls in system security plans to inform officials about the security risks involved in operating those systems; conducted complete and effective security testing of its systems to ensure that controls were implemented and operating as intended; developed remedial action plans for identified security weaknesses and taken timely action to complete those it did develop; ensured that all systems had been appropriately reviewed and authorized to operate, increasing the risk that officials may not be aware of system security risks; ensured that all required users completed security awareness training; included appropriate security-related provisions in contracts for IT products and services; and fully assessed risks to privacy arising from the use of selected systems. In addition to these program shortcomings, we also identified weaknesses in the implementation of technical security controls for nine selected systems. These included controls related to preventing unauthorized access, authorization, configuration management, boundary protection, patch management, and physical security. These weaknesses limited the effectiveness of security controls and placed sensitive information at risk of unauthorized disclosure, modification, or loss. Recognized best practices call for ensuring that an organization’s IT services are aligned with and support its business needs. These include (1) developing a catalog of all current IT services delivered by the service provider to its customers and (2) establishing service-level agreements between the provider and customer to describe the services, specify the responsibilities of both parties, and document expected levels of service. As mentioned previously, at the time of our review, the Library’s office of Information Technology Services (ITS) was the central IT organization in the agency and was responsible for providing an array of IT services to other units within the Library. To its credit, ITS developed a service catalog that captured its current IT services, which included, for example, service desks, backup and recovery, and network services. However, ITS did not establish service-level agreements that covered all the services it provided to other units, or establish targets for expected levels of service. This increased the risk that the office would not provide services that meet the needs of other units in the Library, and in turn that IT would not effectively support the overall mission of the organization. While ITS had undertaken some ad hoc efforts to improve the satisfaction of users throughout the Library, they were largely unsuccessful and were not guided by a documented plan that prioritized improvement projects and identified needed resources, schedules, and measurable outcomes. Reflecting these weaknesses, a survey we conducted of the various service units showed that customers of the Library’s IT services were generally not satisfied. Respondents cited a number of factors that contributed to their dissatisfaction, including a lack of transparency, poor service quality, inconsistent implementation of IT management processes, inconsistent communication, and use of outdated technology. This dissatisfaction, along with the lack of an enterprise-wide approach to managing IT, had contributed to other units within the Library performing duplicative or overlapping activities. For example: Multiple service units maintained their own service desks. Service units conducted their own IT human capital assessments. Several units independently purchased similar IT assets, such as desktop or laptop computers, network devices, and server and desktop software. One service unit purchased 82 24-inch computer monitors even though ITS had already purchased 100 similar monitors. Service units independently managed their servers, networks, and websites. Without more concerted efforts to improve the satisfaction of users of the Library’s IT services, as well as reviewing the costs and benefits of overlapping or duplicative activities, the agency lacked assurance that it was cost-effectively using IT to support its mission. As our research and experience at federal agencies have shown, agencies need a CIO with responsibility for managing their IT and clearly defined responsibilities between the CIO and officials responsible for IT management at component organizations. In addition, we have reported that CIOs and other former agency IT executives believed that it was necessary for a CIO to stay in office for 3 to 5 years to be effective and 5 to 7 years to implement major change initiatives. However, many of the IT management weaknesses we identified at the Library stemmed from a lack of strong, sustained leadership. Specifically, the agency’s CIO did not have adequate responsibility for the agency’s IT, including authority over commodity IT and oversight of investments in mission-specific systems made by the service units. In addition, five different people had filled the CIO position temporarily since 2012. The absence of strong, sustained leadership hampered the Library’s ability to make needed improvements in the face of long-standing IT management challenges. Since our report was issued, the Library appointed a new permanent CIO in September 2015, and this official heads a reorganized office that reports to the newly appointed Chief Operating Officer. In our March 2015 report on the Copyright Office, we noted that it had been reacting to short-term needs, such as retiring legacy systems, but needed to develop concrete plans and strategies for how IT would support its mission and business needs in the longer term. The Copyright Office’s mission requirements, including its use of IT, are driven by its role as the administrator of the nation’s copyright law. Specifically, the office is required by law to, among other things, receive and examine copyright registration applications, collect and maintain deposited copies of copyrighted works, produce certificates of registration and certified copies of applications, and maintain records of the transfer of copyright ownership. These responsibilities drive the office’s use of IT to facilitate, for example, the electronic registration of works, examination of copyright registrations, and recording transfers of copyright. In particular, the Copyright Office relies heavily on its eCO system to support the registration process. This system provides a public interface for submitting applications as well as a back-end system for Copyright staff to process these applications. While the office relies on other legacy systems to support its recordation and licensing functions, Copyright staff told us that the office plans to consolidate functionality from all registration and recordation systems into eCO. However, eCO has had significant technical issues, both with the system itself, which is managed by the Copyright Office, and its underlying infrastructure managed by the Library. Both internal and external users have highlighted challenges in using the system, as well as with the office’s broader technical environment. These included the following: Performance and usability: Both internal and external users described challenges with eCO’s performance and usability. These included the system freezing up multiple times daily and an interface that requires users to enter the same data multiple times. In an online survey by the office, one eCO user described the system as “hands down, the worst site I have ever had to navigate.” Security: Consistent with our findings across the Library, as of February 2015, the Copyright Office did not have complete security documentation for eCO, including complete security testing, a current authorization to operate, and a privacy impact assessment. Data integrity: Both the Copyright Office and the Library’s ITS had identified issues with the integrity of data in the eCO system. For example, eCO was not properly saving registration certificates, and the office’s General Counsel stated that it does not have a means of verifying the integrity of files maintained in its systems. Data availability and retention: A service-level agreement had not been established between the Copyright Office and ITS for the office’s legal responsibility to retain unpublished works (including digital works) for up to 120 years. Maintaining access to these files for that long will require migration to new storage solutions as technology evolves. In addition to these technical challenges, the Copyright Office faced organizational challenges related to the IT management weaknesses at the Library (as highlighted in our report and discussed above). For example, the lack of clearly defined roles and responsibilities among the Library CIO and the service units had impeded the Copyright Office’s ability to meet its IT needs. In addition, the office had been hindered in developing its own IT strategic plan and other long-term plans due to the absence of such plans for the Library as a whole. Further, inconsistent service management had resulted in dissatisfaction at Copyright with IT services provided by the Library, which led the office to pursue IT activities on its own. As mentioned above, ITS did not always establish levels of expected services it provides to other units in the Library, and this has resulted in services that do not meet business needs. For example, according to the Copyright Office CIO, ITS controls when eCO is to be shut down for maintenance, and these scheduled outages had, at times, occurred during periods of heavy traffic from the office’s external users. Although the Copyright Office acknowledged many of the organizational and technical challenges we identified, it had not yet developed adequate plans to improve its IT environment. Specifically, while the office had identified several proposed initiatives for making improvements and requested over $7 million to fund them, it had not developed plans and proposals to justify those investments. The office’s proposed improvement projects included the following: Reengineering the recordation process from an IT, legal, and administrative perspective and ultimately developing on online filing system. Developing a secure digital repository for works that are registered and electronically deposited with the office for protection. Creating a software development environment for future copyright- specific applications. Developing a data strategy, plan, model, and standards for managing the office’s records. In addition, the office had researched needed technical upgrades to its electronic registration process and identified four areas in greatest need of improvement. These were (1) challenges with the current user experience, (2) challenges with access to and usability of copyright records, (3) inefficiencies with current copyright data, and (4) poor performance of outdated IT architecture. The research also resulted in proposed recommendations for improvements in these areas. These activities notwithstanding, the Copyright Office did not develop plans to justify and provide direction for its investments, as called for by leading practices. Specifically, while the office developed funding requests for its improvement projects, they did not include key information such as 3-year cost estimates, the business needs driving the investments, how the investments aligned with the agency’s strategic plan, or expected funding sources. We also reported that the Copyright Office had not developed an IT strategic plan, including goals, measures, and timelines, to guide its IT improvement efforts and monitor progress in meeting its goals. This effort was hindered by the fact that the Library itself did not have an up-to-date IT strategic plan, and we noted that developing such a plan, aligned with the Library’s future efforts, would help ensure the office’s current and future investments would support its mission needs and avoid duplication with existing activities within the Library. In October 2015, the Copyright Office released a draft overall strategic plan for fiscal years 2016 through 2020. The plan included six strategic goals and strategies to achieve those goals, including strategies involving IT. For example, strategies for achieving the goal of build a robust and flexible technology enterprise that is dedicated to the current and future needs of a modern copyright agency included employing sound policies for the acquisition and management of technology investments. Furthermore, the strategic plan noted that the Copyright Office is developing a detailed IT plan with the assistance of a consulting firm and will seek public comments on specific strategies, costs, and timelines for its technology objectives. In our reports we made a number of recommendations to the Library of Congress and the Copyright Office aimed at improving the management of their IT resources. For the Library, we recommended that the Librarian take a number of actions to address weaknesses in the six IT management areas, to include the following: Expeditiously hire a permanent CIO responsible for managing the Library’s IT and ensure this official has clearly defined responsibilities and adequate authority, including (1) responsibility for commodity IT, (2) oversight of mission-specific systems, and (3) clearly defined responsibilities and authorities between the Library CIO and service unit IT leadership. This can help provide stable, consistent, and effective leadership for addressing the weaknesses we identified and improve the management of IT at the Library. Complete an IT strategic plan that addresses key elements, develop a complete and reliable enterprise architecture, and complete an assessment of IT human capital needs. Take steps to improve the Library’s investment management process, including clarifying the responsibilities of the investment review board, improving the investment selection process, improving the investment oversight process, and ensuring complete and accurate data on IT investments and assets. Address weaknesses in the Library’s IT acquisition efforts by establishing and implementing organization-wide policies for risk management, requirements development, cost estimation, and schedule estimation. Take steps to address weaknesses identified in the Library’s information security and privacy programs, including its systems inventory, system security plans, security testing, remedial action plans, authorization process, contingency planning, security awareness training, contract management, and privacy impact assessments. Improve the management of IT services by ensuring that service-level agreements appropriately cover all services and include service-level targets, documenting and executing a plan for improving satisfaction with IT services, and assessing the costs and benefits of consolidating potentially duplicative or overlapping IT activities across the organization. In its comments on a draft of our report, the Library generally concurred with our recommendations, described ongoing and planned actions to address them, and provided milestones for completing these actions. For example, the Library stated that by September 2015 it would complete a skills assessment of IT staff throughout the Library, ensure its inventory of IT assets is up to date, and require appropriate service-level agreements between ITS and Library service units. In November 2015, we discussed the implementation status of the recommendations with the newly appointed Library CIO, and he stated that the Library had taken steps toward addressing them. For example, the CIO released an IT strategy for fiscal year 2016 to provide guidance while the Library’s IT strategic plan is being developed. Additionally, the CIO and Chief Financial Officer issued a memo requiring service units to track IT spending in the Library’s financial accounting system. Further, according to the acting Deputy CIO, the Library has completed an inventory of its IT hardware. These efforts notwithstanding, as of November 2015, the Library has yet to fully implement any of our 31 recommendations, including those that were to be completed by the end of fiscal year 2015. For example, while the Library, consistent with our recommendation, hired a new permanent CIO, it remains to be seen whether he will be provided with clear responsibility and adequate authority for leading improvements in the management of the Library’s IT. As it continues these efforts, it will be important for the Library to commit to milestones for implementing our recommendations and follow through on these commitments in order to make progress in improving its IT management. For the Copyright Office, we recommended that it develop (1) more detailed plans for its proposed IT improvement initiatives and (2) an IT strategic plan with prioritized IT goals, measures, and timelines to guide its improvement efforts. In November 2015, Copyright officials provided us with plans that had been developed for three IT improvement initiatives proposed for funding in fiscal year 2017. These initiatives were for software and hardware upgrades, searchable historic copyright records, and a data management initiative. The plans for these three initiatives included key elements such as a business problem and proposed solution, expected benefits, alignment with the Library’s strategic plan, and initial, 3-year cost estimates and funding sources. In addition, as noted above, the office recently developed a draft overall strategic plan, and it includes strategies to support the goal of improving the Copyright IT environment. This is an important step that should help provide direction for future IT initiatives. In conclusion, effectively managing its IT resources is critical for the Library to carry out its mission of preserving and making available the knowledge and creative output of the American people, as well as ensuring the smooth operations of the nation’s copyright system. Widespread weaknesses in IT management at the Library raised serious concerns about its ability to effectively carry out its responsibilities in a 21st century digital environment. In addition, dissatisfaction with services and support provided by the Library’s central IT organization had led to other service units pursing activities independently, potentially resulting in overlapping or duplicative activities. Implementing our recommendations will help ensure the Library is better positioned to effectively use technology to support its mission. The Library’s recent appointment of a permanent CIO is a positive development; ensuring that this official has the appropriate authority and responsibilities is key to addressing the many weaknesses we identified. For its part, the Copyright Office has taken steps—such as developing a draft strategic plan and detailed plans for new IT improvement initiatives—that can help lay the groundwork for a proactive approach to modernizing its IT environment. Chairman Miller, Ranking Member Brady, and Members of the Committee, this concludes my prepared statement. I would be pleased to answer any questions you may have at this time. If you or your staffs have any questions about this statement, please contact Joel C. Willemssen, Managing Director, Information Technology, at (202) 512-6253 or [email protected]. Other staff who contributed to this statement include Nick Marinos (assistant director), Torrey Hardee, Thomas Johnson, Kaelin Kuhn, Lee McCracken, Kathleen Sharkey, and Tina Torabi. This is a work of the U.S. government and is not subject to copyright protection in the United States. The published product may be reproduced and distributed in its entirety without further permission from GAO. However, because this work may contain copyrighted images or other material, permission from the copyright holder may be necessary if you wish to reproduce this material separately. | The Library of Congress is the oldest federal cultural institution and the world's largest library. Its mission is to preserve and make available works of creativity and human knowledge, and to serve as the research arm of the U.S. Congress. In addition, the Library houses the U.S. Copyright Office, which is charged with administering the nation's copyright law. As information is increasingly created, shared, and preserved digitally, both the Library and Copyright Office rely on IT to support their missions. GAO was asked to provide a statement summarizing its March 2015 reports on the Library's IT management and the Copyright Office's IT environment and plans for modernization. In preparing this statement, GAO relied on the work supporting these reports. GAO also interviewed Library and Copyright officials about more recent activities to implement GAO recommendations. In a March 2015 report, GAO identified widespread weaknesses in the Library of Congress's management of its information technology (IT) resources. These weaknesses spanned six IT management–related areas: Strategic planning: The Library had not developed an IT strategic plan that defined what it wants to accomplish with IT and strategies for achieving those results. Such a strategic approach is essential to the Library as information is increasingly created, shared, and preserved digitally. Investment management: The Library had not effectively implemented processes for selecting or overseeing its investments in IT. In addition, it did not have an accurate inventory of its IT assets and did not know how much it was spending on IT. Acquisition management: The Library had not fully implemented processes for ensuring that its IT acquisitions were guided by well-developed requirements, risk management practices, and reliable cost and schedule elements. Information security: Weaknesses in its information security and privacy programs, as well as weaknesses in technical security controls, placed the Library's systems at risk of unauthorized access, modification, or loss. Service management: The Library's central IT office did not provide services that satisfied the other units in the organization, leading to those units engaging in overlapping and duplicative activities and purchases. Leadership: The Library's lack of a chief information officer with adequate authority and clear responsibility for managing the agency's IT was a key contributing factor to the weaknesses GAO identified. Since GAO issued its report, the Library has taken actions toward addressing these weaknesses; however, much more remains to be done. For example, it appointed a new chief information officer, but it remains to be seen whether this official will have clear responsibility and adequate authority to drive needed improvements. Regarding the Copyright Office, GAO reported in March 2015 that the office's IT environment was to support its duties of receiving and examining copyright registration applications, maintaining deposited copies of copyrighted works, producing certificates of registration, and maintaining records of the transfer of copyright ownership. However, the office faced a number of IT challenges, particularly with regard to its Electronic Copyright Office system, which supports the registration of copyrights. These challenges included user complaints about the performance and usability of the system, information security weaknesses, and data retention and integrity issues, among other things. The Copyright Office was also hindered by inadequate IT services and support from the Library. While the office had proposed investments in several IT improvement projects, it had not developed an IT strategic plan to guide its efforts and monitor progress in meeting its goals. Since GAO's review, the Copyright Office has issued an overall draft strategic plan that, among other things, describes goals and strategies for improving its IT environment. In its March 2015 reports, GAO recommended that the Library of Congress take 31 actions to address weaknesses in six IT management–related areas and that the Copyright Office, among other things, develop an IT strategic plan. The Library concurred with GAO's recommendations, but it has yet to fully implement any of the 31 actions. GAO continues to believe that actions should be taken to fully implement these recommendations. For its part, the Copyright Office has taken steps to address GAO's recommendations, such as drafting a new strategic plan. |
IRS does not have internal controls over its financial reporting process adequate to provide reasonable assurance that its principal financial statements are reliable. As a result, IRS (1) was unable to prepare reliable statements of net cost, changes in net position, budgetary resources, and financing and (2) could not support material amounts reported on its balance sheet, including fund balance with Treasury, accounts payable, and net position. In addition, we found that property and equipment is likely to be materially understated. We found that the custodial and administrative general ledger systems which support the principal financial statements are not in conformance with the U.S. Government Standard General Ledger (SGL) at the transaction level and do not provide a complete audit trail for recorded transactions, material balances reported on IRS’ principal financial statements are not supported by detailed subsidiary records, and IRS’ principal financial statements are not subject to management oversight adequate to provide reasonable assurance that significant errors and omissions are identified and corrected before the principal financial statements are issued. In an effort to overcome these deficiencies, IRS employs a costly, labor intensive, and time-consuming process involving extensive and complex analysis and ad hoc procedures to assist in preparing its principal financial statements. IRS continues to utilize specialized computer programs to extract information from databases underlying the administrative and custodial general ledgers to derive and/or support amounts to be reported in the principal financial statements. For example, IRS must use this process to identify the portion of its unpaid assessments that represent taxes receivable for financial reporting purposes. However, as in fiscal year 1997, the amounts produced by this approach needed material audit adjustments totaling tens of billions of dollars to produce reliable balances for custodial activities. With respect to IRS’ administrative activities, this approach was unsuccessful in producing reliable balances. In addition, IRS’ basic approach was designed specifically for the narrowly defined purpose of preparing auditable balances at year-end only. This mechanism is not capable of producing reliable agencywide principal financial statements or financial performance information to measure results throughout the year as a management tool, which is standard practice in private industry and some federal entities. We also found that IRS’ previously separate financial reporting processes for its custodial and administrative activities have not been integrated under unified supervision at the operational level. This unnecessarily complicates IRS’ year-end financial reporting process and hampers efforts to provide interim IRS-wide financial information as a management tool. IRS’ complex and often manual financial reporting process requires extensive technical computer and accounting expertise and is highly vulnerable to human error. It is therefore critical that this process be adequately staffed and supervised and be subject to adequate management oversight at each stage as balances and disclosures are developed. However, IRS’ financial reporting process often lacked these basic controls. For example, during fiscal year 1998, key personnel with responsibilities for financial systems and reporting on IRS’ administrative activities left IRS and had not been replaced by year-end. Consequently, IRS was compelled to attempt to prepare its financial statements without the necessary staff. This occurred at the same time as the implementation of new federal accounting and reporting requirements that required IRS to prepare four new financial statements. In addition, throughout the process, we found numerous errors and omissions in financial reporting documentation as well as in the draft financial statements themselves, which likely would have been caught and corrected had these records been appropriately reviewed by management. In our previous audit, we reported that IRS’ custodial financial management systems did not substantially comply with Federal Financial Management Systems Requirements (FFMSR), federal accounting standards, and the SGL at the transaction level, which are the core requirements of FFMIA. During fiscal year 1998, we found that this condition continued and that IRS’ administrative financial management systems also had significant problems. IRS (1) cannot reliably prepare four of the six principal financial statements required by the Office of Management and Budget, which prescribes the form and content of federal financial statements, (2) does not have a general ledger(s) that conforms to the SGL, (3) lacks a subsidiary ledger for its unpaid assessments, accounts payable, and undelivered orders, and (4) lacks an effective audit trail from its general ledgers back to subsidiary detailed records and transaction source documents. In addition, IRS does not consistently capture costs as required by federal accounting standards to permit it to (1) routinely prepare reliable cost-based performance measures for inclusion in the management discussion and analysis that accompanies its principal financial statements or (2) prepare the information to be included in its annual performance plan as required by the Government Performance and Results Act (GPRA) of 1993. This deficiency also renders IRS unable to include reliable cost-based performance information in its budget submission to Congress. As we have previously reported, IRS does not have a subsidiary ledger which tracks and accumulates unpaid assessments and their status on an ongoing basis, the absence of which adversely affects its ability to effectively manage and accurately report unpaid assessments. To compensate for this, IRS runs computer programs against its master files—the only detailed record of taxpayer information it maintains—to identify, extract, and classify the universe of unpaid assessments for financial reporting purposes. However, this approach is only designed for the limited purpose of allowing IRS to report auditable financial statement totals at year-end and is not an adequate substitute for a reliable subsidiary ledger which provides an accurate outstanding balance for each taxpayer on an ongoing basis. Additionally, this approach still resulted in the need for tens of billions of dollars of audit adjustments to IRS’ principal financial statements to correct duplicate or otherwise misstated unpaid assessment balances identified by our testing. Without the information an effective subsidiary ledger should provide, IRS cannot ensure that payments and assessments are promptly posted to the appropriate taxpayer accounts. We found in our statistical sample of unpaid assessments that this problem resulted in inaccurate taxpayer account balances and led IRS to pursue collection efforts against taxpayers who had already paid their taxes in full. In addition, in our sample we found that IRS inappropriately issued refunds to taxpayers with outstanding tax assessment balances. We previously reported that IRS had significant problems locating supporting documentation for unpaid assessment transactions. To address this issue, we worked closely with IRS and identified various forms of documentation to support these items, and we requested these documents in performing our fiscal year 1998 testing. While we did note some improvement, we continued to find that IRS experienced difficulties in providing supporting documentation. The lack of adequate supporting documentation made it difficult to assess the classification and collectibility of unpaid assessments reported in the principal financial statements as federal taxes receivable and may make it difficult for IRS to readily identify and focus collection efforts. As in prior years, we continued to find that IRS does not have sufficient preventive controls over refunds to reduce to an acceptable level the risk that inappropriate payments for tax refunds will be disbursed. Inappropriate refund payments continued to be issued in fiscal year 1998 due to (1) IRS comparing the information on tax returns and third party data such as W-2s (Wage and Tax Statement) too late to identify and correct discrepancies between these documents, (2) significant levels of invalid Earned Income Tax Credit (EITC) claims, and (3) deficiencies in controls that allowed duplicate refunds to be issued. We also found instances of erroneous refunds being issued as a result of errors or delays in posting assessments to taxpayer accounts. Errors and posting delays such as these impair IRS’ ability to effectively offset refunds due taxpayers against amounts owed by the same taxpayers on another account. Although IRS has detective (post-refund) controls in place, the lack of sufficient preventive controls exposes the government to potentially significant losses due to inappropriate disbursements for refunds. According to IRS’ records, IRS investigators identified over $17 million in alleged fraudulent refunds that had been disbursed during the first 9 months of calendar year 1998 and prevented the disbursement of an additional $65 million in alleged fraudulent refund claims. During calendar year 1997, IRS’ records indicate that intervention by IRS investigators prevented the disbursement of additional alleged fraudulent refund claims totaling over $1.5 billion. However, the full magnitude of invalid refunds disbursed by IRS is unknown. In addition, rates of invalid EITC claims have historically been high. During fiscal year 1998, IRS reported that it processed EITC claims totaling over $29 billion, including over $23 billion (79 percent) in refunds. In an effort to minimize losses due to invalid EITC claims, IRS electronically screens tax returns claiming EITC to identify those exhibiting characteristics considered indicative of potentially questionable claims based on past experience and then selects those claims considered most likely to be invalid for detailed examination. During fiscal year 1998, IRS examiners reviewed over 290,000 tax returns claiming $662 million in EITC of which $448 million (68 percent) was found to be invalid. These examinations are an important control mechanism for detecting questionable claims and providing a deterrent to future invalid claims. However, because examinations are often performed after any related refunds are disbursed, they cannot substitute for effective preventive controls designed to identify invalid claims before refunds are disbursed. In fiscal year 1998, IRS began implementing a 5-year EITC compliance initiative intended to expand customer service to increase taxpayers’ awareness of their rights and responsibilities related to EITC, strengthen enforcement of EITC requirements, and enhance research into the sources of EITC noncompliance. However, most of IRS’ efforts under that initiative had not progressed far enough at the time we completed our audit for us to make any judgment about their effectiveness. While we were able to substantiate the amounts of refunds disbursed as reported on IRS’ fiscal year 1998 principal financial statements, IRS nevertheless lacks effective preventive controls to minimize its vulnerability to payment of inappropriate refunds. Once an inappropriate refund has been disbursed, IRS is compelled to expend both the time and expense to attempt to recover it, with dubious prospects of success. As we have previously reported, IRS’ controls over cash, checks, and related hardcopy taxpayer data it manually receives from taxpayers are not adequate to reduce to an acceptably low level the risk that these payments will not be properly credited to taxpayer accounts and deposited in the Treasury or that proprietary taxpayer information will not be properly safeguarded. Strong physical security is critical to ensure that receipts are not lost or stolen or that sensitive taxpayer data are not compromised, and is thus critical to IRS’ customer service goals. However, we found that (1) unattended checks and tax returns were often stored in open and easily accessible areas, (2) hundreds of millions of dollars of receipts in the form of checks, and in one case cash, were transported from IRS field offices to financial institutions by unarmed couriers who often used unmarked civilian vehicles including, in one instance, a bicycle, and (3) individuals were hired and entrusted with access to cash, checks, and sensitive taxpayer data before completion of background or fingerprint checks. This problem is particularly acute during peak filing season when IRS typically hires thousands of temporary employees. IRS’ investigations of 80 thefts at service centers between January 1995 and July 1997 found that 15 percent of these were committed by individuals who had previous arrest records or convictions that were not identified prior to their employment. At commercial lockbox banks IRS contracts with to process tax receipts, we found similar weaknesses, including the use of unarmed couriers and the hiring of temporary employees before background checks are completed. In fiscal years 1997 and 1998, IRS identified 56 actual or alleged cases of employee theft of receipts at IRS field offices and lockbox banks totaling about $1 million. An additional 100 cases were opened during the period in which the amount potentially stolen was not quantified. Further, the magnitude of thefts not identified by IRS is unknown. The weaknesses we identified also expose taxpayers to increased risk of losses due to financial crimes committed by individuals who inappropriately gain access to confidential information entrusted to IRS. For example, this information — which includes names, addresses, social security and bank account numbers, and details of financial holdings —may be used to commit identity fraud. Although receipts and taxpayer information will always be vulnerable to theft, IRS has a responsibility to protect the government and taxpayers from such losses. Throughout fiscal year 1998, IRS did not reconcile its administrative fund balance with Treasury accounts. Such reconciliations are required by Treasury policy and are analogous to companies or individuals reconciling their checkbooks to monthly bank statements. When in January 1999, IRS’ contractor provided what it considered to be reconciliations of IRS’ Treasury fund balance for the 12 months of fiscal year 1998, we found amounts on the reconciliations for Treasury and IRS balances did not agree with Treasury and IRS records and reconciling items listed on the reconciliations were not investigated and resolved. Similarly, IRS has not been investigating and resolving amounts in its administrative suspense accounts. As of September 30, 1998, IRS had items totaling a net credit balance of over $100 million in its fund balance with Treasury suspense account, including some items dating back to 1989 appropriations. The lack of timely, thorough reconciliations makes it difficult if not impossible for IRS to determine if operating funds have been properly spent or if reported amounts for operating expenses, assets, and liabilities are reliable. Without performing such reconciliations, IRS has no assurance that its fund balance with Treasury is accurate. The lack of appropriate reconciliations also impacts IRS’ ability to ensure that it complies with the law governing the use of its budget authority. Because this fundamental internal control was not followed, we were unable to conclude whether IRS’ fund balance with Treasury account was reliable at September 30, 1998. Additionally, we were unable to test to determine whether IRS had complied with the Anti-Deficiency Act, as amended. As we have reported in prior year audits, IRS’ controls over its property and equipment (P&E) records are not adequate to ensure that these records provide a complete and reliable record of P&E assets. Without current and accurate records, IRS cannot ensure that the P&E items it owns are not lost or stolen, that new purchases of equipment are appropriately capitalized in its accounting records, or that related principal financial statement balances are reliable. IRS does not have policies and procedures in place to ensure that material P&E are recorded in IRS’ financial statements. For example, IRS’ computer systems information shows substantial funding available and used for computer systems, such as mainframe consolidation and a new receipts processing system. IRS’ computer systems information also shows evidence of contractor services related to design, plans, and specifications for computer hardware and software projects—costs required to be capitalized under federal accounting standards. Finally, IRS’ financial records show equipment-related expenses of $339 million in fiscal year 1998. Although this significant P&E activity occurred, only about $30 million was recognized as P&E additions in fiscal year 1998. We also saw evidence of substantial unrecorded capital expenditures in fiscal year 1997. These problems are compounded by IRS’ use of a $50,000 minimum financial statement cost capitalization threshold, which is permitted by Treasury policy. This amount far exceeds the cost of most of the P&E items IRS purchases and results in a material distortion of IRS’ reported P&E in its financial statements. Based on assets included in IRS’ property systems, we found that $1.2 billion, or 69 percent of IRS’ gross P&E, was not included as property and equipment in the financial statements because of the use of this threshold to capitalize P&E assets. Consequently, P&E balances are likely to be materially understated. In addition to the P&E completeness problem, IRS’ policies and procedures for recording P&E transactions impede its ability to reconcile the general ledger to related P&E subsidiary records. IRS’ field offices record individual property acquisitions and dispositions on site throughout the year. However, IRS’ accounting system expenses property purchases during the year, then records adjustments at year-end to reflect P&E dispositions and to move property purchases from expenses to P&E based on field office subsidiary records. As a result, IRS has no assurance that the amounts it records in its general ledger and underlying P&E subsidiary systems, respectively, are complete and agree with each other. IRS is compelled to manually adjust the general ledger at year-end to force it to agree with its P&E subsidiary records. However, the reliability of these subsidiary P&E records is highly questionable. In many cases, the items in the records that we selected for testing could not be located by IRS, including a Chevrolet Blazer motor vehicle and a laser printer costing over $300,000. Additionally, a significant number of items that we selected from the floor of IRS’ field offices were not included in IRS’ detailed property records. Physical inventories we observed being performed by IRS personnel at two IRS field offices produced similar results. We also found instances where different IRS field offices had recorded substantially identical items at significantly different costs. These discrepancies and reported problems reflect weaknesses in IRS property management controls that impair its ability to ensure that P&E are used only in accordance with IRS policy and that related records are accurate. It is important to note that IRS has itself reported deficiencies in its property management controls for the last 17 consecutive years. IRS places extensive reliance on its computer information systems to perform basic functions, such as processing tax returns, maintaining sensitive taxpayer data, calculating interest and penalties, and generating refunds. Consequently, weaknesses in controls over its computer information systems could render IRS unable to perform these vital functions or result in the unauthorized disclosure, modification, or destruction of taxpayer data. In December 1998, we reported that while significant weaknesses in computer information controls remain, IRS had made significant progress in improving its computer security. For example, IRS has centralized responsibility for its security and privacy issues in its Office of Systems Standards and Evaluation. This Office is implementing a servicewide security program to manage risk and has led IRS’ efforts in mitigating about 75 percent of the weaknesses identified in one of our previous reports. Serious weaknesses, however, continue to exist in (1) security program management, (2) access control, (3) application software development and change controls, (4) system software, (5) segregation of duties, and (6) service continuity. Continued weaknesses in these areas can allow unauthorized individuals access to critical hardware and software where they may intentionally or inadvertently add, alter, or delete sensitive data or programs. Such individuals can also obtain personal taxpayer information and use it to commit financial crimes in the taxpayers’ name (identity fraud), such as fraudulently establishing credit, running up debts, and taking over and depleting banks accounts. IRS continues to be plagued by serious internal control and systems deficiencies that hinder its ability to achieve lasting financial management improvements. IRS has acknowledged the issues and concerns identified in our fiscal year 1998 audit and the Commissioner and Deputy Commissioner of Operations have pledged their commitment to addressing these long-standing issues. IRS already has a number of initiatives underway to try to address continued weaknesses with respect to its unpaid assessments. Additionally, significant progress continues to be made on the serious computer security issues we have reported for several years. Most recently, IRS has established a corrective action team under the direction of the Chief Financial Officer to formulate a detailed plan for addressing the issues identified in our audit. IRS expects to complete the formulation of this plan by March 31, 1999. IRS also plans to bring in outside experts to assist its staff in resolving the issues relating to its administrative operations. IRS has stated that while its financial management systems were not designed to meet current systems and financial reporting standards, it is in the process of planning and implementing interim solutions until enhanced systems are available over the next several years. We have assisted IRS in formulating corrective actions to address its serious internal control and financial management issues by providing numerous recommendations over the years. We will continue to provide such assistance as necessary as IRS faces its significant financial and other management challenges. We recognize that IRS’ financial management systems were not designed to meet current systems and financial reporting standards, that these problems did not occur overnight, and that the task ahead of IRS to fully correct its systems-related deficiencies will take years to achieve. We do, however, believe that serious internal control issues can be addressed in the near term through a dedicated effort on the part of IRS management. We realize that IRS’ ability to successfully meet the financial management challenges it faces must be balanced with the competing demands placed on its resources by its customer service and tax law compliance responsibilities. However, it is critical that IRS rise to the challenges posed by these financial management issues, because its success in achieving all aspects of its strategic objectives depends in part upon reliable financial management information and effective internal controls. It is also important to recognize that several of the financial management issues we have raised in our financial audits directly or indirectly affect IRS’ ability to meet its customer service and tax law compliance responsibilities. Mr. Chairman, this concludes my prepared statement. I would be pleased to answer any questions. Taxes Receivable - Collectible ($26) Taxes Receivable - Uncollectible ($55) Compliance Assessments ($22) Write-offs ($119) The first copy of each GAO report and testimony is free. Additional copies are $2 each. Orders should be sent to the following address, accompanied by a check or money order made out to the Superintendent of Documents, when necessary. VISA and MasterCard credit cards are accepted, also. Orders for 100 or more copies to be mailed to a single address are discounted 25 percent. U.S. General Accounting Office P.O. Box 37050 Washington, DC 20013 Room 1100 700 4th St. NW (corner of 4th and G Sts. NW) U.S. General Accounting Office Washington, DC Orders may also be placed by calling (202) 512-6000 or by using fax number (202) 512-6061, or TDD (202) 512-2537. Each day, GAO issues a list of newly available reports and testimony. To receive facsimile copies of the daily list or any list from the past 30 days, please call (202) 512-6000 using a touchtone phone. A recorded menu will provide information on how to obtain these lists. | Pursuant to a congressional request, GAO discussed the results of its audit of the Internal Revenue Service's (IRS) fiscal year (FY) 1998 financial statements. GAO noted that: (1) serious internal control and financial management issues continue to plague the IRS; (2) pervasive weaknesses in the design and operation of IRS' financial management systems, accounting procedures, documentation, recordkeeping, and internal controls, including computer security controls, prevented IRS from reliably reporting on the results of its administrative activities; (3) in contrast, IRS was able to report reliably on the results of its custodial activities for FY 1998, including tax revenue received, tax refunds disbursed, and taxes receivable due from the public; (4) this was the second year GAO has been able to render an unqualified opinion with respect to IRS' financial reporting of its custodial activities; (5) this achievement, however, required extensive, costly, and time-consuming ad hoc procedures to overcome pervasive internal control and systems weaknesses; and (6) IRS' major accounting, reporting and internal control deficiencies include: (a) an inadequate financial reporting process that resulted in IRS' inability to reliably prepare several of the required principal financial statements, and financial management systems that do not comply with the requirements of the Federal Financial Management Improvement Act of 1996; (b) the lack of a subsidiary ledger to properly manage taxes receivable and other unpaid assessments, resulting in instances of both taxpayer burden and lost revenue to the government; (c) deficiencies in preventive controls over tax refunds that have permitted the disbursement of millions of dollars of fraudulent refunds; (d) vulnerabilities in controls over tax receipts and taxpayer data that increase the government's and taxpayers' risk of loss or inappropriate disclosure of sensitive taxpayer data; (e) a failure to reconcile its fund balance to Treasury records during FY 1998, and an inability to provide assurance that its budgetary resources are being properly accounted for, reported, and controlled; (f) the inability to properly safeguard or reliably report its property and equipment; and (g) vulnerabilities in computer security that may allow unauthorized individuals to access, alter, or abuse proprietary IRS programs and data, and taxpayer information. |
ISTEA authorized over $122 billion for highway programs for fiscal years 1992 through 1997. The authorization was funded primarily through federal highway user taxes such as those on motor fuels (gasoline, gasohol, and diesel), tires, and trucks. Funds from these sources are collected from users and credited to the Highway Trust Fund for highway and mass transit projects or related activities. The fund is divided into a highway account and a mass transit account. Except for a few minor deductions, such as those for federal administrative expenses, federal highway funds are provided to the states through FHWA, which is part of the U. S. Department of Transportation. The money is generally distributed to the states through various formula calculations. The current formula, established by ISTEA, determines the distribution of funds for 13 funding categories, such as the Interstate Maintenance, the National Highway System, and the Congestion Mitigation and Air Quality (CMAQ) programs. During the ISTEA authorization period, FHWA annually apportioned to the states authority to obligate funds. And, if the Congress took no further action, the states could proceed to obligate all the authority apportioned to them by FHWA. However, the Congress also imposed an annual obligation limitation as part of the appropriation process on most elements of the federal highway program. These limits did not take back spending authority that was already apportioned to the states; rather, the obligation limits acted to control the obligation rate. The congressionally imposed obligation limits acted to control total obligations but left the states with some discretion to decide how they would use their obligation authority across the range of federal-aid programs. For example, in a particular year, a state could obligate all its Interstate Maintenance and National Highway System funds. But the state would then have to compensate by obligating a smaller part of its federal highway funds from other categories. In addition, a few categories of highway funding are exempt from obligation limitations—the two largest are minimum allocation and demonstration projects. Once FHWA approves a project that a state proposes, the federal share of the project’s cost is considered “obligated” against the state’s apportionment. The state then proceeds—doing detailed design engineering, advertising for bids, and selecting a contractor for the construction work. The state incurs costs, pays the bills, and then seeks reimbursement of the federal share from FHWA. Federal outlays—that is, actual expenditures—do not occur until the state is reimbursed. Furthermore, the funds are outlayed over a number of years. At the beginning of fiscal year 1998, the total unobligated federal highway fund balance for all states was $12.1 billion. This unobligated balance came from two sources. First, $9.6 billion in unobligated balances exists because the Congress annually imposed an obligation limit during the ISTEA period to control spending for most federal highway funding categories. Second, another $2.5 billion in unobligated authority remains for a few highway funding categories that were exempt from the obligation limitation. The two largest exempted programs were minimum allocation ($0.65 billion) and demonstration projects ($1.85 billion). From a national perspective, the total unobligated highway balance of $12.1 billion at the beginning of fiscal year 1998 (including program funds exempt from obligation limits) is nearly 1.5 times the $8.1 billion that all states obligated during the first 6 months of fiscal year 1997. This does not mean, however, that each state’s unobligated balance is greater than its obligations during the first 6 months of fiscal year 1997. FHWA’s data show that the unobligated balances for each of 14 states fall short by 1 percent to 30 percent or by $1 million to almost $82 million of its actual obligations during the first 6 months of fiscal year 1997. Several states were in the 20 to 30 percent range. For example, Indiana’s total unobligated balance is over $80 million less than its total highway obligations during the first 6 months of fiscal year 1997. This represents about a 28-percent difference. Similarly, North Carolina’s total unobligated balance is about $94 million less than the amount it obligated during this same period in fiscal year 1997—a difference of about 26 percent. (App. I provides a state-by-state comparison of the fiscal year 1998 unobligated balance of $9.6 billion (from highway programs subject to the obligation limit) to actual state obligations during the first 4 through 7 months of fiscal year 1997. App. II provides a similar comparison based on the combined total unobligated balance of $12.1 billion.) It is important to note that these comparisons imply that the state’s obligation rates for fiscal year 1997 correspond to those for fiscal year 1998, which may or may not be the case for individual states. Furthermore, the total unobligated balance of $12.1 billion includes balances from programs that were not subject to the obligation limitation. As of October 1, 1997, seven states had little or no unobligated balances in these program categories. A number of strategies could help the states get through a short period without a new highway funding authorization. At the federal level, the Congress could provide the states with the flexibility to use their unobligated balances across the range of federal highway programs, rather than keeping the balances generally tied to specific highway programs and demonstration projects. At the state level, some states may be able to obtain state, local, or private resources to begin projects and later seek federal reimbursement for these costs through advance construction authority. The unobligated balance of $9.6 billion (from programs subject to the obligation limit) represents the sum of the unobligated balances remaining from specific programs, such as the Interstate Maintenance, National Highway System, Surface Transportation, and CMAQ programs. These balances may now generally be obligated in accordance with the individual program categories. Throughout the ISTEA period, the obligation limits acted to control “total” obligations, thus leaving the states discretion to decide how they would use their obligation authority across the range of specific federal-aid highway programs. For example, in a particular year, a state could have opted to obligate all of its available National Highway System funds, but it would have had to make up for its full use of these funds by obligating less in another funding category, such as the CMAQ program. Differences in the priorities that the states assigned to different highway programs are now reflected in significant variances in the unobligated balances that remain from ISTEA authorizations for these programs. For example, the National Highway System had a total unobligated balance of over $426 million at the beginning of fiscal year 1998, which represents only about 13 percent of the total fiscal year 1997 apportionment for this program. In comparison, the Surface Transportation program started fiscal year 1998 with an unobligated balance of $4.2 billion, or nearly half of the fiscal year 1997 apportionment for this program. Furthermore, the CMAQ program had an unobligated balance of $1 billion, or 108 percent of the fiscal year 1997 apportionment for this program. Because of the variances in the unobligated balances remaining across federal highway programs, these balances may not be consistent with state funding priorities or projects that the states planned for this year. To identify any problems that the states might have in using their unobligated balances and to identify strategies that the states may use to help them respond to the absence of new federal highway funds in the short term, we contacted nine states—Arkansas, Connecticut, Indiana, Iowa, Missouri, New York, North Carolina, North Dakota, and South Dakota. These differed in the extent to which they expected that their unobligated federal highway balances would help them respond to any short-term absence of new federal highway funds. Several of the states did note that the usefulness of these unobligated balances will be somewhat limited because they are tied to specific programs. For instance, a Missouri transportation finance and budget manager estimated that in early fiscal year 1998, the state will be able to use only $50 million of its total of $169 million in unobligated funds because the balance of the money is for categories such as CMAQ or transportation enhancements in which the state does not have projects ready to go. Similarly, the Transportation Director of Program Management for New York commented that it is very difficult to say exactly when the state will use its unobligated balance because some of this money is limited to programs that (1) are not a state priority or (2) do not have projects that are ready to go. If the Congress were to enact legislation that would give the states the flexibility to use unobligated balances interchangeably among federal highway programs, then some states would be better positioned to more fully use their unobligated federal highway funds. In addition, while minimum allocation funding can be used for numerous federal highway programs, demonstration project funds must be used only for the specific projects for which the funds were authorized under current law. These demonstration project funds, which generally were not subject to the obligation limits, ended fiscal year 1997 with a total unobligated balance of about $1.9 billion. If the Congress were to provide the states with the flexibility to use program as well as demonstration project funds to meet other highway program needs, a later reauthorization could provide for reimbursement to the borrowed fund account. Federal highway funding represents one of the many financial sources used to support the nation’s highways. The Department of Transportation’s statistics indicate that the revenue available for highways totaled $92.5 billion in 1995, the latest year for which data are available. About $59.6 billion of this revenue came from highway user taxes—$18.3 billion from federal highway user taxes, $39.3 from state highway user taxes, and $2 billion from local highway user taxes. The balance came from a variety of sources, such as $5.1 billion from property taxes and assessments and $7.6 billion from bond receipts. To compensate for the lack of new federal highway funds being available for part of fiscal year 1998, some states may be able to fund a proportionately larger share of their planned highway projects in early fiscal year 1998 with state funds. Later in fiscal year 1998, these states could use the federal funds made available to them. This assumes that at some unspecified time in fiscal year 1998, new federal highway funds will be available; however, this uncertainty poses problems for some states. A few of the nine states we contacted noted that they would be postponing highway projects if new federal funds are not available within the next few months. The states also differ in their ability to provide greater funding in fiscal year 1998. For instance, the Commissioner of North Dakota’s Department of Transportation stated that the disastrous flood this year left North Dakota without any additional state funds to pay for highway projects. In contrast, Indiana’s Deputy Commissioner for Finance stated that the state does not face a financial crisis in early fiscal year 1998. He noted that Indiana’s Department of Transportation has, if necessary, the ability to use $600 million in bonding authority to begin projects in fiscal year 1998. However, if the states draw on their own resources, they may have to delay other planned projects. Also, this short-term solution could have a defined payback period. For instance, a Missouri transportation official noted that the state expects to award highway contracts through December 1997, using $100 million of state funds. He noted that this state money will be borrowed from other state programs and must be returned to the other accounts by June 30, 1998, the end of the state’s fiscal year. One financial tool that may help some states is advance construction. Under advance construction, a state can begin a highway project by obtaining capital from a variety of sources, including its own funds and private capital, and later receive reimbursement through federal highway obligations. Indiana’s Deputy Commissioner for Finance stated that without new federal funds, Indiana will begin its highway program using advance construction with state funding. New York also indicated that it would turn to advance construction to help with its highway financing. The New York Transportation Director of Program Management remarked that he expects to keep the state’s planned highway projects on schedule in early fiscal year 1998 through the use of advance construction. He stated that New York will use state money to keep the projects on schedule and then backfill with federal funds once a new authorization is passed. In July 1997, the American Association of State Highway and Transportation Officials (AASHTO) conducted a survey to determine the possible effects of a delay in the reauthorization of the federal surface transportation program on state transportation programs. Many states reported to AASHTO that they would use advance construction to continue operations and project schedules. However, AASHTO noted that advance construction will not help some states that have already heavily relied on this technique. Mr. Chairman, this concludes my testimony. I would be pleased to respond to any questions that you or other Members of the Subcommittee may have. Difference between unobligated balance and FY 1997 7-month (continued) Note 1: Bold type indicates that previous obligations exceed the unobligated balance. Note 2: The comparison represents data for the states only and does not include data for the District of Columbia, American Samoa, Puerto Rico, the Virgin Islands, Guam, and the North Marianas. Not available. Difference between unobligated balance and FY 1997 7-month (continued) Note 1: Bold type indicates that previous obligations exceed the unobligated balance. Note 2: The comparison represents data for the states only and does not include data for the District of Columbia, American Samoa, Puerto Rico, the Virgin Islands, Guam, and the North Marianas. Not available. The first copy of each GAO report and testimony is free. Additional copies are $2 each. Orders should be sent to the following address, accompanied by a check or money order made out to the Superintendent of Documents, when necessary. VISA and MasterCard credit cards are accepted, also. Orders for 100 or more copies to be mailed to a single address are discounted 25 percent. U.S. General Accounting Office P.O. Box 37050 Washington, DC 20013 Room 1100 700 4th St. NW (corner of 4th and G Sts. NW) U.S. General Accounting Office Washington, DC Orders may also be placed by calling (202) 512-6000 or by using fax number (202) 512-6061, or TDD (202) 512-2537. Each day, GAO issues a list of newly available reports and testimony. To receive facsimile copies of the daily list or any list from the past 30 days, please call (202) 512-6000 using a touchtone phone. A recorded menu will provide information on how to obtain these lists. | GAO discussed the status of federal surface transportation programs in the absence of funding from a new federal highway reauthorization act, focusing on a comparison of unobligated federal highway fund balances at the beginning of fiscal year (FY) 1998 with the highway funds that the states obligated during the first part of FY 1997. GAO noted that: (1) the total unobligated highway fund balance available at the beginning of FY 1998 equals $12.1 billion and exceeds the total actual obligations of $8.1 billion, made by the states during the first 6 months of FY 1997; (2) a comparison of the unobligated balances of individual states with their actual FY 1997 obligations reveals that some state highway programs may experience financial difficulties by the middle of FY 1998 if their obligation rates for this year are comparable to those for FY 1997; (3) while most states have unobligated balances that are greater than their actual federal highway obligations in the first 6 months of FY 1997, 14 states have an unobligated balance that is lower than their actual obligations during the same period; (4) the nine states that GAO contacted identified various strategies that they would use to try to continue their highway operations, such as relying more extensively on state funds; (5) some of these states also noted that they would soon be postponing highway projects if new federal funds are not available within the next few months; (6) the rates at which states obligated funds in FY 1997 may not correspond to their plans for obligating federal highway funds in FY 1998; (7) some states may be limited in their ability to use available unobligated balances because of restrictions on the specific types of highway programs that the funds can be used for; (8) the comparisons indicate that while many states may be able to continue financing highway projects for some time, some states may have difficulty dealing even in the short term with the absence of new federal highway funds; (9) a number of strategies could help the states respond to the absence of new federal funds in the short term; (10) for example, Congress could provide the states with the flexibility to use their unobligated balances across the range of federal highway programs, rather than keeping the balances tied to specific highway funding categories and demonstration projects; (11) Congress could then reimburse appropriate funding categories after reauthorization; (12) individual states could also consider a number of strategies, such as temporarily substituting state funds for federal highway funds; (13) states could also begin highway projects by using advance construction, which enables a state to access capital from a variety of sources and later receive reimbursements through federal highway obligations; (14) such strategies, however, may delay other planned projects within individual states; and (15) these strategies may not be feasible for some states or for an extended period of time. |
To achieve its facility protection mission, in fiscal year 2012, FPS has a budget of $1.3 billion; over 1,200 full-time employees; and about 12,500 contract security guards. Contract guards are responsible for controlling access to federal facilities, screening access areas to prevent the introduction of weapons and explosives, enforcing property rules and regulations, detecting and reporting criminal acts, and responding to emergency situations involving facility safety and security. FPS relies on the fees it is authorized to charge federal tenant agencies in GSA- For controlled facilities for its security services to fund its operations.example, FPS charges tenant agencies a basic security fee (currently $0.74 cents per square foot) to, among other things, conduct FSAs, monitor alarms and dispatch operations, and perform law enforcement activities. FPS’s FSA process generally entails: gathering and reviewing facility information; conducting and recording interviews with tenant agencies; assessing threats, vulnerabilities, and consequences to facilities, employees, and the public; and recommending countermeasures to federal tenant agencies. To carry out this process, FPS’s long-term goal has been to develop a tool that aligns with DHS’s NIPP risk-management framework and Interagency Security Committee (ISC) standards. According to the NIPP, a risk assessment should assess threats, vulnerabilities, consequences, and recommend countermeasures, specifically: A threat assessment is the identification and evaluation of adverse events that can harm or damage an asset. A vulnerability assessment identifies weaknesses in physical structures, personal protection systems, processes, or other areas that may be exploited. A consequence assessment is the process of identifying or evaluating the potential or actual effects of an event, incident, or occurrence. After these three assessments are completed, the information is used to determine whether a facility’s risk is low, medium, or high. Additionally, the NIPP and ISC state that an agency’s risk assessment methodology should be credible (or complete) as able to assess the threat, vulnerability, and consequences of specific acts; reproducible as able to produce similar or identical results when applied by various security professionals; and defensible as able to provide sufficient justification for deviations from the ISC defined security baseline. In addition, as part of its FSA process, FPS also uses the ISC’s Facility Security Level Determination for Federal Facilities to determine the facility security level (FSL). The ISC recommends that level I and II facilities be assessed every 5 years and level III and IV facilities every 3 years, and according to the ISC’s criteria: A level I facility may be 10,000 or fewer square feet, have fewer than 100 employees, provide administrative or direct service activities, and have little to no public contact. A level II facility may be 100,000 or fewer square feet, have 250 or fewer employees, be readily identifiable as a federal facility, and provide district or statewide services. A level III facility may be 250,000 or fewer square feet, have 750 or fewer employees, be an agency’s headquarters, and be located in an area of moderate crime. A level IV facility may exceed 250,000 square feet, have more than 750 employees, house national leadership, and be located in or near a popular tourist destination. Since 2000, FPS has used three different tools to assess federal facilities and the assessment has varied, as shown in table 1. In the absence of RAMP, FPS currently is not assessing risk at the over 9,000 federal facilities under the custody and control of GSA in a manner consistent with federal standards such as NIPP’s risk management framework, as FPS originally planned. As a result, FPS has accumulated a backlog of federal facilities that have not been assessed for several years. According to FPS data, more than 5,000 facilities were to be assessed in fiscal years 2010 through 2012. However, we were unable to determine the extent of the FSA backlog because we found FPS’s FSA data to be unreliable. Specifically, our analysis of FPS’s December 2011 assessment data showed that 9 percent—or nearly 800—of the approximately 9,000 facilities did not have a date for when the last FSA was completed. According to the NIPP, to be considered credible a risk assessment must specifically address the three components of risk: threat, vulnerability, and consequence. We have reported that timely and comprehensive risk assessments play a critical role in protecting federal facilities by helping decision makers identify and evaluate potential threats so that countermeasures can be implemented to help prevent or mitigate the facilities’ vulnerabilities. Although FPS is not currently assessing risk at federal facilities, FPS officials stated that the agency is taking steps to ensure federal facilities are safe. According to FPS officials, its inspectors monitor the security posture of federal facilities by responding to incidents, testing countermeasures, and conducting guard post inspections. In addition, since September 2011, FPS’s inspectors have been collecting information about federal facilities, such as location, purpose, agency contacts, and current countermeasures (e.g., perimeter security, access controls, and closed-circuit television systems). According to FPS officials, inspectors have collected information for more than 1,400 facilities that will be used as a starting point to complete FPS’s fiscal year 2012 assessments. However, FPS officials acknowledged that this is not a credible risk assessment that addresses threat, vulnerability, and consequence consistent with NIPP’s risk management framework. Moreover, several FPS inspectors told us that they received minimal training or guidance on how to collect this information and expressed concern that the facility information collected could become outdated by the time it is used to complete an FSA. We reported in February 2012 that multiple federal agencies have been expending additional resources to conduct their own risk assessments, in part because they have not been satisfied with FPS’s past assessments. These assessments are taking place even though according to FPS’s Chief Financial Officer, FPS received $236 million in basic security fees from federal agencies to conduct FSAs and other security services in fiscal year 2011. For example, an Internal Revenue Service (IRS) official said that IRS completed its own risk assessments based on concerns about risks unique to its mission for approximately 65 facilities that it also paid FPS to assess. A Federal Emergency Management Agency (FEMA) official stated that FEMA has assessed its own facilities for several years because of dissatisfaction with the facility security levels that FPS assigned to its facilities. Similarly, Environmental Protection Agency (EPA) officials said that EPA has conducted its own assessments based on concerns with the quality and thoroughness of FPS’s assessments. EPA officials noted that the agency’s assessments are conducted by teams of contractors and EPA employees, cost an estimated $6,000 each, and can take a few days to a week to complete. An official from the U.S. Army Corps of Engineers told us that it duplicates FPS’s assessments at some of its regional facilities because the agency follows U.S. Army force protection regulations, rather than FPS’s security requirements. GSA is also expending additional resources to assess risk. We reported in October 2010 that GSA officials did not always receive timely FPS risk assessments for facilities GSA considered leasing. GSA seeks to have these risk assessments completed before it takes possession of a property and leases it to tenant agencies. An inefficient risk assessment process for new lease projects can add costs for GSA and create problems for both GSA and tenant agencies. Therefore, GSA is updating a risk assessment tool that it began developing in 1998, but has not recently used, to better ensure that it has timely and comprehensive risk assessments. GSA officials told us that in the future they may use this tool for other physical security activities, such as conducting other types of risk assessments and determining security countermeasures for new facilities. However, as of June 2012, FPS has not coordinated with GSA and other federal agencies to reduce or prevent duplication of its assessments. In addition to not having a tool that allows it to conduct risk assessments, FPS does not have reliable FSA data, which has hampered the agency’s ability to manage its FSA program. For example, as mentioned previously, we found that 9 percent—or nearly 800—of the approximately 9,000 facilities in FPS’s dataset were missing a date for the completion of their last FSA, thus raising questions about whether facilities have been assessed as required.reliable and timely information regarding when inspectors provided FSA reports to tenant agencies. This information is important because federal tenant agencies rely on these reports to allocate funding for new countermeasures. Additionally, we found that FPS does not have We also found that FPS’s reliance on its 11 regional offices to maintain FSA data has contributed to inconsistency among the regions. For example, each of the three regions we visited maintains FSA data in a different format. More specifically, each of the three regions collected similar information such as a facility’s identifier and address, but they differed in how they tracked FSAs. For example, one region tracked the dates an FSA was submitted, reviewed, and completed. Another region tracked only the date the FSA was completed. Separately, another region used multiple spreadsheets to track FSAs. These inconsistencies among the regions make it difficult to understand whether FPS can manage its FSA program nationwide. In March 2012, DHS’s Inspector General (IG) also reported similar issues The IG found that FPS had not determined if any of the with FPS’s data.FSA data in RAMP were valid and thus needed to be preserved for future use. As a result, the IG stated that FPS risked incurring additional expenditures, including paying for the transfer of useless data or losing critical data, if it did not make a decision before June 2012, when its data maintenance contract expired. The IG recommended that FPS (1) identify the costs and benefits of two potential courses of action: maintaining the data in RAMP or transferring the data out of RAMP, and (2) review RAMP’s data to determine what was critical and what should be saved. FPS concurred with this recommendation and plans to take action. In September 2011, FPS signed an inter-agency agreement with Argonne National Laboratory for about $875,000 to develop MIST by June 30, According to FPS’s MIST documentation, MIST is an interim 2012.vulnerability assessment tool that FPS plans to use until it can develop a permanent solution to replace RAMP. According to FPS officials, among other things, MIST will enable the agency to begin aligning its FSA process with NIPP’s risk management framework and ISC standards. In addition, according to FPS’s MIST documentation, MIST will address key shortcomings identified with the RAMP development effort, including lack of inspector involvement, limited testing, and an inadequate training program. According to MIST project documents and FPS officials, among other things, MIST will also: allow FPS’s inspectors to review and document a facility’s security posture, current level of protection, and recommend countermeasures; provide FPS’s inspectors with a standardized way for gathering and recording facility data; and allow FPS to compare a facility’s existing countermeasures against the ISC countermeasure standards based on ISC’s predefined threats to federal facilities (e.g., blast-resistant windows for a level IV facility) to create the facility’s vulnerability report). In addition, according to FPS officials, after completing the MIST vulnerability assessment, inspectors will use additional threat information gathered outside of MIST by FPS’s Threat Management Division and any local crime statistics to justify any deviation from the ISC-defined threat levels in generating a threat assessment report. FPS plans to issue the facility’s threat and vulnerability reports along with any countermeasure recommendations to the federal tenant agencies. FPS officials stated that MIST provides several potential improvements over its prior assessment tools: FSRM, RAMP, and the FSA calculator and template. For example, in contrast to FSRM, MIST will provide a more standardized and less subjective way of both collecting facility information and recommending countermeasures. Since MIST uses the ISC recommended countermeasures for defined threat scenarios for each facility security level, FPS officials believe that MIST will increase the likelihood that inspectors will produce credible FSAs. In contrast, the risk scores generated by RAMP and the FSA calculator and template were not linked to ISC standards. Unlike RAMP, MIST will use a limited amount of GSA facility data that can be edited by FPS inspectors where a correction is needed, according to FPS officials. The inability to edit data in RAMP was a contributing factor to its failure to produce credible FSAs. According to FPS officials, on March 30, 2012, Argonne National Laboratory delivered MIST to FPS on time and within budget. FPS began training inspectors on MIST and about how to use the threat information obtained outside MIST in May 2012 and expects to complete the training by the end of September 2012. According to FPS officials, inspectors will be able to use MIST once they have completed training and a supervisor has determined, based on professional judgment, that the inspector is capable of using MIST. At that time, an inspector will be able to use MIST to assess level I or II facilities. According to FPS officials, once these assessments are approved, FPS will subsequently determine which level III and IV facilities the inspector may assess with MIST. FPS officials said the agency completed an alternatives analysis prior to selecting MIST. We were not able to confirm this because FPS did not document its analysis. According to industry standards, documenting an alternatives analysis is important because it allows agency officials to: revisit decision rationale when changes occur, reduce the subjectivity of the decision making process, and, provide a higher probability of selecting a solution that meets multiple stakeholders’ demands. FPS officials mentioned two existing tools that were considered for an interim assessment tool: NPPD’s Office of Infrastructure Protection’s (IP) Infrastructure Survey Tool (IST) and DHS Science and Technology Directorate’s (S&T) Integrated Rapid Visual Screening of Buildings (IRVS) tool. FPS officials said they became aware of a security survey conducted by IP for the February 2011 Super Bowl at Cowboys Stadium in Arlington, Texas. Based on that survey, FPS reviewed the IST, which is used by IP to examine existing security countermeasures (which include physical and other protective measures) at critical infrastructure facilities, such as hydro-electric plants and commercial facilities, by comparing their existing countermeasures to those at similar facilities. According to IP officials, the IST does not calculate risk, estimate consequences, or recommend countermeasures. The IRVS is a risk assessment tool that assesses risk using threat, vulnerability, and consequence; that can be adapted to individual agency’s needs; and that, according to an S&T official, was available to FPS at no cost. However, the Director of FPS decided that because of timeliness concerns and the opportunity to better share information within NPPD, FPS would develop a modified version of the IST to assess federal facilities until FPS could develop an FSA tool to replace RAMP. In contrast to RAMP, FPS better managed MIST’s requirements as we recommended in 2011. Specifically, FPS’s Director required that MIST be an FSA-exclusive tool and thus avoided changes in requirements that could have resulted in cost or schedule increases during development. Requirements serve as the basis for establishing agreement among users, developers, and customers and a shared understanding of the system being developed. Managing requirements entails managing the capabilities or conditions that a product is required to meet to satisfy an agreement or standard. However, FPS did not obtain GSA or federal tenant agencies’ input in developing MIST’s requirements. We have reported that leading organizations generally include customer needs when developing programs. information they need to make well-informed countermeasure decisions. FPS officials stated that they were considering getting feedback from GSA and federal tenant agencies. GAO, Geostationary Operational Environmental Satellites: Improvements Needed in Continuity Planning and Involvement of Key Users, GAO-10-799 (Washington, D.C.: Sept.1, 2010). In March 2012, FPS completed user acceptance testing of MIST with some of its inspectors and supervisors, as we recommended in 2011. User acceptance testing is conducted to ensure that a system meets contract requirements and performs satisfactorily for the user of the program—in this case, FPS’s inspector workforce and their supervisors. The results of each test event need to be captured and used to ensure that any problems discovered are disclosed and corrected. We reported in 2009 that comprehensive testing that is effectively planned and scheduled can provide the basis for identifying key tasks and requirements. Testing can also better ensure that a system meets those specified requirements and functions as intended in an operational environment. According to FPS officials, user feedback on MIST was positive from the user acceptance test, and MIST produced the necessary output for FPS’s FSA process. For example, the inspectors who were involved in the testing found the methodology understandable and credible and had no significant problems logging in and using MIST. FPS’s testing identified the following problems: wireless connectivity issues at the testing location resulting in dropped connections and some users with older software encountering problems loading MIST onto their computers. FPS officials stated that they are taking steps to address these issues, such as updating older software. FPS has yet to decide what tool, if any, will replace MIST, which is an interim vulnerability assessment tool. According to FPS officials, the agency plans to use MIST for at least the next 18 months. Consequently, until FPS decides what tool, if any, will replace MIST or RAMP, it will continue to lack the ability to assess risk at federal facilities in a manner consistent with NIPP, as we previously mentioned. We also found the following limitations with MIST: FPS did not design MIST to estimate consequence, a critical component of a risk assessment. Assessing consequence is important because it combines vulnerability and threat information to evaluate the potential effects of an adverse event on a federal facility. For example, consequence information is used to determine whether a terrorist attack on a federal facility may result in the loss of human lives, incur economic costs beyond rebuilding the facility, or have an adverse impact on national security. Three of the four risk assessment experts we spoke with generally agreed that a tool that does not estimate consequences does not allow an agency to fully assess the risks to a federal facility. As a result, while FPS may be able to identify a facility’s vulnerabilities to different threats using MIST, without consequence information, federal tenant agencies may not be able to make fully informed decisions on how to best allocate resources to protect facilities. Both FPS and ISC officials stated that incorporating consequence information into an assessment tool is a complex task. FPS officials stated that they did not include consequence information in MIST’s design as it would have introduced a new component that was not part of the IST and would have taken more time to develop, validate and test, and that any changes in threats would necessitate corresponding changes to the estimated consequences. For example, if new threats to federal facilities were identified, FPS would have to modify MIST’s methodology to estimate the consequences and determine how those consequences could affect other previously identified threats. FPS officials do not know if this capability can be developed in the future, but they said that they are working with the ISC and S&T to explore the possibility. However, according to an S&T official, incorporating consequence is possible and S&T’s current IRVS tool does estimate consequences. FPS did not design MIST to compare risk or assessment results across federal facilities. Consequently, FPS does not have the ability to take a comprehensive approach to risk management across its portfolio of 9,000 facilities and recommending countermeasures to federal tenant agencies. Instead, FPS takes a facility-by-facility approach to risk management. Under this approach, FPS assumes that all facilities with the same security level have the same security risk, regardless of their location. However, level I facilities typically face less risk because they are generally small store-front operations with a low volume of public contact, such as a small post office or Social Security Administration Office. In comparison, a level IV facility has a high volume of public contact and may contain high-risk law enforcement and intelligence agencies. We reported in 2010 that FPS’s facility-by-facility approach to risk management provides limited assurance that the most critical risks at federal facilities across the country are being prioritized and mitigated. FPS recognized the importance of having such a comprehensive approach to its FSA program when it developed RAMP and FPS officials stated that they may develop this capability for the next version of MIST. FPS has not developed metrics to measure MIST’s performance, such as feedback surveys from tenant agencies. Measuring performance allows organizations to track progress toward their goals and gives managers critical information on which to base decisions for improving their programs. We and other federal agencies have maintained that adequate and reliable performance measures are a necessary component of effective management. should provide agency managers with timely, action-oriented information in a format conducive to helping them make decisions that improve program performance, including decisions to adjust policies and priorities. Without such metrics, FPS’s ability to improve MIST will be hampered. FPS officials stated that they are planning to develop performance measures for MIST, but did not give a time frame for when they will do so. GAO, Homeland Security: The Federal Protective Service Faces Several Challenges That Hamper its Ability to Protect Federal Facilities, GAO-08-683 (Washington, D.C.: June 11, 2008). FPS does not have a comprehensive and reliable system to oversee its approximately 12,500 contract guards. In addition to conducting FSAs, FPS developed RAMP as a comprehensive system to help oversee two aspects of its contract guard program: (1) verifying that guards are trained and certified to be on post in federal facilities and (2) conducting guard post inspections. However, FPS experienced difficulty with RAMP because the contract guard training and certification information in RAMP was not reliable.conduct post inspections. For example, FPS inspectors we interviewed stated they could not use RAMP to conduct post inspections because of difficulty connecting to RAMP’s servers in remote areas and recorded post inspections disappearing from RAMP’s record without explanation. Although we reported some of these challenges in 2011, FPS did not stop using RAMP for guard oversight until June 2012. Consequently, it is now more difficult for FPS to verify that guards on post are trained and certified and that inspectors are conducting guard post inspections as required. Additionally, FPS faced challenges using RAMP to According to FPS officials, the agency decided to no longer use RAMP for these and other reasons, including the expiration of the RAMP operations and maintenance contract in June 2012 and FPS’s decision to migrate data from RAMP. In the absence of RAMP, in June 2012, FPS decided to deploy an interim method to enable inspectors to record post inspections. FPS officials said this capability is separate from MIST, does not include guard training and certification data, and will not have the ability to generate post inspection reports. In addition, FPS officials acknowledged that this method is not a comprehensive system for guard oversight. FPS does not independently verify the guard training and certification information provided by guard contractors. FPS currently requires its 33 guard contractors to maintain their own files containing guard training and certification information and began requiring them to submit a monthly report with this information to FPS’s regions in July 2011. To verify the guard companies’ reports, FPS conducts monthly audits. As part of its monthly audit process, FPS regional staff visits the contractor’s office to select 10 percent of the contractor’s guard files and check them against the reports guard companies send FPS each month. In addition, in October 2011, FPS undertook a month-long audit of every guard file for its contracts across its 11 regions. Similar to the monthly audits, regional officials explained that the “100 percent audit” included a review of the approximately 12,500 guard files for FPS’s 110 contracts to verify that guards had up-to-date training and certification information. According to an FPS official, the audit was FPS’s first review of all of its contractors’ guard files and provided a baseline for future nationwide audits. FPS provided preliminary October 2011 data showing that 1,152 of the 12,274 guard files FPS reviewed at that time—9 percent—were deficient, meaning that they were missing one or more of the required certification document(s). However, FPS does not have a final report on the results of the nationwide audit that includes an explanation of why the files were deficient and whether deficiencies were resolved. A guard company may have more than one contract with FPS. contributed to a situation in which a contractor allegedly falsified training information for its guards. In addition, officials at one FPS region told us they maintain a list of the files that have been audited previously to avoid reviewing the same files, but FPS has no way of ensuring that the same guard files are not repeatedly reviewed during the monthly audits, while others are never reviewed. In the place of RAMP, FPS plans to continue using its administrative audit process and the monthly contractor-provided information to verify that qualified contract guards are standing post in federal facilities. FPS has taken some steps to improve its ability to assess risk at federal facilities but additional improvements are needed. Most notably, FPS has developed an interim vulnerability assessment tool that once implemented, may allow it to resume assessing federal facilities, which it has not done consistently for several years. However, FPS’s lack of progress in developing a risk assessment tool that meets federal physical security standards such as NIPP’s risk management framework is problematic for several reasons. First, FPS spent almost 4 years and $35 million dollars on RAMP and another $875,000 on MIST but still does not have a risk assessment tool that meets NIPP’s risk management framework that can calculate risk using threat, vulnerability, and consequence information. Second, without a risk assessment tool that can compare risks across its portfolio, FPS cannot provide assurance that the most critical risks at federal facilities are being prioritized and mitigated. Third, some federal agencies are expending additional resources to conduct their own risk assessments in addition to paying FPS to complete them. Fourth, federal tenant agencies do not have critical information needed to make risk-based decisions about how to upgrade the security of their facilities. Identifying ways to resolve these issues could greatly enhance FPS’s efforts to assess risk at federal facilities and reduce duplication of effort, among other things. We recognize that MIST is an interim tool and is not yet fully implemented; however, it has limitations that could affect FPS’s ability to protect federal facilities and provide security services. FPS generally increased its use of our project management best practices, as we recommended, and we encourage it to continue to do so in any future development of a risk assessment tool. However, FPS has not improved the accuracy and reliability of its FSA and contract guard data as it agreed to do in response to our previous recommendation. Given that FPS is still experiencing difficulties managing its FSA data, we reiterate the importance of this prior recommendation and encourage FPS to take action to address it. Finally, FPS recently decided to not use RAMP to oversee its contract guards, but still does not have a comprehensive and reliable system to ensure that its approximately 12,500 contract guards have met training and certification requirements, and that FPS’s guard post inspections are occurring in accordance with the agency’s guidelines. That FPS cannot ensure that its 33 contractors are providing accurate information on its guards is also problematic. Without a comprehensive and reliable system for contract guard oversight, FPS is relying primarily on information provided by guard companies. These issues raise important questions regarding the overall effectiveness of FPS’s oversight of its contract guard workforce. Given the challenges that FPS faces in assessing risks to federal facilities and managing its contract guard workforce, we recommend that the Secretary of Homeland Security direct the Under Secretary of NPPD and the Director of FPS to take the following five actions: incorporate NIPP’s risk management framework—specifically in calculating risk to include threat, vulnerability, and consequence information—in any permanent risk assessment tool; coordinate with GSA and other federal tenant agencies to reduce any unnecessary duplication in security assessments of facilities under the custody and control of GSA; address MIST’s limitations (assessing consequence, comparing risk across federal facilities, and measuring performance) to better assess and mitigate risk at federal facilities until a permanent system is developed and implemented; develop and implement a new comprehensive and reliable system for contract guard oversight; and verify independently that FPS’s contract guards are current on all training and certification requirements. We provided a draft of this report to the Secretary of Homeland Security for review. DHS concurred with our recommendations and provided written comments that are reprinted in appendix II. DHS also provided technical comments that we incorporated where appropriate. We are sending copies of this report to the Secretary of Homeland Security and the Director of the Federal Protective Service. As agreed with your office, unless you publicly announce the contents of this report earlier, we plan no further distribution until 30 days from the report date. At that time, we will send copies to relevant congressional committees. In addition, the report will be available at no charge on the GAO website at http://www.gao.gov. If you or your staff members have any questions concerning this report, please contact me at (202) 512-2834 or [email protected]. Contact point for our Offices of Congressional Relations and Public Affairs may be found on the last page of this report. GAO staff that made key contributions to this report is listed in appendix III. To examine the extent to which FPS is completing risk assessments without RAMP, we reviewed FPS’s current FSA procedures and data on completed and planned FSAs for fiscal years 2010 to 2012. Specifically, we reviewed FPS’s FSA data aggregated from its 11 regions to determine the extent of FPS’s FSA backlog. These data included the GSA facility identifier, address, city, state, zip code, FPS region, facility security level, date of the last FSA, and the date of the next scheduled FSA. However, we could not determine the extent of FPS’s FSA backlog because FPS’s data contained a number of missing and incorrect values that made it unreliable. We also visited 3 of FPS’s 11 regions and interviewed regional managers, area commanders, and inspectors about how they are completing FSAs in the absence of RAMP. We selected these 3 regions based on the number of federal facilities in the region and their facility security levels, the number of contract guards in the region, and geographic dispersion. Our work is not generalizable to all FPS regions. We also interviewed FPS headquarters officials to understand how the agency is currently conducting FSAs. During our visits to the selected 3 FPS regions, we spoke with officials from the General Services Administration, Department of Veterans Affairs, the Federal Highway Administration, Immigration and Customs Enforcement, and United States Citizenship and Immigration Services to obtain their perspectives on FPS’s assessment efforts. These agencies were selected because they are members of their facility security committees, which have responsibility for addressing security issues at their respective facilities and approving countermeasures recommended by FPS. To determine the status of FPS’s efforts to develop an FSA tool, we reviewed FPS’s documents including: the interagency agreement, requirements plan, project plan, system test plan, and training plan for MIST. As applicable, we compared FPS’s efforts to develop an FSA tool to DHS’s National Infrastructure Protection Plan’s (NIPP) risk management framework and the Interagency Security Committee’s (ISC) standards, including the Physical Security Criteria for Federal Facilities and the Facility Security Level Determination for Federal Facilities. We examined FPS’s requirement and project documents to determine whether in developing MIST, FPS complied with selected GAO and industry project-management best practices, such as: conducting alternative analysis, managing requirements, and conducting user acceptance testing. These practices were selected because they are critical in developing information technology systems and we recommended in 2011 that FPS better manage its requirements and conduct user acceptance testing in developing future tools. We interviewed FPS headquarters and regional officials as well as inspectors, representatives from Argonne National Laboratory who are responsible for developing MIST, officials from NPPD’s Office of Infrastructure Protection, and four risk management experts. We selected our four risk assessment experts from a list of individuals who participated in the Comptroller General’s 2008 risk management forum. We interviewed these experts to discuss FPS’s efforts to assess risks to federal facilities and the benefits and challenges of a risk assessment. To assess FPS’s effort to manage its contract guard workforce, we reviewed FPS’s guard oversight policies and procedures and RAMP’s September 30, 2011, post inspection data. During our visits to the selected three FPS regions, we interviewed FPS regional managers, area commanders, inspectors, three guard contractors, GSA, and other federal agencies about guard oversight. We also interviewed officials at FPS’s headquarters. We conducted this performance audit from July 2011 through August 2012 in accordance with generally accepted government auditing standards. Those standards require that we plan and perform the audit to obtain sufficient, appropriate evidence to provide a reasonable basis for our findings and conclusions based on our audit objectives. We believe that the evidence obtained provides a reasonable basis for our findings and conclusions based on our audit objectives. In addition to the contact named above, Tammy Conquest, Assistant Director; Geoffrey Hamilton; Greg Hanna; Grant Mallie; Justin Reed; Amy Rosewarne; and Frank Taliaferro made key contributions to this report. | FPS provides security and law enforcement services to over 9,000 federal facilities under the custody and control of the General Services Administration (GSA). GAO has reported that FPS faces challenges providing security services, particularly completing FSAs and managing its these challenges, FPS spent about $35 million and 4 years developing RAMPessentially a risk assessment and contract guard oversight tool. However, RAMP ultimately could not be used because of system problems. GAO was asked to examine (1) the extent to which FPS is completing risk assessments; (2) the status of FPSs efforts to develop an FSA tool; and (3)FPSs efforts to manage its contract guard workforce. GAO reviewed FPS documents, conducted site visits at 3 of FPSs 11 regions, and interviewed FPS officials and inspectors, guard companies, and 4 risk management experts. The Department of Homeland Securitys (DHS) Federal Protective Service (FPS) is not assessing risks at federal facilities in a manner consistent with standards such as the National Infrastructure Protection Plans (NIPP) risk management framework, as FPS originally planned. Instead of conducting risk assessments, since September 2011, FPSs inspectors have collected information, such as the location, purpose, agency contacts, and current countermeasures (e.g., perimeter security, access controls, and closed-circuit television systems). This information notwithstanding, FPS has a backlog of federal facilities that have not been assessed for several years. According to FPSs data, more than 5,000 facilities were to be assessed in fiscal years 2010 through 2012. However, GAO was unable to determine the extent of FPSs facility security assessment (FSA) backlog because the data were unreliable. Multiple agencies have expended resources to conduct risk assessments, even though the agencies also already pay FPS for this service. FPS received $236 million in basic security fees from agencies to conduct FSAs and other security services in fiscal year 2011. Beyond not having a reliable tool for conducting assessments, FPS continues to lack reliable data, which has hampered the agencys ability to manage its FSA program. FPS has an interim vulnerability assessment tool, referred to as the Modified Infrastructure Survey Tool (MIST), which it plans to use to assess federal facilities until it develops a longer-term solution. According to FPS, once implemented, MIST will allow it to resume assessing federal facilities vulnerabilities and recommend countermeasuressomething FPS has not done consistently for several years. Furthermore, in developing MIST, FPS generally followed GAOs project management best practices, such as conducting user acceptance testing. However, MIST has some limitations. Most notably, MIST does not estimate the consequences of an undesirable event occurring at a facility. Three of the four risk assessment experts GAO spoke with generally agreed that a tool that does not estimate consequences does not allow an agency to fully assess risks. FPS officials stated that they did not include consequence information in MIST because it was not part of the original design and thus requires more time to validate. MIST also was not designed to compare risks across federal facilities. Thus, FPS has limited assurance that critical risks at federal facilities are being prioritized and mitigated. FPS continues to face challenges in overseeing its approximately 12,500 contract guards. FPS developed the Risk Assessment and Management Program (RAMP) to help it oversee its contract guard workforce by (1) verifying that guards are trained and certified, and (2) conducting guard post inspections. However, FPS faced challenges using RAMP, such as verifying guard training and certification information, for either purpose and has recently determined that it would no longer use RAMP. Without a comprehensive system, it is more difficult for FPS to oversee its contract guard workforce. FPS is verifying guard certification and training information by conducting monthly audits of guard contractor training and certification information. However, FPS does not independently verify the contractors information. Additionally, according to FPS officials, FPS recently decided to deploy a new interim method to record post inspections to replace RAMP. GAO recommends that FPS incorporate NIPPs risk management framework in any future risk assessment tool; coordinate with federal agencies to reduce any unnecessary duplication in FPSs assessments; address limitations with its interim tool to better assess federal facilities; develop and implement a comprehensive and reliable contract guard oversight system; and independently verify that its contract guards are current on all training and certification requirements. DHS concurred with GAOs recommendations. |
Despite a substantial investment in IT, the federal government’s management of information resources has produced mixed results. Although agencies have taken constructive steps to implement modern strategies, systems, and management policies and practices, our work continues to find that agencies face significant challenges. These challenges can be addressed with strong and committed leadership by the agency CIOs—a position that was established by the Congress to serve as the focal point for information and technology management issues within an agency. Our most recent high-risk and performance and accountability series identified continuing high-risk system modernization efforts and governmentwide information and technology management challenges, namely, pursuing opportunities for e-government; improving the collection, use, and dissemination of government strengthening information security; constructing and enforcing sound enterprise architectures; employing IT system and service management practices; and using effective agency IT investment management practices. Unless and until these challenges are overcome, federal agencies are unlikely to optimize their use of information and technology, which can affect an organization’s ability to effectively and efficiently implement its programs and missions. Agency CIOs are key leaders in addressing these challenges. To allow them to serve effectively in this role, federal agencies must utilize the full potential of CIOs as information and technology management leaders and active participants in the development of the agency’s strategic plans and policies. The CIOs, in turn, must meet the challenges of building credible organizations and developing and organizing information and technology management capabilities to meet mission needs. For more than 20 years, federal law has structured the management of information technology and information-related activities under the umbrella of information resources management (IRM). Originating in the 1977 recommendations of the Commission on Federal Paperwork, the IRM approach was first enacted into law in the Paperwork Reduction Act of 1980 (PRA). The 1980 Act focused primarily on centralizing governmentwide responsibilities in the Office of Management and Budget (OMB). The law gave OMB specific policy-setting and oversight duties regarding individual IRM areas—for example: records management, privacy, and the acquisition and use of automatic data processing and telecommunications equipment (which was later renamed information technology). The law also gave agencies a more general responsibility to carry out their IRM activities in an efficient, effective, and economical manner and to comply with OMB policies and guidelines. To assist in this effort, the law required that each agency head designate a senior official who would report directly to the agency head to carry out the responsibilities of the agency under the law. Together these requirements were intended to provide for a coordinated approach to managing federal agencies’ information resources. The requirements addressed the entire information life cycle, from collection through disposition, in order to reduce information collection burdens on the public and to improve the efficiency and effectiveness of government. Amendments to the PRA in 1986 and in 1995 were designed to strengthen agency and OMB implementation of the law. Most particularly, the PRA of 1995 provided detailed agency requirements for each IRM area, to match the specific OMB provisions. The 1995 Act also required agencies to develop, for the first time, processes to select, control, and evaluate the results of major information systems initiatives. In 1996, the Clinger-Cohen Act supplemented the information technology management provisions of the PRA with detailed CIO requirements for IT capital planning and investment control and performance and results-based management. The 1996 Act also established the position of agency CIO by amending the PRA to rename the senior IRM officials CIOs and specifying additional responsibilities for them. Among these responsibilities, the act required that the CIOs in the 24 major departments and agencies specified in 31 U.S.C. 901 have IRM as their “primary duty.” Accordingly, under current law, agency CIOs are required to carry out the responsibilities of their agencies with respect to information resources management, including information collection and the control of paperwork; statistical policy and coordination; records management; privacy, including compliance with the Privacy Act; information security, including compliance with the Federal Information information disclosure, including compliance with the Freedom of information technology. Together, these legislated roles and responsibilities embody the policy that CIOs should play a key leadership role in ensuring that agencies manage their information functions in a coordinated and integrated fashion in order to improve the efficiency and effectiveness of government programs and operations. To address the objectives of this review, we first identified and reviewed major information and technology management legislative requirements. Specifically, we reviewed the Paperwork Reduction Act of 1995, the Clinger-Cohen Act of 1996, the E-Government Act of 2002, the Federal Information Security Management Act of 2002, the Federal Records Act, the Freedom of Information Act, and the Privacy Act of 1974. We identified the following 13 major areas of CIO responsibilities as either statutory requirements or critical to effective information and technology management. IT/IRM strategic planning. CIOs are responsible for strategic planning for all information and information technology management functions— thus, the term IRM strategic planning . IT capital planning and investment management. CIOs are responsible for IT capital planning and investment management [44 U.S.C. 3506(h) and 40 U.S.C. 11312 & 11313]. Information security. CIOs are responsible for ensuring compliance with the requirement to protect information and systems [44 U.S.C. 3506(g) and 3544(a)(3)]. IT/IRM workforce planning. CIOs have responsibilities for helping the agency meet its IT/IRM workforce or human capital needs [44 U.S.C. 3506(b) and 40 U.S.C. 11315(c)]. Information collection/paperwork reduction. CIOs are responsible for the review of agency information collection proposals to maximize the utility and minimize public “paperwork” burdens . Information dissemination. CIOs are responsible for ensuring that the agency’s information dissemination activities meet policy goals such as timely and equitable public access to information . Records management. CIOs are responsible for ensuring that the agency implements and enforces records management policies and procedures under the Federal Records Act . Privacy. CIOs are responsible for compliance with the Privacy Act and related laws . Statistical policy and coordination. CIOs are responsible for the agency’s statistical policy and coordination functions, including ensuring the relevance, accuracy, and timeliness of information collected or created for statistical purposes . Information disclosure. CIOs are responsible for information access under the Freedom of Information Act . Enterprise architecture. Federal laws and guidance direct agencies to develop and maintain enterprise architectures as blueprints to define the agency mission, and the information and IT needed to perform that mission. Systems acquisition, development, and integration. We have found that a critical element of successful IT management is effective control of systems acquisition, development and integration [44 U.S.C. 3506(h)(5) and 40 U.S.C. 11312]. E-government initiatives. Various laws and guidance direct agencies to undertake initiatives to use IT to improve government services to the public and internal operations [44 U.S.C. 3506(h)(3) and the E- Government Act of 2002]. We then developed and administered a questionnaire to the CIOs of the 27 major departments and agencies requesting information on whether these officials were responsible for each of these areas, their reporting relationships, their professional and educational backgrounds, and their challenges. We also asked each agency to supply the name, beginning and ending dates in office, and circumstances (e.g., whether they were in an acting or permanent position) of each of the individuals who had served as CIO at the agency since the enactment of the Clinger-Cohen Act. We subsequently interviewed each of the CIOs who were in place at the time of our review (see app. I for the list of the CIOs) in order to corroborate their responses and obtain more detailed explanations of these responses. In addition, as applicable, we collected and reviewed the resumes or biographies of the current CIOs. In analyzing CIOs comments on their challenges, two GAO analysts reviewed the responses and arrived at agreement for the broad categories. Each comment was then placed into one or more of the resulting categories, and agreement regarding each placement was reached between the two analysts. We also conducted two panel discussions with former agency IT executives (six in each panel), including former CIOs, that addressed their experiences and challenges. Appendix II lists these panelists. Finally, we discussed our findings with representatives of OMB’s Office of Information and Regulatory Affairs and the members of our Executive Council of Information Management and Technology—a preexisting panel of outside industry, state government, and academic experts—to obtain their views. We conducted our work at the 27 agencies during November 2003 through May 2004 in greater Washington, D.C. in accordance with generally accepted government auditing standards. CIOs generally were responsible for most of the 13 key areas we had identified as either required by statute or among those critical to effective information and technology management, and most reported directly to their agency heads. All 27 CIOs had responsibility for 5 of the 13 areas, such as information security and IT capital planning. Of the other eight areas, two of them—information disclosure and statistics—were the responsibility of fewer than half of the CIOs. This assignment of responsibilities is not consistent with the law. However, in those cases where the CIOs were not assigned the expected responsibilities and expressed an opinion about this situation, more than half of the CIOs’ responses were that the applicable information and technology management areas are appropriately held by some other organizational entity. Moreover, virtually all of the responses indicated that the CIOs were comfortable with their roles. Nevertheless, having these responsibilities performed by multiple officials could make the integration of various information and technology management areas, as envisioned by the law, more difficult to achieve. In addition to requiring that federal agency CIOs have many specific responsibilities, federal law also generally requires that these CIOs report directly to their agency heads. This requirement establishes an identifiable line of accountability and recognizes the importance of CIOs’ being full participants in the executive team in order to successfully carry out their responsibilities. Nineteen of the CIOs we interviewed have a direct reporting relationship to their agency head as required by the statute. The other eight have various reporting relationships, often through their agencies’ senior administrative or management executives. While reporting to the agency heads may be a means to ensure that the CIO has sufficient stature to “have a seat at the table,” only about a third of those who did not report to their agency heads expressed a concern with their reporting relationships. Given these results, it is clear that questions arise about whether the current statutory framework of roles and responsibilities reflects the most effective assignment of information and technology management responsibilities. Our work developing a set of best practices for CIOs’ roles and responsibilities, based on leading organizations in the private sector, may shed additional light on this issue. The Congress has assigned a number of responsibilities to the CIOs of federal agencies. In addition, we have identified other areas of information and technology management that can contribute significantly to the successful implementation of information systems and processes. Figure 1 lists the 13 areas of responsibility and the number of CIOs who are assigned responsibility for each (app. III contains additional information on each of these areas). Five of the 13 areas of responsibility were assigned to every agency CIO. These areas are capital planning and investment management, enterprise architecture, information security, IT/IRM strategic planning, and IT workforce planning. Two of these areas— enterprise architecture and capital planning—were mentioned by several CIOs as the mechanisms they use for integrating responsibilities across some of the other areas, because, for example they can provide a checkpoint where the CIO has the opportunity to review proposals and investments before they are funded. The governance processes used in implementing enterprise architecture and capital planning can also provide the opportunity to ascertain that other responsibilities are being executed as required. For example, these processes can require that plans for new systems meet security or records management standards before they are allowed to progress to the next stage of development or funding. The next six areas of responsibility shown on the chart—systems acquisition, major electronic government (e-gov) initiatives, information collection/paperwork reduction, records management, information dissemination, and privacy—were assigned to CIOs at between 17 and 25 agencies. Although these responsibilities were formally assigned to the CIO, it was not uncommon for CIOs to report that multiple units contributed to carrying out the activities associated with these responsibilities. For example, in the management of e-gov initiatives, several CIOs said that they managed the overall effort and share responsibility with the functional unit; in systems acquisition, several agencies reported that responsibility is shared among the CIO and other officials, such as a procurement executive or program executive. In addition, many CIOs mentioned that they provided metrics and measures of ongoing work, while the procurement or program executive managed the contractor relationship; for records management, several CIOs described execution of responsibilities as a cooperative effort with administrative or program employees to collect, aggregate, and store the volumes of records; responsibility for information dissemination at a few agencies was described as being coordinated with the public affairs office, as this unit performs quality reviews and the CIO provides technical support; and responsibility for privacy at a few agencies was described as being coordinated with the general counsel, as these officials provide high level guidance and the CIO implements it. Finally, information disclosure/Freedom of Information Act and statistical policy, both statutory responsibilities of the CIO, are the areas least often assigned to the CIO. In these areas, fewer than 10 of the CIOs hold responsibility as specified by the PRA. Disclosure is a responsibility that has frequently been assigned to offices such as general counsel and public affairs in the agencies we reviewed, while statistical policy is often the responsibility of separate offices that are responsible for agency data analysis, particularly in agencies that contain Principal Statistical Agencies. Even for those areas of responsibility that were not assigned to them, several CIOs reported that they contributed to the successful execution of agency responsibility. For example, a few mentioned that they provide technical support for the responsible units, such as assisting with Web services for information dissemination or maintaining electronic archives for electronic records management. In addition, five CIOs mentioned that they supported the unit responsible for records management by providing, for example, specific support for the design of systems compatible with electronic records management or by serving in an oversight or coordination role. Most CIOs told us they were comfortable with the existing assignment of responsibilities, although only five CIOs at the 27 major departments and agencies were responsible or shared responsibility for all 13 information and technology management areas. In fact, one of the panels of former agency IT executives suggested that not all 13 areas were equally important to CIOs. A few of the former agency IT executives even called some of the areas relating to information management distractions from the CIO’s primary responsibilities. However, this is not consistent with the law, which envisioned that having a single official responsible for the various information and technology functions would provide integrated management. Specifically, one purpose of the PRA is to coordinate, integrate, and—to the extent practicable and appropriate—make federal information resources management policies and practices uniform as a means to improve the productivity, efficiency, and effectiveness of government programs by, for example, reducing information collection burdens on the public and improving service delivery to the public. Moreover, the House Committee Report accompanying this act in 1980 described that aligning IRM activities under a single authority should provide for greater coordination among an agency’s information activities as well as greater visibility within the agency. Although many agencies did not have the CIO responsible for all IRM activities, a number of CIOs described alternative mechanisms that their agencies used to coordinate or integrate at least some of the activities. Examples of such integrating mechanisms included IRM plans, enterprise architecture processes, and IT capital planning processes. We agree that such mechanisms can provide elements of integration, but we have repeatedly reported that agencies have not effectively implemented such activities. For example, in January 2004, we reported that agencies IRM plans often did not address information functions such as information collection, records management, and privacy or their coordinated management. Accordingly, we recommended that OMB develop and disseminate to agencies additional guidance on developing their strategic IRM plans. In addition to specifying areas of responsibility for the CIOs of major departments and agencies, the Clinger-Cohen Act calls for certain CIOs to have IRM as their primary duty. All but a few of the agencies complied with this requirement. The other significant duties reported by some CIOs generally related to other administrative or management areas, such as procurement and human capital. We and Members of Congress have previously expressed concern about agency CIOs having responsibilities beyond information and technology management and have questioned whether split duties allow a CIO to deal effectively with an agency’s IT challenges. For example, we previously recommended that one agency, which had a CIO who was also the chief financial officer, appoint a CIO with full-time responsibilities for IRM. This agency later implemented our recommendation, thereby taking a significant step toward addressing critical and long-standing information and technology management weaknesses. Federal law—and our guide on CIOs of leading private sector organizations—generally calls for CIOs to report to their agency heads, forging relationships that ensure high visibility and support for far-reaching information management initiatives. Nineteen of the CIOs in our review stated that they had this type of reporting relationship. In the other eight agencies, the CIOs stated that they reported instead to another senior official, for example, a deputy secretary, under secretary, or assistant secretary. The Homeland Security Act of 2002 states that the CIO for the Department of Homeland Security shall report to the Secretary of Homeland Security or to another official as directed by the Secretary. As allowed by the law, the Secretary has directed the CIO to report to the Under Secretary for Management. Executive Council on Information Management and Technology, which is composed of noted IT experts, told us that what is most critical is for the CIO to report to a top level official. The members of our panels of former agency IT executives also had various views on whether it was important that the CIO report to the agency head. For example, one former IT executive stated that such a reporting relationship was extremely important, another emphasized that organizational placement was not important if the CIO had credibility, and others suggested that the CIO could be effective while reporting to a chief operating officer. We have explored the application of the chief operating officer concept to the federal government environment in a roundtable and forum that included participants with current or recent executive or management experience. While participants expressed a range of views on the chief operating officer concept and its application to the federal government, there was general agreement that there is a need to elevate attention and integrate various key management and transformation efforts, as well as to institutionalize accountability for addressing them. As the Congress holds hearings on and introduces legislation related to information and technology management, there may be an opportunity to consider the results of this review and whether the existing statutory framework related to CIO responsibilities and reporting to the agency head is the most effective structure. Our work developing a set of best practices for CIO roles and responsibilities, based on leading organizations in the private sector, may shed additional light on this issue. At the major departments and agencies included in our review, the current CIOs had diverse backgrounds, and since the enactment of the Clinger- Cohen Act, the median tenure of permanent CIOs whose time in office had been completed was about 2 years. Both of these factors can significantly influence whether a CIO is likely to be successful. First, the background of the current CIOs varied in that they had previously worked in the government, the private sector, and academia, and they had a mix of technical and management experience. Because a CIO should be selected based on the specific needs of the agency and the type of role that he or she is expected to play, it was not unexpected to see such diverse backgrounds. Second, the median time in position for agencies’ permanent CIOs was 23 months in office. When asked how long a CIO needed to stay in office to be effective, the most common response of current CIOs and former agency IT executives was 3 to 5 years. This gap is consistent with the views of many agency CIOs, who believed that the turnover rate was high and that the political environment, the pay differentials between the public and private sectors, and the challenges that CIOs face contributed to this rate. Various mechanisms, such as human capital flexibilities, are available for agencies to use to help reduce CIO turnover or mitigate its affect. Although the qualifications of a CIO can help determine whether he or she is likely to be successful, there is no general agreement on the optimal background that a prospective agency CIO should have. The conference report accompanying the Clinger-Cohen Act, which established the agency CIO position, requires them to possess knowledge of—and practical experience in—the information and IT management practices of business or government. While people like current CIOs and former agency IT executives also echoed the need for the CIO to have IT experience, other types of background, such as business knowledge, and an understanding of how IT can be used to transform agencies and improve mission performance were also seen as critical. The personal attributes of a CIO, such as leadership, communication, and political skills can also be key factors in the selection and success of a CIO. For example, members of our Executive Council on Information Management and Technology, which is composed of noted IT experts, told us that a CIO needs personal attributes like leadership ability to succeed in aligning the business and IT sides of the organization. In particular, he or she must be able to work as a partner with other business or program executives and build credibility with them, in order to be accepted as a full participant in the development of new systems and processes and to achieve successful outcomes with IT investments. According to our CIO guide, the degree of importance that senior executives place on the various attributes that are considered in selecting a CIO depends on the information leadership model and the needs of the enterprise. This lack of a standard set of qualifications for CIOs is reflected in the varied work and educational backgrounds of current agency CIOs. For example, 24 of the CIOs had previously worked for the federal government, 16 had worked in private industry, 8 had worked in state and local government, 2 had been in academia. Seventeen CIOs had worked in some combination of two or more of these sectors. Further, virtually all of them had work experience and/or educational backgrounds in IT or IT-related fields. For example, 12 current agency CIOs had previously served in a CIO or deputy CIO capacity. Those who did not have an IT or IT-related professional or educational background had significant non-IRM responsibilities, and their backgrounds were more specific to their other roles (e.g., human capital management). Moreover, most of the CIOs had business knowledge related to their agencies because they had previously worked at the agency or had worked in an area related to the agency’s mission. As the diversity of the current CIOs demonstrates, there is no single template for a CIO’s background; this illustrates that an agency head should select someone based on the specific needs of the agency and the type of role that he or she is expected to play. Another element that influences the likely success of an agency CIO is the length of time the individual has to implement change. For example, our prior work has noted that the experiences of successful major change management initiatives in large private and public sector organizations suggest that it can often take at least 5 to 7 years until such initiatives are fully implemented and the related cultures are transformed in a sustainable manner. The need for major changes in federal information and technology management is demonstrated by our high-risk and performance and accountability series reports, which show that there are long-term information and technology management problems and challenges facing federal agencies that will take years of sustained attention and continuity to resolve. When asked how long a CIO needed to stay in office to be effective, current CIOs and former agency IT executives most commonly responded 3 to 5 years. In particular, some cited the budget cycle as a reason why a CIO needed to be in place for a while in order to allow sufficient time for the CIO’s vision and priorities to be reflected in the agency’s budget requests and subsequent appropriations. Nevertheless, since February 10, 1996 (the date the Clinger-Cohen Act was enacted), the median tenure of agencies’ permanent CIOs who had completed their time in office was about 23 months (see app. IV for a chart that illustrates the tenure of each permanent and acting CIO and a table that presents further statistical analysis of the tenure data). Moreover, between February 10, 1996, and March 1, 2004, only about 35 percent of the permanent CIOs who had completed their time in office reportedly stayed in office for a minimum of 3 years. This is consistent with the views of many agency CIOs, who believed that the turnover rate was high. A high turnover rate is a problem, according to some current CIOs, because it can negatively impact their effectiveness. For example, CIOs may not have time to put their agenda in place or form close working relationships with agency leadership. Echoing this view, one former agency IT executive stated that with too much turnover nothing really substantial is accomplished by a CIO. Among the reasons cited for a high turnover rate were the challenges that CIOs face, the political environment, and the pay differentials between the public and private sectors. For example, among the challenges cited by current CIOs were being perceived as an adversary by others in the agency, the complexity of the issues, and the high-stress nature and long hours typical of the position. Another factor affecting the turnover rate is the number of CIOs who were political appointees; they stayed about 13 months less than those in career civil service positions. Specifically, the median time in position for career CIOs who had completed their time in office was about 32 months, while the median for political appointees was about 19 months. Nevertheless, there was a lack of consensus among the current CIOs and former agency IT executives about whether CIOs should be political appointees or not. For example, some believed that political CIOs could be more effective because they might have more access to, and influence with, the agency head. Others believed that CIOs in career positions could be more effective because, for example, they would be more likely to understand the agency, including its culture and work environment. A number of mechanisms could be used to ensure continuity in the face of frequent CIO changes in agencies. For example, we have previously reported that results-oriented performance agreements can help to maintain a consistent focus on a set of broad programmatic priorities during changes in leadership. This can help to reduce significant discontinuities in objectives as new CIOs step in. One mechanism that came to our attention through our interviews is the establishment of a deputy CIO position. A deputy CIO can help to ensure continued attention to ongoing objectives when there is a hiatus between one CIO and the next. A deputy CIO can also increase the effectiveness of the CIO organization by providing skills and work experiences that are complementary to those of the CIO. Moreover, the appointment of deputy CIOs was anticipated by the Congress when the Clinger-Cohen Act was passed. The conference report accompanying the act states “the conferees also intend that deputy chief information officers be appointed by agency heads that have additional experience .” At the time of our review, 24 departments and agencies had deputy CIO positions, of which 22 were filled. The establishment of this position at almost all of the agencies is important because successful information and technology management rests on the skills and performance of the entire CIO organization within the department and agency—not just the CIO as an individual. In addition to taking action to help ensure continuity, agencies may also be able to use human capital flexibilities—which represent the policies and practices that an agency has the authority to implement in managing its workforce—to help retain its CIOs. For example, our model on strategic human capital management notes that recruiting bonuses, retention allowances, and skill-based pay can attract and retain critical skills needed for mission accomplishment. Similarly, two members of our panels of former agency IT executives stated that the government should examine its rewards systems and learn from the private sector’s incentive programs. Other panelists asserted that additional money is not key to attracting and retaining CIOs; instead they cited the importance of nonmonetary incentives, such as offering an attractive package of authorities and responsibilities. We have previously identified six key practices for the effective use of human capital flexibilities, including planning strategically and making targeted investments and educating managers and employees on the availability and use of flexibilities. In addition, we have reported that although the Office of Personnel Management has taken several actions to assist agencies in the identification and use of human capital flexibilities, additional actions by this agency could further facilitate the use of flexibilities. Current CIOs reported that they faced major challenges in fulfilling their duties (see fig. 2). In particular, two challenges were cited by over 80 percent of the CIOs: implementing effective IT management and obtaining sufficient and relevant resources. This indicates that CIOs view IT governance processes, funding, and human capital as critical to their success. Other common challenges cited were communicating and collaborating internally and externally and managing change. Effectively tackling these reported challenges can also improve the likelihood of CIOs’ success. To aid them in addressing the multitude of challenges that they face, we have issued guidance that address several of the problems they cited. Leading organizations execute their IT management responsibilities reliably and efficiently. A little over 80 percent of the CIOs reported that they faced one or more challenges related to implementing effective IT management practices at their agencies. This is not surprising given that, as we have previously reported, the government has not always successfully carried out its responsibilities in the IT management areas that were most frequently cited as challenges by the CIOs; information security, enterprise architecture, investment management, and e-gov. Fifteen agency CIOs cited managing and improving information security as a challenge. For example, one agency CIO cited a challenge of increasing the security maturity of his agency while dealing with increased security risks and threats; another discussed institutionalizing information security policies in the management, planning, and operation of over 200 systems. We have previously issued guidance addressing security best practices to help agencies with their information security challenges. Fifteen CIOs discussed challenges associated with IT investment management, including strengthening an agency’s process to help ensure that investments are in line with its mission, business needs, and enterprise architecture and implementing appropriate IT performance measures. For example, one CIO reported a challenge in developing a capital planning process that will ensure that the agency’s IT investments are selected, resourced, and acquired to optimize mission accomplishment. This individual further elaborated that the agency’s capital planning process was unwieldy and, therefore, not a good fit in an IT environment that requires agility to deal with a rapid rate of change. Another CIO reported problems with performance measurement—such as a lack of baseline data—and planned to introduce a balanced scorecard approach and a portfolio management tool to address this challenge. We have previously issued guidance related to IT investment management including, most recently, a new version of our framework, which offers organizations a road map for improving their IT investment management processes in a systematic and organized manner. Eleven agency CIOs emphasized the building and enforcement of an enterprise architecture as challenging. For example, one CIO noted that keeping the agency’s enterprise architecture up-to-date was a challenge in light of evolving federal enterprise architecture guidelines. In April 2003, we issued a framework that provides agencies with a common benchmarking tool for planning and measuring their efforts to improve their enterprise architecture management. Seven CIOs mentioned that they faced challenges related to implementing e-government; two of them citing addressing the e- government element of the President’s Management Agenda as a challenge. Other challenges associated with e-government included (1) meeting the requirements of the E-Government Act of 2002 (P.L. 107- 347), (2) needing more comprehensive modernization and/or migration plans that incorporate governmentwide solutions, and (3) balancing and integrating rapidly evolving e-government initiatives with the need to provide responsive ongoing operational support. In addition to managing IT, agency CIOs also reported challenges associated with specific technological solutions. In particular, eight CIOs reported dealing with integration and consolidation issues as a challenge. Other specific technological challenges included ensuring adequate bandwidth and network connectivity. One key element in ensuring an agency’s information and technology success is having adequate resources available. Virtually all agency CIOs cited resources, both in dollars and staff, as major challenges. The funding issues cited generally concerned the development and implementation of agency IT budgets and whether certain IT projects, programs, or operations were being adequately funded. We have previously reported that the way agency initiatives are originated can create funding challenges that are not found in the private sector. For example, certain information systems may be mandated or legislated, so the agency does not have the flexibility to decide whether or not to pursue them. Additionally, there is a great deal of uncertainty over the funding levels that may be available from year to year. The multitude of players in the budget process can also lead to unexpected changes in funding. The CIOs cited similar challenges. They observed some specific budgetary or funding challenges such as (1) technology moving faster than the budget process, (2) systems requirements not always accompanied by funding, (3) ensuring adequate and stable funding to support Office of CIO operations, and (4) difficulty prioritizing IT initiatives within the budget to ensure that the agency meets Presidential and Secretarial priorities and mission. The government also faces long-standing and widely recognized challenges in maintaining a high-quality IT workforce. In 1994 and again in 2001, we reported the importance that leading organizations placed on making sure they had the right skill mix in their IT workforce. About 70 percent of the agency CIOs reported on a number of substantial IT human capital challenges, including, in some cases, the need for additional staff. Examples of specific comments follow. Recruiting. Seven CIOs named recruiting as a challenge. For example, one CIO stated that the hiring process takes too long and that good candidates are no longer available by the time the hiring process is completed. Another CIO noted that turnover in technical positions is high and that that government cannot fill openings as fast as they occur. Training and development. Seven CIOs listed training and development as a challenge. One CIO noted that training funds were inadequate. In addition, several CIOs pointed to project management as a particular area in need of enhancement. Retention. Four CIOs listed retention of high quality skilled staff as a challenge. One CIO commented that, as staff become more skilled and obtain certifications, they become more difficult to retain and that more flexibility in retaining staff was needed. Succession planning. Three CIOs cited succession planning as a challenge; succession planning can help an organization identify, develop, and select human capital to ensure that successors are the right people, with the right skills, available at the right time for leadership and other key positions. We have previously reported that many of these same issues exist for the government as a whole, not just for information and technology management. As a result, in January 2001 and again in January 2003, we designated strategic human capital management as a governmentwide high-risk area. Moreover, in June 2004, we reported that within the government and the private sector it has been widely recognized that the federal government’s hiring process is lengthy and cumbersome and hampers agencies’ ability to hire high-quality people. We have issued several reports that discuss these issues in more depth and provide possible solutions and recommendations. Our prior work has shown the importance of communication and collaboration, both within an agency and with its external partners. For example, one of the critical success factors we identified in our CIO guide focuses on the CIO’s ability to establish his or her organization as a central player in the enterprise. Specifically, effective CIOs—and their supporting organizations—seek to bridge the gap between technology and business by networking informally, forming alliances, and building friendships that help ensure support for information and technology management. In addition, earlier this year we reported that to be a high-performing organization, a federal agency must effectively manage and influence relationships with organizations outside of its direct control. Ten agency CIOs reported that communication and collaboration were challenges. For example, one CIO stated that it is a challenge for him to deal with the sheer diversity and volume of interactions within and outside the agency and with the need to align these organizations’ agendas with his agency’s objectives. Examples of internal communication and collaboration challenges included (1) cultivating, nurturing, and maintaining partnerships and alliances while producing results in the best interest of the enterprise and (2) establishing supporting governance structures that ensure two-way communication with the agency head and effective communication with the business part of the organization and component entities. Other CIOs cited activities associated with communicating and collaborating with outside entities challenging, including sharing information with partners and influencing the Congress and OMB. Although communication and collaboration can be problematic, our work on the Year 2000 computing challenge demonstrated their value. Both effective communication and partnering were cited by agencies and others as lessons learned that contributed to the government’s success in this critical effort. Specifically, for the Year 2000 effort, government actions went beyond the boundaries of individual programs or agencies and involved governmentwide oversight; interagency cooperation; and cooperation among federal, state, and local governments; private sector entities; and foreign countries. Top leadership involvement and clear lines of accountability for making management improvements are critical to overcoming an organization’s natural resistance to change, marshalling the resources needed to improve management, and building and maintaining organizationwide commitment to new ways of doing business. Some CIOs reported challenges associated with implementing changes—those originating both from outside forces and at their own initiative. For example, one CIO found it a challenge to maintain compliance with changing regulations and ever-increasing executive direction and data calls. Another CIO cited dealing with resistance to the use of a rigorous IT methodology as a challenge. Implementing major IT changes can involve not only technical risks, but also nontechnical risks, such as those associated with people and the organization’s culture. Six CIOs cited dealing with the government’s culture and bureaucracy as challenges to implementing change. For example, one CIO reported that there was institutional resistance to departmentwide changes. Another noted that one of his challenges was breaking down long- standing stovepipes that make no sense in a global information environment. Former agency IT executives also cited the need for cultural changes as a major challenge facing CIOs. Accordingly, in order to effectively implement change, it is important that CIOs build understanding, commitment, and support among those who will be affected by the change. In 2002, we convened a forum to identify useful practices and lessons learned from major private and public sector organizational mergers, acquisitions, and transformations that agencies could implement to successfully transform their cultures. Examples of the nine key practices identified are (1) ensuring that top leadership drives the transformation, (2) setting implementation goals and a time line to build momentum and show progress, and (3) using the performance management system to define responsibility and ensuring accountability for change. Agency CIOs generally reported that they had most of the responsibilities and reporting relationships required by law or critical to effective information and technology management, but there were notable exceptions. In particular, contrary to requirements in the law, some agency CIOs reported that they were not responsible for certain areas, such as records management, and that they did not report to their agency heads. However, views were mixed as to whether CIOs could be effective leaders without having responsibility for each individual area. The success of the CIO position also hinges, at least in part, on whether the individuals placed in this role have the background and attributes necessary to assume an agency’s IT leadership mantle and whether they spend sufficient time in office to implement changes. Current agency CIOs have had a wide variety of prior experiences; but they generally have work and/or educational backgrounds in IT or IT-related fields, as well as business knowledge related to their agencies. However, most CIOs did not stay in office for 3 to 5 years, which was the most common response when we asked current CIOs and former agency IT executives how long a CIO needed to be in office to be effective. Agencies’ use of various mechanisms, such as human capital flexibilities, could help reduce the turnover rate or mitigate its effect. Reducing turnover among CIOs is important because the length of time CIOs are in office can affect their ability to successfully address the major challenges they face. Some of these challenges—such as how IT projects are originated—may not be wholly within their control. Other challenges—such as improved IT management—are more likely to be overcome if a CIO has sufficient time to more effectively address these issues. As it holds hearings on and introduces legislation related to information and technology management, we suggest that the Congress consider the results of this review and whether the existing statutory requirements related to CIO responsibilities and reporting to the agency heads reflect the most effective assignment of information and technology management responsibilities and reporting relationships. We received written or oral responses on a draft of this report from OMB and from all 27 of the agencies that were included in our review. In particular, OMB and three agencies made specific comments on the report. These comments and our analysis are summarized below: Oral comments were provided by representatives of OMB’s Office of Information and Regulatory Affairs, Office of Electronic Government and Information Technology, and Office of General Counsel. Representatives of these offices noted that, although this report focused on the extent to which CIOs reported that the areas of responsibility assigned to them are consistent with 13 areas that GAO identified as critical to effective information and technology management, they were unclear on the correlation between or conclusions drawn about who in the agency is responsible and whether the agency achieves intended outcomes or results. The objective of this review was to determine which responsibilities were assigned to current agency CIOs. We did not attempt to draw conclusions regarding the relationship between the assignment of specific responsibilities and an agency’s success in achieving desired outcomes in those areas. The OMB representatives also noted that only 10 of the 13 areas surveyed by GAO are mandated by statute, and they questioned the need to include 3 nonstatutorily- mandated areas of CIO responsibility in this report. We continue to believe that the 3 additional responsibilities included in this report— systems acquisition, development, and integration; major e-government initiatives; and enterprise architecture—can contribute significantly to the successful implementation of information systems and processes. Furthermore, these responsibilities are assigned to agencies by statute (though not to the CIO explicitly), the President’s Management Agenda, and OMB’s own guidance. The importance of these three areas to CIOs was borne out by the fact that over 90 percent of the CIOs have been assigned responsibility for them. Finally, the representatives had no opinion about whether these areas or the agency official designated to be responsible for them are “critical” to effective information and technology management, and they drew no conclusions about the adequacy or effectiveness of the current statutory framework of CIO responsibilities. The Department of Defense’s Deputy Assistant Secretary of Defense (Deputy CIO) agreed with the findings of the report but did not concur with our suggestion that the Congress consider the results of our review when it holds hearings on and introduces legislation related to information and technology management. In particular, Defense recommended that either we make no suggestion to the Congress or that we suggest that the Congress consider ways to strengthen the CIOs’ authority and to focus on specific responsibilities for congressional review. We agree that strengthening the authority of CIOs can be crucial to their success and to the effectiveness of information and technology management in their agencies. Nevertheless, with respect to reporting to the agency head, the participants in our review offered a number of alternative arrangements. These alternatives included reporting to a deputy secretary or to a chief operating officer or equally high-level official, or maintaining a dual reporting relationship that includes the agency head. Such reporting relationships may provide the authority and accountability necessary for CIOs to be effective in their organizations. Accordingly, we continue to believe that such alternatives deserve consideration if the Congress holds hearings or introduces legislation related to CIOs’ reporting relationships. With respect to being more specific in our suggestions for changes to CIO responsibilities, we do not want to suggest that the Congress constrain the scope of its deliberations should it choose to take another look at the responsibilities of the CIO. The Department of Defense also provided a technical comment that we addressed, as appropriate. Defense’s written comments—along with our responses—are reproduced in appendix VI. The Department of the Interior’s Assistant Secretary for Policy, Management and Budget provided comments suggesting that the Congress consider the impact of continuing changes on the ability of agencies to effect those changes. While we recognize that agencies require time to implement major changes, we also note that most of the statutory requirements considered in our report have been law since 1996. The Assistant Secretary also recommended that the CIO continue to be required to report to the agency head, which is the reporting relationship at Interior. Interior’s CIO reporting relationship is consistent with the law and potentially provides strong support for the CIO in executing his or her responsibilities. However, as we previously noted, the participants in our review offered a number of alternative reporting arrangements that could provide the CIO with the necessary support. We believe that these alternatives deserve consideration. Interior’s written comments, along with our responses, are reproduced in appendix VII. The director of the Office of Personnel Management provided written comments in which she included several examples of actions the agency has taken to encourage the use of human capital management flexibilities to recruit and retain a high quality workforce. It was outside the scope of this report to review the Office of Personnel Management’s actions to encourage the use of human capital flexibilities. The Office of Personnel Management’s written comments, and our response, are reproduced in appendix VIII. With respect to the other agencies in our review, most generally agreed with our findings or declined to comment specifically. The agencies’ responses are as follows: The Department of Agriculture’s CIO thanked GAO for the opportunity to review the report but provided no further comments. The department’s written comments are reproduced in appendix V. The Department of Commerce’s GAO Liaison e-mailed a response in which she thanked GAO for the opportunity to review the report but provided no further comments. A management and program analyst from the Office of the Secretary at the Department of Education e-mailed a response in which the department provided no comments. A program analyst from the Office of the CIO at the Department of Energy e-mailed a response in which the department provided no comments. The Environmental Protection Agency’s GAO Liaison Officer e-mailed a response in which the agency offered no comments. A management analyst at the General Services Administration e-mailed a response in which the agency provided no comments. The Department of Health and Human Services’ E-Gov Program Coordinator and CIO provided an e-mail response in which the department provided no comments. The Department of Homeland Security’s GAO Liaison provided an e-mail response in which the department offered no comments. The director of Department of Housing and Urban Development’s Office of Management and Planning, Office of Administration, e-mailed a response in which the department offered no comments. The Department of Justice’s Justice Management Division Audit Liaison at the Department of Justice provided an e-mail response in which she thanked GAO for the opportunity to review the report but provided no further comments. A senior accountant in the Office of the Chief Financial Officer at the Department of Labor e-mailed a response in which the department generally agreed with GAO’s findings and conclusions. In particular, they concurred on the challenges a CIO faces and on other general conclusions. The National Aeronautics and Space Administration’s GAO/OIG Audit Liaison Team Leader e-mailed a response in which the agency offered no comments. The CIO at the National Science Foundation provided e-mail comments in which he described the report as very informative and well organized and presented. He commented that it is certain to be of use as the foundation considers the role of the CIO in the future. He did not have any further comments or suggestions. The Special Assistant to the CIO at the Nuclear Regulatory Commission provided an e-mail response in which he thanked GAO for the opportunity to review the report but provided no further comments. The Assistant Administrator for Congressional and Legislative Affairs at the Small Business Administration provided an e-mail response in which he thanked GAO for the opportunity to review the report but provided no further comments. The audit liaison at the Social Security Administration provided an e- mail response in which he thanked GAO for the opportunity to review the report but provided no further comments. A program analyst at the Department of State provided e-mail comments in which she thanked GAO for the opportunity to comment on the report and described it as a useful tool for supporting the advancement of information technology throughout the federal government. She also provided technical comments that we incorporated, as appropriate. The Department of Transportation’s Director of Audit Relations e- mailed that the department had no comments. The Department of the Treasury’s CIO provided written comments in which he agreed with the report’s identification of the major challenges a CIO faces. Treasury’s written comments are reproduced in appendix IX. The U.S. Agency for International Development’s Assistant Administrator, Bureau for Management, provided written comments in which he concurred with the content of the report. The U.S. Agency for International Development’s written comments are reproduced in appendix X. The Department of Veterans Affairs’ Acting Director of the Congressional Reports and Correspondence Service in the Office of Congressional and Legislative Affairs provided an e-mail response in which he agreed with the information presented in our report. We are sending copies of this report to the secretaries of the Departments of Agriculture, the Air Force, the Army, Commerce, Defense, Education, Energy, Health and Human Services, Homeland Security, Housing and Urban Development, the Interior, Justice, Labor, the Navy, State, Transportation, the Treasury, and Veterans Affairs; the administrators of the Environmental Protection Agency, General Services Administration, National Aeronautics and Space Administration, Small Business Administration, and U.S. Agency for International Development; the commissioners of the Nuclear Regulatory Commission and the Social Security Administration; and the directors of the National Science Foundation, Office of Management and Budget, and Office of Personnel Management. We will also make copies available to others upon request. In addition, this report will be available at no charge on the GAO Web site at http://www.gao.gov. If you have any questions on matters discussed in this report, please contact me at (202) 512-9286 or Lester Diamond, Assistant Director, at (202) 512-7957. We can also be reached by e-mail at [email protected] and [email protected], respectively. Other key contributors to this report are listed in appendix XI. In March 2004, we held two panels of former agency senior IT executives, during which we discussed CIOs’ roles and responsibilities, reporting relationships, and challenges. Table 1 provides the former and current titles of these officials. Capital Planning and Investment Management—Federal laws and guidance direct agencies to develop and implement processes for IT capital planning and investment management. 44 U.S.C. 3506(h) and 40 U.S.C. 11312 & 11313. Although all the CIOs had primary responsibility for this area, several said that other organizational units supported the execution of this responsibility, often through diverse membership on an IT investment board, which virtually all agencies had in place. At a majority of agencies, the CIO chaired this IT investment board. Other mechanisms CIOs used to ensure that their responsibilities were being executed included making sure appropriate policies and guidance were in place, conducting periodic investment reviews, and building strong relationships with other officials. Working within the constraints of the federal budget cycle, including responding to evolving budget exhibit requirements, was perceived as a challenge by almost half of the CIOs, as was working with the business side of the agency. Capturing sufficient attention from top management to build an effective process was mentioned as a challenge by several CIOs. Another challenge was how to exert influence over IT investments within agency components. Prioritizing investments and cutting projects due to budget constraints was also mentioned by several CIOs. Enterprise Architecture (EA)—Federal laws and guidance direct agencies to develop and maintain enterprise architectures as blueprints to guide IT modernization. The CIOs used a variety of mechanisms to address their EA responsibilities, such as participating on investment review boards to ensure compliance with EA requirements and chairing or participating in committees that review and approve EA development activities. Several CIOs also said that they promote EA awareness and ensure that the EA include key business processes and requirements. Finally, some CIOs commented that understanding of and support for the agency EA are improving. CIOs said they faced challenges with the activities related to the development and implementation of the EA. These challenges included documenting the “as is” architecture, including interdependencies and interoperability, compliance with the agency EA and the federal enterprise architecture, and implementation and transition issues. Of the CIOs who reported challenges pertaining to EA activities, among other things, they identified obtaining staff buy-in and building relationships with business components and field offices as another key challenges. Of the CIOs who responded to a question about changes they would recommend, 13 commented that no changes were needed to their role, and some CIOs described EA legislation and guidance as being adequate. However, seven identified the need for changes in other areas, including increased support from management and staff, discipline, oversight, and improvements in managers’ and staff’s knowledge and skills. Two reported that CIOs needed to play a greater role in EA activities. Information Security—The agency CIO is responsible for protecting information and systems. 44 U.S.C. 3506(g) and 3544(a)(3). CIOs described several mechanisms for ensuring that their information security responsibilities were being carried out, including periodic meetings to review agency security performance, Federal Information Security Management Act reporting, vulnerability and intrusion detection testing, and risk mitigation strategies. All of the agencies had senior information security positions to take direct responsibility for this area. Many CIOs mentioned that they followed Federal Information Security Management Act guidance and were satisfied with it. Challenges in this area included institutionalizing strong security practices throughout the agency and reducing the number of networks and systems to be secured. In addition, five CIOs mentioned that it was difficult to find qualified staff for the security function. Many CIOs expressed concern with the criteria used to score information security performance at their agencies. Seven CIOs mentioned the need for greater clarity in the definition of information security success or progress, and five CIOs suggested that it would be helpful if the various oversight bodies could develop a consistent set of criteria. Finally, two CIOs suggested that quicker turnaround between measuring and reporting performance would present a more accurate picture of the actual security condition. IT/IRM Strategic Planning—The agency CIO is responsible for strategic planning for all information and technology management functions—thus, the term information resources management (IRM) strategic planning. 44 U.S.C. 3506(b)(2). In describing how they ensure that this responsibility is being carried out, many said they made sure that appropriate policies, procedures, or processes were in place. Seven CIOs mentioned using the investment management process to ensure that strategic priorities were enforced. Nearly half of the CIOs mentioned that coordination across various stakeholders was a challenge in this area. Several CIOs also cited Several CIOs suggested any changes in this area, although three mentioned that additional guidance would be beneficial. IT/IRM Workforce Planning— CIOs have responsibilities for helping the agency meet its IT/IRM workforce or human capital needs [44 U.S.C. 3506(b) and 40 U.S.C. 11315(c)] Responsibility for this area is often shared. Most CIOs worked with other organizational units to identify agency workforce needs and define gaps in available staff. The process of addressing these gaps – through hiring, training, or contracting – was carried out by most CIOs in collaboration with the human resources or procurement units of the agency. Most CIOs identified personnel management as a key challenge in this area, including the ability to attract staff with specific skills required, ensure personnel retention, and keep adequate numbers of personnel in the IT leadership pipeline. Additionally, several CIOs described hiring processes as cumbersome and a factor that tends to hinder workforce planning activities. Major electronic government (e-gov) initiatives—Various laws and guidance have directed agencies to undertake a variety of e-gov initiatives relating to using IT to improve government services to the public, as well as operations within the government. At agencies where CIOs have been given responsibility for major e-gov initiatives, CIOs have adopted a number of mechanisms to ensure that their responsibilities were being carried out adequately. Several agencies have established an e-gov program management office and/or have assigned project managers. Several CIOs reported that they use a scorecard, or other grading system, to identify strengths and weaknesses in their e-gov initiatives. Even when the CIOs have been assigned primary responsibility, they sometimes share responsibility with the functional unit. A few agencies have assigned responsibility for major e-gov initiatives to a senior-level political appointee to raise the visibility of the Challenges in this area included managing projects of the scale of the major e-gov initiatives. Systems Acquisition, Development, and Integration—GAO found that a critical element of successful IT management is effective control of systems acquisition, development, and integration. Several CIOs who had responsibility for this area shared that responsibility with other officials, including the senior acquisition official and system owners. Most CIOs reported that they utilized various control processes, such as system review boards and investment management boards, to provide oversight of systems acquisition and development activities. The enterprise architecture was also mentioned as a mechanism to guide these activities and ensure interoperability of systems. The two CIOs who did not have responsibility for this area reported that they contributed to the successful execution of responsibilities by ensuring that systems comply with the EA or other standards. Where the CIO did not have primary responsibility, the senior acquisition or procurement official usually had that responsibility. Several CIOs mentioned that coordinating activities related to systems acquisition was a challenge. Monitoring activities to ensure adherence to standards was also mentioned as a challenge. A few CIOs also reported that attracting and retaining individuals with expertise in acquisition and development was difficult. Information Collection/Paperwork Reduction—The agency CIO is responsible for overseeing a process to review agency information collection proposals in order to maximize the utility and minimize the public "paperwork" burdens associated with the agency's collection of information. 44 U.S.C. 3506(c). Most CIOs said that they focused on statutory and Office of Management and Budget (OMB) requirements in meeting their responsibilities in this area, and several CIOs noted that they developed reports for OMB in this area. Several CIOs specifically mentioned the use of internal systems and databases to produce automated reports. A few CIOs mentioned using agency Web sites as a mechanism to support information collection and paperwork reduction, for example, by allowing for public comment on collections. Several CIOs described this function as largely administrative and not a priority. In most agencies where the CIO did not have this responsibility, administrative units carried out these activities. A general lack of understanding of the area and its terminology was mentioned as a challenge by a few CIOs. CIOs at a few agencies also mentioned that coordinating and implementing their responsibilities was difficult when they dealt with large and complex collections. Records Management—The agency CIO is responsible for ensuring that the agency implements and enforces records management policies and procedures. 44 U.S.C. 3506(f). Most CIOs with responsibility for records management felt that they were the most appropriate official to have that responsibility. Several also stated that their involvement in the area has been made more important since agencies began maintaining records electronically. Most of the CIOs stated that they have developed policies and procedures to make sure records management activities are carried out appropriately, and a few mentioned they also use OMB and NARA reporting to oversee activities in the area. In agencies where the CIO was not responsible for records management, various other officials held responsibility, including senior administrative officials and General Counsel. A few CIOs mentioned that NARA guidance was continuing to evolve, particularly in the area of electronic records. A few CIOs also described the need for agencies to become more aware of the value of records management and begin to use it to manage the agency’s records as an asset. Information Dissemination—The agency CIO is responsible for ensuring that the agency's information dissemination activities meet policy goals, such as timely and equitable public access to information. 44 U.S.C. 3506(d). Several CIOs reported that they participate in internal review activities to determine compliance with requirements. Five CIOs develop policies, procedures, and guidance for information dissemination activities. Several CIOs also reported that they shared information dissemination responsibilities with other agency staff to fulfill the department’s information dissemination responsibilities. In those agencies in which the CIO was not responsible for this area, responsibility was most often held by the Office of Public Affairs. One CIO said that transitioning from traditional information dissemination methods to digital information delivery was presenting challenges, including developing appropriate access controls and updating policies. A few CIOs also identified challenges in balancing security and/or privacy with access to information. Another challenge was ensuring consistency in information dissemination activities across the agency. Privacy—The agency CIO is responsible for compliance with the Privacy Act and related laws. 44 U.S.C. 3506(g). Of the CIOs holding this responsibility, their responsibilities included activities to ensure compliance with privacy laws, such as developing privacy policies, conducting privacy impact assessments, and monitoring their agency’s Web sites. Two CIOs said that they have centralized persons or units reporting directly to them that perform all information privacy responsibilities. In order to increase staff awareness of privacy requirements, a few CIOs conducted training programs to address privacy issues. In the agencies in which the CIO did not have responsibility for privacy, the responsibility was most often held by the Office of General Counsel and various FOIA and Privacy Offices. Only one CIO expressed some concern with this assignment of responsibility. A few CIOs reported challenges in distinguishing privacy concerns from security concerns and in balancing privacy with requests for information. This ambiguity sometimes made it difficult to understand if information should be released, or not. Information Disclosure/Freedom of Information Act (FOIA)—The agency CIO is responsible for information access requirements, such as those of the FOIA and related laws. 44 U.S.C. 3506(g). Most CIOs with this responsibility reported that it was executed in concert with other units. Departmental and component-level FOIA offices were most often cited as partners in this area. Where the CIO did not have responsibility for this area, responsibility was assigned to units such as department- and component-level FOIA offices, offices of public affairs, and offices of general counsel. Several CIOs reported that the interplay among FOIA, privacy, records management, and security sometimes created challenges, such as whether to release specific information and under what conditions. Other CIOs stated that it is difficult to anticipate the volume and nature of requests and to plan accordingly. Coordination of activities with and ensuring adherence to standards by component-level organizations was also cited as a challenge by a few CIOs. Statistical Policy and Coordination—The agency CIO is responsible for the agency's statistical policy and coordination functions. 44 U.S.C. 3506(e). CIOs used various mechanisms to ensure that their responsibilities were being carried out, including guidance, tools, assessments and performance reviews, and information quality reports to OMB. Only 3 agencies with 1 of the 15 Principal Statistical Agencies had assigned responsibility to the CIO. Over half of the CIOs who did not have responsibility for this area reported that this function was appropriately assigned to other units. No CIOs expressed concern that they should have responsibility if they did not. Nine of the agencies where the CIO did not have responsibility for this function were home to 1 of the 15 Principal Statistical Agencies. Agencies provided us with the start and end dates of the tenure of each of their CIOs since the passage of the Clinger-Cohen Act in February 1996. These data are represented in figure 1. Table 1 contains statistical analysis of the data presented in figure 1. Computations have been provided both including and excluding the current CIOs. In cases where the current CIOs are included, the end of their tenure was established as of March 1, 2004, the ending date of data collection for this report. The following are GAO’s comments on the Department of Defense’s letter dated July 1, 2004. 1. We agree with the Department of Defense that strengthening the authority of CIOs in many of the areas for which they have responsibility can be crucial to their success and to the effectiveness of information and technology management in their agencies. However, we do not agree that there was an overall consensus that CIOs should report to their agency heads. The participants in our review offered a number of alternative reporting arrangements, including reporting to a deputy secretary or to a chief operating officer or equally high-level official, or maintaining a dual reporting relationship that includes the agency head. While such reporting relationships are not necessarily directly to the agency head, they may provide the authority and accountability necessary for CIOs to be effective in their organizations. We believe these alternatives deserve consideration if the Congress holds hearings or introduces legislation related to CIOs’ reporting relationships. 2. We disagree that our Matter for Congressional Consideration should be more specific. While the two responsibilities mentioned by the Department of Defense clearly differ from the others in the number of CIOs reporting that they hold responsibility, the Congress has established a coordinated approach to managing federal agencies’ information resources. As the Congress considers future statutory frameworks, this same coordinated approach may well be critical in its deliberations. Given the broad range of the Congress’s purview, we do not want to suggest that the Congress constrain the scope of its deliberations should it choose to take another look at the responsibilities of the CIO. 3. We believe that we accurately characterized Dr. Wells’s status. The Office of Personnel Management has used the term “political appointees” in various documents to describe Schedule C appointees. The following are GAO’s comments on the Department of the Interior’s letter dated July 6, 2004. 1. While we recognize that agencies require time to implement major changes, most of the statutory requirements considered in our report have been law since 1996. Since the findings of our report indicate that opinions are mixed on whether the current statutory framework is the most appropriate, we continue to believe that if the Congress holds hearings or introduces legislation related to the CIOs’ reporting relationships, the findings of this report should be considered. 2. We believe it is critical for CIOs to have the authority and accountability that they need in order to be effective in their organizations. The Department of the Interior’s approach, with the CIO reporting to the Secretary, is consistent with the law and potentially provides strong support for the CIO in executing his responsibilities. However, the participants in our review offered a number of alternative reporting arrangements that could provide the CIO with the necessary support; these included reporting to a deputy secretary, to a chief operating officer, or equally high level official, or maintaining a dual reporting relationship that includes the agency head. We believe these alternatives deserve consideration if the Congress holds hearings or introduces legislation related to the CIOs’ reporting relationships. The following are GAO’s comments on the Office of Personnel Management’s letter dated July 6, 2004. 1. As we have stated in this report, we believe that human capital flexibilities offer opportunities for agencies to help reduce CIO turnover or mitigate its effect. However, it was outside the scope of this report to review the Office of Personnel Mangement’s activities in this area. The Office of Personnel Management’s description of these activities in its written comments provides a few examples of opportunities that agencies may be able to take advantage of. Neha Bhavsar, Margaret W. Davis, Neil J. Doherty, Joanne Fiorino, Evan B. Gilman, Peggy A. Hegg, Ashfaq M. Huda, Robert G. Kershaw, Linda J. Lambert, Mary Beth McClanahan, David F. Plocher, and Cynthia J. Scott made key contributions to this report. The Government Accountability Office, the audit, evaluation and investigative arm of Congress, exists to support Congress in meeting its constitutional responsibilities and to help improve the performance and accountability of the federal government for the American people. GAO examines the use of public funds; evaluates federal programs and policies; and provides analyses, recommendations, and other assistance to help Congress make informed oversight, policy, and funding decisions. GAO’s commitment to good government is reflected in its core values of accountability, integrity, and reliability. The fastest and easiest way to obtain copies of GAO documents at no cost is through GAO’s Web site (www.gao.gov). Each weekday, GAO posts newly released reports, testimony, and correspondence on its Web site. To have GAO e-mail you a list of newly posted products every afternoon, go to www.gao.gov and select “Subscribe to Updates.” | Although the federal government has invested substantially in information technology (IT), its success in managing information resources has varied. Agencies have taken steps to implement modern strategies, systems, and management policies and practices, but they still face significant information and technology management challenges. Recognizing the key role of the chief information officer (CIO) in helping an agency to achieve better results through IT, congressional requesters asked GAO to study the current status of CIOs at major departments and agencies. Among the topics this report describes are (1) CIOs' responsibilities and reporting relationships, and (2) current CIOs' professional backgrounds and the tenures of all of the CIOs since enactment of the Clinger-Cohen Act. GAO administered a questionnaire and interviewed CIOs at 27 major departments and agencies, finding that respondents were responsible for most of the 13 areas we identified as either required by statute or critical to effective information and technology management. All of the CIOs had responsibility for five areas, including enterprise architecture and IT investment management. However, two of these areas--information disclosure and statistics--were outside the purview of more than half of the officers. Although the CIOs generally did not think placing responsibility for some areas in separate units presented a problem, having these responsibilities performed by multiple officials could make the integration of various information and technology management areas, as envisioned by law, more difficult to achieve. Given these results, it may be time to revisit whether the current statutory framework of responsibilities reflects the most effective assignment of information and technology management responsibilities. The law also generally requires that CIOs report directly to their agency heads, and 19 of the 27 said that they did. However, views were mixed among current and former officers on whether such a direct reporting relationship was important. Agency CIOs come from a wide variety of professional and educational backgrounds, but they almost always have IT or IT-related work or educational experience. Since enactment of the Clinger-Cohen Act, the median tenure of a federal CIO has been about 2 years; in contrast, both current CIOs and former agency IT executives most commonly cited 3 to 5 years as the time they needed to become effective. According to some current CIOs, high turnover is a problem because it can limit CIOs' ability to put their agendas in place. Various mechanisms, such as human capital flexibilities, are available for agencies to use to help them try to reduce CIO turnover or mitigate its effect. |
SSA administers two programs that provide benefits for individuals who are unable to work because of disability. Although they differ with respect to program purpose and requirements for entitlement, both DI and SSI use the same definition of disability for initial entitlement. Specifically, in order to be found disabled, an individual must have a medically determinable physical or mental impairment that (1) has lasted or is expected to last at least one year or result in death and (2) prevents an individual from engaging in substantial gainful activity. DI was established in 1956 as an insurance program to help replace earnings lost because of disability. To be eligible for benefits, individuals with disabilities must have a specified number of recent work credits under Social Security based on age as of onset of disability. Individuals may also be able to qualify on the work record of a deceased, retired, or disabled parent or a deceased spouse. Benefits are financed by payroll taxes paid by covered workers and their employers, and are linked to the worker’s earnings history. In most cases, individuals who have been entitled to DI benefits for 24 months qualify for Medicare. The SSI program was established in 1972 to provide a standard minimum level of income for individuals with disabilities, as well as aged individuals, who have limited income and assets. Eligibility does not require a past work history. Benefits are paid from general revenues and, in general, most beneficiaries are eligible for the same benefit amount. However, other income counts against this benefit amount, usually resulting in a reduction in that amount. In most states, entitlement to SSI means automatic entitlement to Medicaid. Most beneficiaries qualify for either one program or the other; however, receipt of benefits under one program does not necessarily preclude entitlement under the other program. Beneficiaries who are receiving one benefit may transition to the other benefit or they may receive both benefits concurrently. Receiving an SSI benefit has no bearing on continuing entitlement to DI benefits. However, because SSI is a means- tested program, the amount of the DI benefit must be considered in determining whether an individual with a disability also qualifies for SSI. If the amount of the DI benefit is low and all other income and resource factors are met, a DI beneficiary may also receive an SSI benefit. Concurrent beneficiaries who are covered by Medicaid and who have been entitled to DI long enough to qualify for Medicare may also be eligible for payment of their Medicare premiums and co-payments by their state. The minimum value of these payments would be $54.00 a month. Both programs feature work incentive provisions that are intended to encourage beneficiaries to return to work. However, the provisions of the two programs differ significantly, providing different levels of safeguards for continuing eligibility, income, and medical coverage for DI and SSI beneficiaries. For example, earnings, regardless of the amount, do not affect a DI beneficiary’s cash benefit for a period of time known as the trial work period. However, benefits will eventually stop completely after this period if earnings exceed a specified level. In contrast, earnings can affect an SSI beneficiary’s cash benefit immediately but the reduction in benefits is gradual with a reduction in benefits of $1 for every $2 earned over the first $65. Table 1 highlights each program’s work incentive provisions in effect at the time the Ticket to Work and Work Incentives Improvement Act of 1999 called for this study. Even with the work incentive provisions in the two programs, relatively few disability beneficiaries work and no more than 1 percent leave the DI and SSI beneficiary rolls each year because of their work. DI and SSI beneficiaries who do return to work are responsible for reporting their work activity to SSA as soon as it occurs. SSA has no specific provisions for adjusting benefits for concurrent beneficiaries who work and must apply the work incentive provisions of the two programs independently to determine whether an individual remains entitled to DI and SSI and, if so, the amount of each benefit. Most concurrent beneficiaries interact with SSA through its network of nearly 1,300 field offices. To cope with the complexity of its programs, most of these field offices use employees who specialize in either the Social Security programs, including the DI program, or the SSI program. The remaining offices use generalist employees who are trained in both programs. To supplement the information provided by its staff, SSA also publishes several pamphlets that explain the provisions of the DI and SSI programs. Two of these publications, Red Book on Employment Support and Working While Disabled—How We Can Help, provide information about the effect of work on DI and SSI benefits. Concurrent beneficiaries, who comprised about 14 percent of SSA’s disability population, were likely to have mental impairments and be female. In addition, their average age was 45. About 11 percent of concurrent beneficiaries worked and had a median earned income of about $250 a month. More than three-quarters of those who worked have mental impairments—mental illness and mental retardation. Individuals with mental retardation worked at twice the rate of beneficiaries with mental illness, but earned much less. The median earnings of beneficiaries with mental retardation were nearly half those of beneficiaries with mental illness. Of the more than 6 million working-age adults receiving disability benefits under the DI program and the more than 3.5 million working-age adults receiving SSI, our analysis of the February 2002 SSA data indicates that, approximately 1.2 million—14 percent—received benefits from both programs. These beneficiaries were an average age of 45, with fewer than 15 percent between the ages of 17 and 30. In addition, 53 percent were female. Concurrent beneficiaries received an average DI payment of about $430 per month and an SSI payment of about $150 per month. The majority of concurrent beneficiaries qualified for DI benefits on the basis of their work record. The remainder received benefits on the basis of the work history of a deceased, disabled, or retired parent (25 percent); or their deceased spouse (3 percent). Over half of concurrent beneficiaries had a mental impairment—a third had mental illness and about a quarter had mental retardation. Approximately one-ninth of concurrent beneficiaries had an impairment related to their muscular or skeletal system. The remaining beneficiaries had one of a wide range of impairments as their primary impairment. Of the approximately 142,000 concurrent beneficiaries who worked, almost 80 percent had a mental impairment. Concurrent beneficiaries who worked were more likely to have mental retardation, tended to be younger, and male. As shown in figure 1, while individuals with mental retardation made up only a quarter of the concurrent population, they accounted for over half of the concurrent beneficiaries who worked. Moreover, nearly half may not have had a significant work history. Instead, they qualified for benefits on the basis of the work history of a parent or spouse. Most concurrent beneficiaries who worked earned low wages, but earnings levels varied by impairment categories. While the median earned income of all working concurrent beneficiaries was approximately $250 per month, more than one-quarter earned $65 per month or less. Workers with mental retardation had median monthly earnings of about $200, compared with about $400 for concurrent beneficiaries with mental illness. However, the median earned income for concurrent beneficiaries eligible for DI benefits on the basis of the work history of a deceased, disabled, or retired parent was only $85 per month. A higher proportion of concurrent beneficiaries worked than SSI beneficiaries, but they earned much less. Fewer than 8 percent of SSI beneficiaries worked, but they had median earnings of $400, compared with about $250 for concurrent beneficiaries. More than one-quarter of SSI beneficiaries earned $1,000 per month or more, greater than three times the percentage of concurrent beneficiaries with earnings at that level. Table 2 provides the percentage of concurrent and SSI beneficiaries that were earning at the levels listed. The difference in earnings may be explained, in part, by the higher proportion of working concurrent beneficiaries with mental retardation as compared with SSI beneficiaries. However, this higher incidence of beneficiaries with mental retardation does not completely explain the difference in earnings since the earnings for SSI beneficiaries with mental retardation were higher than those for concurrent beneficiaries with mental retardation. For example, median monthly earnings for SSI beneficiaries with mental retardation were $250 compared with $200 for concurrent beneficiaries with the same impairment. Our analysis of data available on the use of work incentives indicated that, while 11 percent of concurrent beneficiaries worked, they did not take advantage of most of the work incentives available to them under the SSI and/or DI programs. Most concurrent beneficiaries who worked used the earned income exclusion under the SSI program that reduces cash benefits by $1 for every $2 earned, but the other incentives were not widely used. The next most frequently used work incentive was the Impairment Related Work Expenses provision, which allows beneficiaries to exclude the costs of certain impairment-related items and services needed to work. It was used by fewer than 3 percent of concurrent beneficiaries who worked. Concurrent beneficiaries’ use of work incentives was comparable to that of SSI beneficiaries. Because beneficiaries may not meet all the eligibility requirements for work incentives, it may be difficult to determine whether the low rates of use of work incentives were attributable to the inability to meet eligibility factors or lack of understanding of the provisions. There is little coordination between SSI and DI program rules, especially for concurrent beneficiaries who work and, as a result, SSA must apply the complex provisions of the two programs independently. The specialization of most SSA field office staff in either the DI or SSI program makes it difficult to serve concurrent beneficiaries effectively. Specialists in one program lack integrated guidance to readily determine the effect of work on the benefits in the other program. Moreover, because the guidance does not adequately cross reference the DI and SSI rules that pertain to concurrent beneficiaries, these specialists may not recognize the need to communicate information about work to the other program as required by SSA guidance. In addition, SSA has not established formal operating procedures that ensure that this information is collected and communicated nor has it established a monitoring system to ensure that appropriate actions are taken. Because information on the work activities of concurrent beneficiaries may not be exchanged between the two programs or acted on in a timely manner, SSA may be overpaying benefits. SSA took steps recently that have the potential for improving service to concurrent beneficiaries and increasing the accuracy of their payments by better coordinating the administrative process related to work activity. For example, SSA officials have created a new position and new software to handle work-related issues for all beneficiaries, which could provide better integrated service to concurrent beneficiaries. Because these initiatives are still being tested and evaluated, it is too early to know whether they will have the intended effect if implemented nationwide. SSA’s guidance for administering the DI and SSI programs may contribute to the difficulty encountered by staff that specialize in one program but are required to collect information about both programs for concurrent beneficiaries. SSA’s written guidance for both programs is contained in a voluminous document of about 35,000 pages divided into multiple parts. A DI specialist collecting work activity information from a concurrent beneficiary may find it challenging to use the multi-part guidance for DI benefits and even more challenging to use the guidance for SSI that would also be needed for a concurrent beneficiary. SSA guidance does not provide integrated instructions for processing work information reported for concurrent beneficiaries or an integrated explanation of the effect of work on both DI and SSI benefits. Available guidance usually segregates information by program and provides little cross-referencing to issues that may be common to both programs. In addition, the cross-referencing that is provided does not always direct specialists to the specific procedures to follow for the other program. For example, the guidance for dealing with a DI beneficiary who returns to work contains a single cross-reference to an 81 page section of SSI policy and procedural statements. However, this 81 page section does not explain the basic effect of work on benefits. To determine the specific procedures and how work affects the person’s SSI benefits, the DI specialist would need to go to yet another section of SSI guidance without the benefit of a cross-reference to find it. The need for efficient and accessible guidance is particularly important in field offices where heavy workloads and changing priorities often compete for employee attention. The lack of integrated guidance may contribute to SSA not collecting all the required information on concurrent work beneficiaries. In some offices, concurrent beneficiaries report their work activity to either a DI or SSI specialist who collects the information he or she believes necessary to determine the amount of benefits that should be paid under both programs. Some specialists reported that they did not always know when an individual was a concurrent beneficiary and did not always know what information to collect about the other program. In other offices, a concurrent beneficiary reported to a specialist in each program. If the beneficiary is unable to meet with both specialists, SSA may not collect all the information needed to adjust benefits correctly. Even if the information is collected, some field offices lack standard procedures for ensuring that information about the work activity is shared between programs. Some field offices have established local procedures for sharing this information, but these procedures may not always be adequate. For example, in one field office we visited, the SSI specialists who usually collected information about work activity from concurrent beneficiaries would copy and share the information with one designated supervisor who was responsible for taking the actions necessary to adjust DI benefits. Even with this procedure in place, the supervisor told us she was not confident that she was receiving all the information that was being reported by concurrent beneficiaries. SSA’s procedures for determining the appropriate DI benefit amount when concurrent beneficiaries work make it difficult to adjust benefits in a timely manner. When a concurrent beneficiary reports work, the field office handling the case can adjust the SSI benefit, when warranted. In contrast, in most cases, field office employees cannot take immediate actions to adjust DI benefits because they cannot be adjusted until the beneficiary has completed a 9 month trial work period. At the beginning of the trial work period, SSA procedures direct the field office to transfer DI cases to one of seven program service centers (PSC) for documenting the start of this period. At the end of this period, the PSC is supposed to return the case to the field office, which then determines whether the beneficiary will continue to be entitled to benefits. However, SSA does not routinely monitor or have a comprehensive system that tracks actions on cases as they move between SSA components and automatically identifies the cases may be nearing the completion of the trial work period. As a result, the field offices may not be notified immediately upon the completion of a trial work period and, therefore, may not know whether or not to terminate DI benefits. Employees in several field offices told us that they often do not receive the cases back from the PSCs in a timely manner. Their estimates of the time it took the PSC to return these cases for further action ranged from 1 to 10 years. SSA officials could not verify these delays because they told us that they did not systematically collect information about these time frames. These problems occur not only when administering the trial work period for concurrent beneficiaries, but for all DI beneficiaries who return to work. Untimely actions may also occur because the tasks related to adjusting benefits after the end of the trial work period are given a lower priority than other workloads. Several SSA officials told us that many tasks associated with adjusting benefits to account for work activity do not receive workload credits that help maintain or increase field office staffing levels. For this reason, field office managers generally give a higher priority to tasks that do, such as processing initial claims for benefits. However, an SSA headquarters official recently told us that SSA will focus greater attention on the post trial work period workload as it implements the Ticket to Work program. Because SSA employees do not always evaluate and take action related to the work activity in a timely manner, some DI beneficiaries continue to receive benefits that they are no longer due. When DI beneficiaries earn more than a specified amount in any month after completing the trial work period, as of that month, SSA no longer considers the person disabled and should end their DI benefits 2 months later. However, several SSA officials told us about a one-time analysis of SSA disability overpayments based on cessation of disability in calendar year 2000 that revealed that about one-half of the overpayment dollars were made to people who should not have received benefits because of their earnings. Given this analysis, failure to take timely actions when DI beneficiaries work may account for about $350 million dollars in overpayments for calendar year 2001. SSA established a temporary new position in July 2000, the employment support representative, which has the potential to address the challenges it faces in serving concurrent beneficiaries. SSA developed the position, in part, to concentrate on the needs of disability beneficiaries who work and tested it with 32 SSA employees who had responsibility for 54 field offices. These representatives received extensive training in the work incentive provisions of both the DI and SSI programs. This training prepared them to take the necessary actions for both programs without the need to rely on unfamiliar program guidance. Moreover, funneling all work activity cases through a single employee would allow this individual to develop a level of expertise that was not possible in the traditional field structure. Further, combining all duties related to disability beneficiaries who return to work into a single position could eliminate the problem of specialists in one program failing to share information with the other program. In addition, since these representatives do not share responsibility for handling the case with the PSC, they could take actions to adjust DI benefits in a timelier manner. It is unclear whether SSA will make this position permanent, and to what degree. In a November 2001 report, an SSA workgroup recommended that the position be implemented permanently in as many of its 1,300 service locations as feasible. While the 32 employment support representatives continue to perform the duties of this position, the agency has not announced decisions about the ultimate fate of this position. As of July 2002, SSA officials were still evaluating the resource implications of implementing this position in most of its field offices. Without additional resources, some field office managers told us they would have to divert existing staff from their current positions to assume the employment support representative role. SSA has not evaluated the timeliness of actions taken by the employment support representatives to adjust benefits. However, the employment support representatives with whom we spoke thought that the additional costs associated with the new position could be offset by the reduction in overpaid DI benefits from their more timely actions. In addition to testing the employment support representative position, SSA is developing a new computer system that may potentially help to improve the timeliness of actions in response to the work activity of DI beneficiaries. Scheduled for release at the end of calendar year 2002, the new program will allow SSA for the first time, to collect information about the monthly earnings of all DI beneficiaries who are working. This information should provide the basis for a systematic method for SSA to determine whether additional action is needed to determine continuing eligibility for of DI benefits. However, SSA is still deciding what additional information the new system should include and what reports it should produce to monitor all the actions needed to account for the work activity of DI beneficiaries and to adjust benefits in a timely way. Just as SSA has no special procedures for administering the rules for concurrent beneficiaries, it does not provide concurrent beneficiaries with any integrated explanation of the effects of work on both DI and SSI benefits through its public information materials. The numerous publications that SSA has issued explain how work affects one benefit or the other. SSA extends this practice of not integrating their explanations of the effects on benefits by sending beneficiaries two separate letters, one to explain changes in DI benefits and another to explain SSI benefits. In addition, SSA field office specialist employees that lack expertise about both programs may provide incomplete or incorrect information about these effects. While it may be difficult to communicate, it is important for concurrent beneficiaries to understand that work activity affects their benefits at different levels of earnings and at different times, depending on the program. For example, concurrent beneficiaries with relatively low earnings may be able to maintain both benefits while increasing their total income. However, as earnings increase, so does the probability that they will eventually lose one or both benefits. Figure 2 illustrates these effects of work activity at three earnings levels on the DI and SSI benefits. At low earnings, a beneficiary receiving the average DI benefit who starts working in February 2002 retains DI and SSI benefits throughout the 13 month period shown. In contrast, a beneficiary with high earnings—higher than substantial gainful activity—will lose both benefits during the same period. Because the work incentive provisions of the two programs are designed to encourage beneficiaries to test their ability to work without losing their benefits, concurrent beneficiaries who understand the rules of both programs can make decisions that best support their priorities for income, services, and self-sufficiency. Concurrent beneficiaries who wished to become self-sufficient would need to understand that, to maintain an equivalent of their level of benefits and services, they would need to earn enough to make up for the eventual loss of cash benefits and health insurance and benefits and services from other sources. Concurrent beneficiaries who are uncertain about their ability to sustain work can focus on working at a level that preserves enough benefits to support them while they test their ability to work. In determining what level of work they can pursue, these beneficiaries would have to weigh the value of non cash benefits that depend on income and assets such as housing or social services compared with the earnings from increased work activity. For example, a service provider told us about one concurrent beneficiary who was receiving in-home support services from his county that allowed him to live independently. However, he returned to work and was then earning too much to continue to qualify for these services. He determined that he could continue to qualify for the support services by working 1 hour less per week and he negotiated the change with his employer. Concurrent beneficiaries who do not understand the programs’ provisions may make decisions about work that will make them worse off financially. Some concurrent beneficiaries do not work at all because they are afraid of losing their benefits. For example, two social service providers with whom we spoke indicated that some of their clients with mental retardation and the family members who helped them make decisions would avoid any work activity. Even though some earnings would not significantly affect benefits, they feared the loss of any benefit and health insurance and decided to forego the additional income they could have earned. At the other extreme, beneficiaries may inadvertently lose the benefits and health insurance they need by earning more than the allowable limits under one or both of the programs. Concurrent beneficiaries who do not understand the full range of work incentives may not pursue provisions that might ease their transitions to work. For example, one young concurrent beneficiary who was working part-time and attending college told us that SSA employees had never explained two SSI work incentive provisions that would have allowed her to exclude more of her earned income from the total used to determine her benefit. This would have allowed her to have more money for her tuition. Another concurrent beneficiary said that, even though she had expressed a strong desire to work and had returned to work for a short time, SSA had never explained that she could deduct from her countable earnings the cost of any items or services related to her impairments that were necessary for her to continue working. To assist beneficiaries in making better decisions about work activity, as authorized by the Ticket to Work and Work Incentives Improvement Act of 1999, SSA has provided funding since 2000 to community-based organizations. These organizations are funded to provide work incentives planning and assistance to beneficiaries and conduct outreach to individuals who are potentially eligible to participate in work incentive programs. In fiscal year 2002, SSA awarded a total of about $20 million to more than 100 organizations for these activities. The 2001 annual report of this program indicates that, through the end of that calendar year, more than 100 organizations receiving funding provided intensive benefit support services to more than 4,500 beneficiaries, most of whom were working or considering a return to work. In addition, more than 5,000 beneficiaries received less intensive services, such as information and referral. Some disability advocates have recommended making the work incentive rules similar in both the DI and SSI programs to help beneficiaries better understand the effect of work on benefits. They frequently suggest eliminating the 9 month trial work period for DI and replacing it with a gradual reduction in benefits in response to increased earnings, similar to the SSI program. Such a change would require legislative action. The Ticket to Work and Work Incentives Improvement Act requires SSA to conduct a demonstration project to test whether a reduction of $1 in DI benefits for every $2 earned would remove disincentives to return to work. SSA is still in the planning stages for this demonstration, and it is unclear when data will be available. The DI and SSI programs were designed as two separate programs to serve two distinct categories of disability beneficiaries. However, a third category, concurrent beneficiaries—those who qualify for both DI and SSI benefits–has emerged as a sizable disability population. Failure to properly administer the program for this special population could result in benefit overpayments and underpayments and less-than-ideal beneficiary decisions about work. Without taking additional steps, it will be more difficult for SSA to effectively administer the disability program and serve concurrent beneficiaries under the current program. Without improved guidance and procedures, staff that have knowledge only about SSI or DI program rules may not collect and share information needed to make accurate determinations about concurrent beneficiaries’ benefit payments. In addition, without a monitoring system to ensure information about concurrent beneficiaries’ work activity is shared across program components and acted upon within a timely manner, SSA faces an increased risk that concurrent beneficiaries, as well as all DI beneficiaries who return to work, will be overpaid. Moreover, without public information materials that clearly explain the complex interaction of the two programs, the possibility that beneficiaries would make decisions about working that are not in their best interest could increase. Further, a lack of understanding of the work incentive provisions could create a disincentive to work. SSA needs to undertake the necessary steps to ensure it adequately serves concurrent beneficiaries and exercises its stewardship over program funds by avoiding overpayments. We recommend that the Commissioner of SSA: Develop procedures and integrated guidance to ensure information about work activity is collected and shared between the DI and SSI programs. One option would be to improve the cross-references used in its program guidance to more specifically target needed information to take actions to adjust benefits for both programs. Another option would be to require that some staff are knowledgeable about both programs and that they collect and act on work activity information for both programs. Regardless of the option selected, SSA should also consider adding to its guidance explanations and examples of the effect of work activity for individuals receiving both DI and SSI benefits. Develop comprehensive systems to monitor the progress of DI cases as they move between SSA components and set timeliness goals for the entire process for each action and component. In addition, use this information to help ensure timely actions and minimize overpayments of DI benefits when individuals return to work. Develop public information materials targeted to concurrent beneficiaries that explain the complex interaction of the two programs in language that beneficiaries can understand. SSA may wish to consider revising its publication, Working While Disabled—How We Can Help, to include a basic explanation of the effects of work when an individual receives both DI and SSI benefits and examples that illustrate these effects. For more detailed explanations, SSA could direct beneficiaries to contact an SSA representative knowledgeable of both programs. In its comments on a draft of this report, SSA agreed with our conclusions and highlighted the initiatives it has underway or planned that it believes will address our recommendations (see app. II). Concerning our first recommendation, SSA stated that it is developing training for fall 2002 to enhance field office employees’ technical proficiency in both the DI and SSI programs. It is also developing and refining its supportive software systems to print referral forms for use in routing program information. We believe additional training should help to improve the technical proficiency of field office employees in both programs. However, SSA may need to consider the time field employees will need to develop proficiency after completing the training. Reliable, user-friendly program guidance could help reinforce this training as well as be a reference to these and future employees. Therefore, we continue to believe that program guidance should be modified to more completely explain the interactions of the two programs when concurrent beneficiaries work. Further, while the enhancements to software should provide SSA with an additional tool for sharing information between programs, SSA may wish to consider developing procedures to ensure that such available tools are being used appropriately to share information. Concerning our second recommendation, SSA said that the systems it now has under development and scheduled for release in November 2002 will provide the necessary management information capabilities needed to ensure actions related to beneficiaries working are taken on a timely basis. As acknowledged in our report, the new system under development has the potential for improving the timeliness of actions in concurrent cases. However, because the system is still under development, we are unable to determine how effective it will be in identifying and controlling work activity. For example, we cannot confirm at this time whether the databases being developed will contain information about all working beneficiaries nationwide that can be accessed by all field offices or local databases that can only be accessed by the employees in one office, similar to those being tested in a number of field offices. Concerning our third recommendation, SSA stated that it would develop a fact sheet for concurrent beneficiaries that explains the interaction of the two programs in language they can understand. The agency will also modify another publication to make it clear that beneficiaries should contact the agency for an explanation because the interaction of work activity with the two programs is so complex that it requires individualized explanations. We believe a fact sheet that explains the interactions of the DI and SSI programs should be useful for concurrent beneficiaries. In addition, we agree that the interaction of work with DI and SSI benefits is complex and that individualized explanations may provide concurrent beneficiaries with the most complete information. In relying on individualized explanations provided by SSA employees, SSA may wish to consider developing methods to ensure that concurrent beneficiaries have access to employees who are knowledgeable in both programs regardless of the method of contact. For example, given that many beneficiaries may contact SSA through its 800 number teleservice centers, SSA could either deploy knowledgeable staff in the teleservice centers or establish procedures to ensure that these calls are referred to staff who are knowledgeable in both programs. SSA also provided technical comments, which we have incorporated as appropriate. We are sending copies of this report to the Commissioner of Social Security, appropriate congressional committees, and other interested parties. We will also make copies available to others on request. In addition, the report will be available at no charge on the GAO Web site at http://www.gao.gov. If you or your staff have any questions about this report, please contact me on (202) 512-7215 or Shelia Drake at (202) 512-7172. Key contributors to this report were Beverly Crawford, Amy Bevan, Patrick DiBattista, and Vanessa Taylor. To determine the number and characteristics of concurrent beneficiaries, we used data from the Social Security Administration’s (SSA) monthly 10 Percent Characteristic Extract Record file of the Supplemental Security Record, which contains data from a 10 percent simple random sample of the records of all Supplemental Security Income (SSI) applicants and beneficiaries. We used data from the September 2001 extract to test our analysis and used the February 2002 extract for the final analysis. We first determined the number of working age beneficiaries (both concurrent and SSI only). To do this, we deleted from the sample universe all records that were not active (those that did not have a Record Identification Code of G); showed a date of death in a month prior to the month of the file; showed a master file type other than disabled or blind; showed that the beneficiary was under age 18 or over age 64 as of the month of the file; showed that the claim was denied and no payments had been made on that record; showed entitlement for a veteran under title VIII of the Social Security Act; and showed that the beneficiary was not receiving SSI because of excess income, except for those beneficiaries who continued to be eligible for Medicaid under section 1619b of the Social Security Act and who would be eligible for SSI payments if it were not for their earnings. We then determined which beneficiaries received Disability Insurance (DI) income as well as SSI income—concurrent beneficiaries. To do this, for the records that remained, we identified concurrent beneficiaries as individuals who were currently receiving type A unearned income. Type A unearned income is any Social Security benefit. The remaining records were identified as beneficiaries who received SSI but not DI. We did not eliminate the remaining records for which benefits were suspended, but were not terminated as of February 2002, because, in many cases, these suspensions are temporary and the beneficiary will return to payment status within a relatively short period of time. In addition, our methodology did not allow us to discern whether concurrent beneficiaries ages 62 through 64 were receiving Social Security benefits on the basis of disability or retirement. As a result, we may be slightly overstating the size of the concurrent beneficiary population. All estimates have sampling errors of +/- 5 percent or less of the value of the point estimates offered. We employed standard and widely accepted social science and statistical methods. We did not independently verify the accuracy or completeness of the data provided to us by the SSA. To assess the extent to which SSA coordinates the DI and SSI program rules when individuals are working and receiving benefits from both programs, we reviewed the relevant sections of the Social Security Act, regulations, and SSA policy and procedural guidance to its employees. We also interviewed SSA officials at the headquarters in Baltimore, Maryland, and at several field offices. We visited two SSA field offices each in metropolitan Los Angeles, California; and Chicago, Illinois, and one each in Alexandria, Virginia; Wilmington, Delaware; and Towson, Maryland. We judgmentally selected the locations on the basis of geographic diversity, the presence or absence of an employment support representative pilot, and the use of generalist or specialist claims representatives. To determine the potential effect of applying both DI and SSI program rules on concurrent beneficiaries’ decisions to work and on their benefits, we relied on our review of SSA law, regulations, and policy and procedural guidance as well as our interviews with SSA officials at headquarters and in field offices. We also reviewed the public information materials that SSA developed and used to communicate information about its programs to beneficiaries and other interested parties. In addition, we interviewed academic researchers, advocates for people with disabilities, social service providers for individuals with disabilities, and a small number of concurrent beneficiaries. | In calendar year 2001, the Social Security Administration (SSA) paid cash benefits of $60 billion to more than six million working-age adults with disabilities and eligible family members under its Social Security Disability Insurance (DI) program, and $20 billion to more than 3.5 million working-age adults with disabilities under the Supplemental Security Income (SSI) program. Some beneficiaries, known as concurrent beneficiaries, receive cash and medical benefits from both programs. Concurrent beneficiaries comprised about 14 percent of SSA's disability population; 58 percent have mental impairments, and about 53 percent are female. Eleven percent of concurrent beneficiaries worked and earned a median income of approximately $250 per month. There is little coordination between SSI and DI program rules for individuals who work and receive benefits from both programs concurrently. Because most field office staff specialize in one program, they may not be sufficiently knowledgeable of the procedures for the other program to ensure that concurrent beneficiaries who work are paid the appropriate benefit amount under both programs. Applying both SSI and DI program rules to concurrent beneficiaries may make it difficult for them to make informed decisions about attempting work and could result in an increase or decrease in overall income, depending on the amount of earnings. Concurrent beneficiaries may not receive adequate explanations from SSA staff or published materials about the complete effect work has on their disability benefits. However, because the rules are complex and may be difficult to understand even with a detailed explanation, beneficiaries who do not understand them could possibly make decisions about work that would not meet their needs or improve their situation. |
Responsibility for providing care and services to foster children is shared by federal, state, and county governments, with HHS having responsibility for oversight of federal foster care programs. The Administration for Children and Families (ACF) within HHS helps the states to develop plans required under title IV-B of the Social Security Act; reviews and approves those plans; conducts audits to certify states’ compliance with the safeguards for foster children, thereby making states eligible for additional federal funds; and allocates funds to states, among other duties. The Social Security Act of 1935 was amended twice to include safeguards for foster children. The Adoption Assistance and Child Welfare Act of 1980 (P.L. 96-272) added most of these safeguards—such as requirements that the case file contain a plan for appropriate care and services, as determined by state and local foster care policies; periodic court or administrative reviews; and a reunification program to return children to their parents. This act also authorized HHS to provide technical assistance to aid states in developing programs to meet the requirements of the law. Furthermore, the Omnibus Budget Reconciliation Act of 1989 (P.L. 101-239) added other safeguards to the Social Security Act, including a requirement to maintain health records for foster children. A combination of federal, state, and county funds may be used to provide services to young foster children. States may participate in federal programs authorized by the Social Security Act such as title IV-B, matching grants for various child welfare services; title IV-E, an uncapped entitlement for a portion of the maintenance of foster children who are eligible under the Aid to Families With Dependent Children (AFDC) program; title XIX, Medicaid, an entitlement for a portion of medical services; or title XX, block grants for a wide array of social services for children. In addition, the Education of the Handicapped Act, part H, authorizes grants to states for early intervention programs for handicapped infants and toddlers. Except for federal title IV-E expenditures, data were unavailable to estimate federal, state, and county expenditures for services for foster children. In the last 10 years, federal title IV-E expenditures for the administration and maintenance of AFDC-eligible foster children increased from about $546 million in 1985 to an estimated $2.9 billion in 1995. When foster children do not meet title IV-E eligibility for federal funding, states must bear the full cost for maintaining these children. However, some states pass at least a portion of these costs to their counties. All young children need routine, comprehensive medical monitoring, treatment for minor illnesses, and immunizations to grow up healthy. In the three locations reviewed, state and county regulations require that children in foster care receive periodic medical examinations and treatment. Research indicates that children at risk for serious health problems as a result of prenatal drug exposure often need additional assessments and specialized care. Child development experts generally agree that health care is particularly important during the first 36 months of life as language, motor, psychological, and social skills develop. Conditions left untreated during the first 3 years of life can influence functioning into adulthood. Some young foster children in the locations we reviewed did not receive even the most basic health service—required routine care. In addition, many children had identified health-related needs that were not met, including the need for specialized services. Foster care agencies refer foster parents to community-based programs and practitioners, rather than providing the services directly. Foster children in the locations reviewed are eligible for Medicaid to cover the cost of these health-related community-based services. Despite state and county foster care regulations, comprehensive routine health care for young foster children may not be ensured. Specifically, an estimated 12 percent of the children received no routine health care, and 34 percent received no immunizations in the three locations reviewed. Furthermore, case files at all three locations did not reflect the exact nature or extent of what services were provided in many cases. Thus, children we noted as having received routine medical care may have received as little care as one visit with a physician for treatment of a minor illness rather than comprehensive or ongoing medical care. (See table II.1 in app. II.) While Early and Periodic Screening, Diagnosis, and Treatment (EPSDT) services are one way to ensure that children receive comprehensive medical examinations, only an estimated 1 percent of the young foster children in the locations reviewed received EPSDT services. EPSDT services are specific, comprehensive medical examinations and follow-up treatment that states must offer to Medicaid-eligible children. EPSDT examinations can serve as an effective safeguard of a child’s overall health and development and as a gateway to other health-related services. (See table II.1 in app. II.) Children with no known health problems were less likely to receive routine care than children who were at risk for or had serious health problems. For the locations reviewed, an estimated 28 percent of the children with no known serious health problems did not receive any health-related services. By comparison, only 6 percent of children who were at high risk for serious health problems because of prenatal drug exposure and 2 percent of children with serious physical health problems did not receive any health-related services. Without routine health care, children with no known health problems are not monitored to identify and treat health and developmental problems as they occur. (See table II.2 in app. II.) In addition to routine health care, young foster children need many specialized health-related services. As we previously reported, an estimated 58 percent of young foster children in the three locations reviewed had serious physical health problems, and 62 percent were at high risk for serious health problems as a result of prenatal drug exposure. Many of these children may need health-related services and treatment beyond those needed by the average child. (See fig. 1 and table II.3 in app. II.) Although young foster children received a wide variety of services from health care providers, many children had identified health-related needs that were not met. Based on information collected from case files, we matched the health-related needs identified and the services received for each child and estimated that one-third of the children in the locations reviewed had some identified needs that were not met. These unmet needs included pulmonary and speech therapy; psychotherapy; developmental assessments; infant stimulation services; cardiological, urological, and neurological examinations; and testing for sickle cell anemia, syphilis, and HIV. (See fig. 2 and table II.4 in app. II.) Of those children with no identified health-related needs, about one-half in each location received no routine health care, and less than one-half received a toxicology screen at birth to detect recent prenatal drug exposure. Thus, many of these children may have had health-related needs that were not identified and, consequently, were not met. One particularly critical health need of young foster children is HIV risk assessment because most young children in the locations reviewed are at risk for the infection as a result of parental drug abuse. Without risk assessment, a child’s HIV status may not be determined early because HIV-infected children can remain asymptomatic or exhibit only minimal signs of infection for years. Recent medical advances in early identification and treatment can enhance and prolong the lives of these children. Early identification is also critical because HIV-infected children should receive modified immunizations to prevent adverse reactions, and their exposure to infectious illnesses such as measles or chicken pox—which are particularly hazardous to these children—should be minimized. While state laws, and the county policies based on them, do not prohibit HIV testing or the disclosure of test results, some can hamper HIV testing and disclosure. State laws and county foster care policies, where they exist, vary widely. In some locations, including the three reviewed, these laws and policies impede HIV testing and disclosure by specifying the risk factors that must be present in order to request HIV testing; who has the authority to consent to testing; and to whom HIV test results can be disclosed. For example, for the 36 states with HIV testing policies as of 1992, one-half of the foster care agencies in the states with testing policies may not have authority to consent to an HIV test for a child, even when the child was identified by the agency as being at high risk for HIV. Foster care agencies in the locations reviewed do not know the full extent of their caseloads that is at high risk for HIV since no mechanism exists to ensure that all young foster children are assessed for HIV risk. While two of the three locations we reviewed currently have some HIV risk assessment requirements, one location did not require risk assessments for all foster children until recently, and the other has not implemented clear assessment procedures. HIV risk has long been associated with intravenous drug use, but more recent research has established an equally strong link between HIV risk and the lifestyle of nonintravenous cocaine and crack users. Using New York City’s current HIV risk factors, which include nonintravenous drug use, we assessed our 1991 population of young foster children on the basis of one risk factor, parental drug abuse. Accordingly, we estimated that at least 78 percent of the children in the three locations reviewed were at high risk for HIV. We estimated that only 9 percent of the young foster children in the locations reviewed were actually tested for HIV, despite the large proportion at high risk and statistics indicating that these are locations with a high incidence of HIV. The American Academy of Pediatrics Task Force on Pediatric AIDS recommends HIV testing for all foster children with high-risk factors or in areas with a high incidence of HIV to facilitate appropriate medical treatment and follow-up. We estimated the HIV infection rate for children born in 1993 and found that the three states reviewed ranked 2nd, 14th, and 26th, based on national data from the Centers for Disease Control and Prevention (CDC) on blind HIV testing of newborns. (See table II.5 in app. II.) Few data are available on the number of foster children infected with HIV. One study reported that the number of foster children in New York City known to be born to HIV-infected mothers increased 26 percent from 1991 to 1993. While data were not available for California and Pennsylvania, 1988 research found that Los Angeles had the fastest growing rate of AIDS cases in the nation. Furthermore, anecdotal evidence suggests that in the Los Angeles area, and the west coast in general, most AIDS in women is due to heterosexual contact. However, according to experts on pediatric AIDS, foster care agencies do not commonly recognize a history of high-risk heterosexual contact as sufficient grounds for HIV testing. Young children placed exclusively with relatives—known as kinship care—were less likely to receive health-related services than children placed exclusively with nonrelatives—known as traditional foster care.Specifically, children placed in kinship care were nearly three times as likely as those placed in traditional foster care to have received no routine health care. Moreover, these children were less likely to receive health-related services of all kinds. Since studies indicate that children in kinship care remain in foster care longer, and they receive a lower level of service, the likelihood is greater that these children will go without needed services for longer periods. (See fig. 3 and table II.6 in app. II.) Young children placed in kinship care in the two locations reviewed were also an estimated three times more likely than those placed in traditional foster care to be at risk for future problems because of prenatal drug exposure. Furthermore, because drug-exposed children are more likely to be at risk for HIV and developmental delays, the need for health-related services for children in kinship care is even more critical. Yet, only 11 percent of children placed exclusively in kinship care received specialized examinations, such as developmental evaluations; whereas, 42 percent of those placed exclusively in traditional foster care received specialized examinations. (See table II.6 in app. II.) While we did not determine why children in kinship care received less health-related care, or compare other aspects of care by placement type, we reviewed key studies on kinship care. Research found that foster care agencies treat kinship care placements and traditional foster care placements differently. Studies indicate that caseworkers generally provide less monitoring and assistance to kinship care placements. Some states have policies requiring less frequent caseworker visitations to kinship care homes, although these homes are more likely to be unlicensed. For example, a 1992 HHS study found that in 30 states, children may be placed in kinship care homes whether or not the homes meet minimum standards designed to ensure the safety and suitability of foster homes and foster parents. Mandatory orientation and training for foster parents are the most frequently waived licensing requirements for kinship caregivers. A 1994 Child Welfare League of America report on kinship care found few studies that focused on either kinship care providers or the children in their care. These studies, which were limited in scope, provided little information regarding the advantages of different types of placement. Analysis of the California and New York state databases showed the number of children of all ages in kinship care increased by over 350 percent between 1986 and 1991, and this percentage increase was even higher for young foster children, at 379 percent. (See fig. 4 and table II.7 in app. II.) The dramatic increase of children in kinship care between 1986 and 1991 resulted in nearly equal numbers of placements in kinship and traditional foster care in the three counties reviewed. We estimated that 49 percent of the young children had been placed in kinship care at some time during the 1991 review period, while 53 percent had been placed in traditional foster care. (See table II.8 in app. II.) Some studies contend that the increase in kinship placements may have been due, at least initially, to a shortage of traditional foster homes. Other studies posit that this increase may be the result of state and county interpretations of the Adoption Assistance and Child Welfare Act of 1980 as implying a preference for relative placements. In recognizing that foster care would continue to be a necessary child welfare service, this act required states to place children in the “least restrictive (most family-like) setting available,” which has been interpreted by many states as implying a preference for kinship care. As of 1992, 44 states commonly placed foster children in kinship care, and 29 states had policies in place requiring foster care agencies to give preference to relatives of foster children. The foster care agencies reviewed struggle to ensure that the health-related needs of children in their care are met. About one-third of all states, including the three reviewed, have established only broad guidelines within which counties administer foster care programs. Thus, counties in these states develop and implement programs with considerable autonomy, which results in a variety of approaches being used. County foster care agencies in the locations reviewed have altered their health-related policies, regulations, and programs in efforts to improve the agencies’ ability to meet the health needs of foster children. For example, one of the foster care agencies we reviewed continues to develop and implement recordkeeping systems in an attempt to improve its ability to ensure that foster children receive needed services. The agency is currently implementing its third variation of a medical recordkeeping system in recent years. Implementation of the first two versions was unsuccessful, and the third was too recently implemented for us to determine its success. However, because the third version is substantially similar to its predecessors, its likelihood of success is limited. Other efforts by this agency have focused on establishing medical clinics for foster children. It established a comprehensive assessment center at the county-run children’s emergency shelter, but that effort appears to have met with only limited success. Medical staff at the center told us that it is seldom used by foster children of any age who reside outside the shelter. The foster care agency is also supporting the development of an ambitious and complex system of multidisciplinary assessment and medical clinics for foster children. This most recent effort, while promising, depends on factors largely outside the control of the foster care agency, such as the continuing involvement of the academia-based physicians who proposed the system and the viability of a complex design for funding services. Furthermore, the system needs strong support from within the agency and procedures that direct foster children to the new system if—unlike the current assessment center—it is to reach even a sustainable level of utilization. Recognizing that states need assistance in improving their child welfare programs, including foster care, ACF recently increased its technical assistance efforts. Within the past year, HHS contracted for 10 National Resource Centers to assist ACF staff in responding to states’ questions and to provide free technical assistance to states. Each resource center specializes in a child welfare issue such as permanency planning, abandoned infants, or special needs adoption. However, none of the resource centers is designated to help states with ensuring health-related services for foster children. ACF also audits states to certify states’ compliance with the safeguards for foster children specified in the Social Security Act. However, the audits do not examine compliance with all safeguards. The safeguards include a requirement that case files of foster children contain up-to-date health-related information, such as records of immunizations and a child’s health conditions. We previously reported that HHS did not audit states on their compliance with all required safeguards for foster children, and we recommended that it expand its audits to include all safeguards. In March 1995, ACF officials confirmed that their audits still do not examine whether states are complying with the health-related safeguards. An HHS determination that a state has passed its compliance audit entitles the state to receive the full federal child welfare funding available by law. However, since HHS does not audit for compliance with the health-related safeguards, states have no federal financial incentive to comply with them. ACF plans to include these safeguards in future audits, according to the same officials. Important health-related needs, including routine medical examinations and various specialized services, remained unmet for nearly one-third of the young foster children in the locations reviewed. Additionally, most young foster children in the locations reviewed were at high risk for HIV as a result of parental drug abuse, yet few children were actually tested for the infection. Furthermore, those in kinship care were less likely than those placed in traditional foster care to receive needed health-related services. Despite federal safeguards for foster children, as well as regulations of responsible agencies to ensure adequate health care for foster children, agencies continue to struggle to meet the complex health needs of young children. Federal efforts to help states design and implement effective foster care health programs have been extremely limited, as evidenced by the lack of both ACF audits and technical assistance to states on health-related issues. Our work confirms our earlier recommendation that ACF audits be expanded to include all foster care safeguards. We continue to believe that ACF should take this action. Finally, foster care agencies have been slow to respond to one critical health need—HIV risk assessment—which is the first step in identifying HIV-infected children so that they can receive appropriate and timely health care. Yet, even if all foster children were systematically assessed, HIV testing of high-risk children can still be hampered by state laws and county policies. Finally, while we do not know why children in kinship care generally receive fewer health-related services than children in traditional care, research indicates that kinship caregivers receive less monitoring and assistance from foster care agencies than traditional foster caregivers. These findings are particularly disturbing given the vulnerable nature of the population of young foster children. Whether the federal government retains the foster care program in its current form or creates block grants to the states, these issues warrant attention. We provided HHS as well as the cognizant social services agencies of the three states and locations reviewed with the opportunity to comment on a draft of this report. We received comments from the state of New York, New York City, and Los Angeles County. Philadelphia County responded that it could not comment on the specifics of the report because of a pending lawsuit. However, it indicated a few general concerns. We did not receive comments from HHS, the state of California, or the state of Pennsylvania. One aspect of our report was commented on by three respondents. New York State, Los Angeles County, and Philadelphia County expressed concern about the age of our data. While our report is based on 1991 data, those were the most current data available when the study began. To ensure the continuing usefulness of the data and other aspects of our study, we continued to monitor the locations reviewed through spring 1995 to determine if any changes in policies and programs had occurred that could substantially alter our conclusions. While some promising changes have occurred, either the locations that provided comments to our draft provided us with no data to support their assertions that the delivery of services has improved or it is too early to determine the impact of the changes. For example, New York City commented that it is implementing a state early care intervention program and has trained staff in the use of the program. However, it is too early to judge the impact of this new effort. Another aspect of our report was commented on by two respondents. New York State and Philadelphia County questioned the appropriateness of combining the results of our analysis of cases across the three locations reviewed. As we stated in the report, we determined that the conclusions drawn from our analysis were similar for each location with two exceptions: Philadelphia County was dropped from analyses of kinship care, and data depicted in figure 2 included two categories where the results varied widely by location. With these exceptions, the results were sufficiently consistent across all three locations that we do not believe that presenting the aggregate results unfairly portrays the situations in any of the locations. The state of New York questioned the adequacy of the sample size. We arrived at our sample size using accepted statistical procedures that gave us an adequate level of precision at the 95-percent confidence level to support our findings. Our detailed methodology is presented in appendix I and the confidence intervals are presented in appendix II. The state also expressed doubts about the accuracy of several of our statistical findings, conveying its belief that an ongoing state study regarding foster care medical services will produce different results. It believes that its ongoing study will produce a more favorable picture of its ability to meet the needs of foster children. However, we cannot evaluate this opinion because the state did not provide us with any results from this study. Furthermore, the state provided little information on the methodology being employed, and we do not know whether the state plans to conduct such analyses as would make it possible to compare their results with ours. New York City raised different issues related to our methodology. It questioned whether inadequate caseworker recordkeeping provided an incomplete depiction of the health-related services received by young foster children. Before beginning the case file review, to test the feasibility of using this method, we reviewed the case files of a small sample of children and then requested the foster care agencies in the three locations reviewed to provide information on those same children from all possible sources, including service providers and foster parents. In general, we found that the additional information provided from these other sources did not change the conclusions we had reached on the basis of our case file review regarding the level of services these children received. On this basis, we concluded that the information in the case files would be sufficient for our analytical purposes. New York State agrees with the importance of risk assessment for HIV and agrees that it does not know the full extent of HIV-infected children in foster care. However, it disagrees that this occurs in New York City because of a lack of a mechanism to carry out risk assessments. Furthermore, the state asserted that more children are now being assessed and tested for HIV as a result of changes in its policies. We agree that this state has the most comprehensive policies on risk assessment of the three locations reviewed. For this reason, we used a portion of their risk assessment policies as criteria in one analysis. However, the large gap we reported between the number of children who were at risk for HIV, based on one New York City risk criterion, and the number actually tested indicated that the mechanisms in place did not ensure that their procedures were consistently carried out. While it is possible that recent changes in New York State or New York City policies may have improved the ability to identify HIV-infected children, state officials pointed out that they have not been able to formally implement regulations that would put their latest policy changes in place because of a state moratorium on regulatory action. New York State agrees that children placed in kinship care were less likely to receive services than children placed in traditional foster care, and this finding was confirmed by the state’s own study. However, it disagrees with the inclusion in the report of data on the growth in kinship care because it asserts that such data do not reflect the proportion of children actually in kinship care and traditional foster care. We agree that it is useful to understand the proportion of children in different types of care, and this information is included in the report. However, we believe that presenting data on the large growth in kinship care placements between 1986 and 1991 is also useful to understand that the utilization of kinship care has changed significantly since the mid-1980s. New York State agrees with our conclusion that periodic reviews for compliance with federal standards are appropriate. It also made technical comments on our characterizations of county versus state regulations and of New York City as a county, and our description of HIV testing policies. On the basis of these comments, we modified the report as appropriate. Los Angeles County commented that its current internal audits of medical assessments show that compliance is at approximately 90 percent. We agree with that estimate of the receipt of required medical examinations, which we refer to as routine care. As stated in our report, about 12 percent of young foster children did not receive any routine health care; Los Angeles County’s current estimate of 10-percent noncompliance with its regulations regarding medical assessments falls within our 95-percent confidence interval cited in appendix II. Los Angeles County also commented that it has made a number of changes over the last few years that were designed to meet the health care needs of foster children. Specifically, it discussed the HIV risk assessment policy, the comprehensive multidisciplinary assessment center it established at a children’s emergency shelter, and the new system of multidisciplinary assessment and medical clinics. We acknowledge that Los Angeles County has a policy of evaluation for risk of exposure to HIV as an ongoing process for all foster children. However, in September 1994, numerous county program officials told us that the county has no procedures to systematically ensure that risk assessments take place; consequently, this policy does not ensure that foster children who are at high risk for HIV will be identified and tested. In addition, in fall 1994, we visited the assessment center at the children’s emergency shelter and interviewed key program officials and medical staff. We acknowledge that this assessment center was designed to provide a variety of comprehensive health-related evaluations. However, as stated in our report, this assessment center is little used by foster children who reside outside the emergency shelter. Finally, as we stated in our report, we agree that the multidisciplinary medical clinics are a promising approach to meeting the complex health-related needs of young foster children. However, it was not until September 1994 that the first of the seven planned assessment center clinics was funded to hire staff; thus, this system is in its infancy and is substantially untested. We will send copies of this letter to the Secretary of Health and Human Services and program officials in the states reviewed. We will also send copies to all state welfare program directors and make copies available to others on request. Please contact me at (202) 512-7215 if you or your staff have any questions. Other GAO contacts and contributors are listed in appendix III. To accomplish the objectives of our review, we obtained and analyzed data on state foster care programs and the children in them from the three states with the largest average monthly foster care populations in 1991—California, New York, and Pennsylvania. Over 50 percent of the nation’s foster children are under the jurisdiction of these three states. We used a variety of approaches to meet our objectives. We analyzed electronic state and county foster care databases; conducted a case file review based on generalizable random samples; interviewed HHS, state, and county foster care officials; conducted a telephone survey of child welfare advocacy groups and other child welfare experts; conducted group interviews with foster parents and caseworkers; reviewed foster care and related literature; reviewed applicable portions of the Social Security Act and other legislation; and reviewed foster care agency regulations and other documents. Studies cited in this report are listed in the bibliography. To determine the number of foster children in different types of placements in the states, we analyzed electronic foster care databases for the two states where they were available, California and New York. State officials provided us with automated records for all children who were in foster care at any time during calendar years 1986 and 1991. We could not obtain comparable electronic records for Pennsylvania as that state has not established an automated case record system. To determine the health-related services needed and received by young foster children, their health conditions, and the types of placements they were in, we reviewed statistically representative samples of foster care case files for the county with the largest foster care population in 1991 for each of the states reviewed: Los Angeles County, New York City, and Philadelphia County. To identify those locations, we again used the state foster care databases for California and New York; for Pennsylvania, we relied on information provided by state officials. Philadelphia County officials provided us with an electronic database of the records for foster children in that county in 1991. Before drawing the sample, we narrowed the databases to include only foster children whose third birthday occurred no later than December 31, 1991. This resulted in population sizes of 8,249 for Los Angeles County, 13,171 for New York City, and 1,335 for Philadelphia County. Then we selected random samples from each of these locations resulting in a total sample of 414 children. The population sizes and initial sample sizes are shown in table I.1. We requested all foster care case files for each child in the sample. A few cases were dropped from the sample because the children did not meet the criterion of being in foster care during the review year or were not of the appropriate age. Other cases were dropped because county officials could not locate the records. Finally, we dropped cases of children who were in foster care during our review period for less than 30 days in Los Angeles County and New York City, and less than 60 days in Philadelphia County. We did this to eliminate cases in which a child’s tenure in foster care was shorter than the time foster care agencies were allowed, by their local regulations, to complete initial medical examinations. This resulted in final samples totaling 360 young foster children in our three locations. We examined the foster care case files for the period covering a child’s first entry into foster care until the end of the review year or until the child was discharged from foster care, whichever occurred earlier. We used an automated data collection instrument to record information from the case files. The recorded information was reviewed for accuracy by the individual preparing it before finalizing each electronic record. We also reviewed the case file data for consistent coding among individuals; minor adjustments were made to the coding as a result of that review. We analyzed the case file data using univariate and bivariate analyses, descriptive statistical methods. We found that for some of the data, the results varied among the three locations; however, the conclusions we drew from the analyses of each location were similar. Thus, the locations could be combined for analysis. Finally, when combining these data, we weighted them to adjust for disproportionate sampling and produced aggregate estimates. However, the results pertain to only the three locations combined and do not necessarily reflect populations of foster children at the state or national level. For data derived from the case file review, the percentage estimates reported in the letter and the numerical estimates reported in appendix II are point estimates. Because the estimates are based on combined results from three samples, each is subject to sampling error. The size of the sampling error reflects the precision of the estimate; the smaller the error, the more precise the estimate. Sampling errors for the estimates were calculated at the 95-percent confidence level except where noted. We are 95-percent confident that the actual percentages fall within the confidence intervals reported in appendix II. In other words, there is a 5-percent chance that the confidence intervals do not contain the actual population percentages. For the analysis comparing the subpopulations of children in kinship and traditional foster care, we used only records of children who had been placed exclusively in kinship care or exclusively in traditional foster care. Furthermore, because the sample for Philadelphia County contained only one child who was placed exclusively in kinship care, we eliminated that location from this analysis. The subpopulation sizes are shown in table I.2. This is the second report responding to this request. We conducted our review for both reports between November 1992 and March 1995 in accordance with generally accepted government auditing standards. We analyzed the electronic databases as provided to us by state and county officials, and we performed limited tests of the completeness of the case files. This appendix presents the numerical values for the data discussed in the body of this report. Where appropriate, point estimates and confidence intervals are provided. The appendix includes case file review results for the review year 1991 and statewide data for calendar years 1986 and 1991. Confidence interval at 95-percent confidence We dropped cases for children who were in foster care during our review period for less than 30 days in Los Angeles County and New York City, and less than 60 days in Philadelphia County. We did this to eliminate cases in which a child’s tenure in foster care was shorter than the time foster care agencies are allowed, by their local regulations, to complete initial medical examinations. Children are exempt from initial examination requirements if they received an equivalent examination within 90 days before entering foster care. Of children who received no routine care during our review period, three were required, because of their age at entry and length of stay, to have an initial examination if they did not have an examination 90 days before entering foster care. We believe, based on the case file data, that these children did not meet the prior examination requirement. Includes children who received at least one immunization and excludes children who were under 90 days of age. Includes children who had minor illnesses. Consists of prenatal drug exposure (including alcohol exposure) and drug withdrawal or symptoms. We considered a child to be prenatally drug-exposed if any of the following conditions were documented in the child’s foster care records: mother reported that she used drugs during pregnancy, toxicology test results for mother or infant were positive for drug use, or infant was diagnosed as having drug-withdrawal symptoms. Consists of fetal alcohol syndrome, low birth weight, cardiac defects or heart problems, HIV-positive or AIDS, developmentally delayed, and other serious problems. Includes treatment for asthma, syphilis, seizures, and kidney problems. Includes blood, laboratory, and radiology. Includes developmental, psychological, and cardiological. Includes care for HIV, pneumonia, and failure to thrive, as well as surgery. Includes apnea monitors, infant stimulation, and speech therapy. Includes therapeutic day care and Head Start services. The point estimates for the three locations varied widely in these two categories. The range of point estimates was 60.6 to 24.6 percent for “all needs met” and 45.6 to 4.9 percent for “no needs identified.” Consists of varying amounts of medical practitioner care and/or EPSDT examinations. Includes children who received at least one immunization and excludes children who were under 90 days of age. Includes treatments for asthma, syphilis, seizures, and kidney problems. Includes blood, laboratory, and radiology. Includes developmental, psychological, and cardiological. Includes care for HIV, pneumonia, and failure to thrive, as well as surgery. Includes apnea monitors, infant stimulation, and speech therapy. Includes therapeutic day care and Head Start services. In addition to those named above, the following individuals made important contributions to this report: Susan Riggio led the fieldwork in California and Pennsylvania and coauthored the draft; Ann Walker led the data analysis and coauthored the draft; Helen Cregger, Sheila Murray, Tranchau Nguyen, and Cameo Zola conducted case file reviews and interviews. American Academy of Pediatrics, Committee on Early Childhood, Adoption, and Dependent Care. “Health Care of Children in Foster Care.” Pediatrics, Vol. 93, No. 2 (Feb. 1994), pp. 335-38. American Academy of Pediatrics, Committee on Practice and Ambulatory Medicine. “Recommendations For Preventive Pediatric Health Care.” July 1991. American Academy of Pediatrics, Task Force on Pediatric AIDS. “Guidelines for Human Immunodeficiency Virus (HIV)-Infected Children and Their Foster Families.” Pediatrics, Vol. 89, No. 4 (Apr. 1992), pp. 681-83. Besharov, Douglas J., ed. When Drug Addicts Have Children—Reorienting Child Welfare’s Response. Washington, D.C.: Child Welfare League of America, Inc., and American Enterprise Institute, 1994. Center for the Future of Children and The David and Lucile Packard Foundation. “Drug Exposed Infants.” The Future of Children, Vol. 1, No. 1 (Spring 1991). Child Welfare & AIDS Project. Child Welfare Protocols for Children with HIV Infection: Guidelines for Development and Evaluation. Berkeley, Calif.: School of Social Welfare, University of California, Berkeley, Jan. 1991. Child Welfare League of America. Kinship Care: A Natural Bridge. Washington, D.C.: 1994. Child Welfare League of America. Standards for Health Care Services for Children in Out-of-Home Care. Washington, D.C.: 1988. Cohen, Felissa, R.N., Ph.D., F.A.A.N., and Wendy Nehring, R.N., Ph.D. “Foster Care of HIV-Positive Children in the United States.” Public Health Reports, Vol. 109, No. 1 (Jan./Feb. 1994), pp. 60-67. Congressional Research Service. “Kinship” Foster Care: An Emerging Federal Issue. Washington, D.C.: Sept. 27, 1993. Deering’s California Codes. “Annotated Health and Safety Code of the State of California,” pp. 106-107. San Francisco: 1990. English, Abigail. “The HIV-AIDS Epidemic and the Child Welfare System: Protecting the Rights of Infants, Young Children, and Adolescents.” Iowa Law Review, Vol. 77, No. 4 (1992), pp. 1509-60. National Abandoned Infants Assistance Resource Center. Report to the Congress on Effective Care Methods for Responding to the Needs of Abandoned Infants and Young Children. Berkeley, Calif.: Family Welfare Research Group, School of Social Welfare, University of California, Berkeley, undated report. Pinkney, Deborah. “America’s Sickest Children.” American Medical News, Jan. 10, 1994, pp. 15-19. Sterk, Claire. “Cocaine and HIV Seropositivity.” Lancet, Vol. I, No. 8593 (May 7, 1988), pp. 1052-53. Teare, Catherine, Abigail English, J.D., Susan Lockwood, M.S.W., and Kirby Clark, J.D. HIV/AIDS Policies and Guidelines: State Child Welfare Agencies. Iowa City, Iowa: University of Iowa National Maternal and Child Health Resource Center, 1992. U.S. Department of Health and Human Services. Maternal Drug Abuse and Drug Exposed Children: Understanding the Problem. Washington, D.C.: 1992. U.S. Department of Health and Human Services, Office of Inspector General. Using Relatives For Foster Care. Washington, D.C.: July 1992. U.S. Department of Health and Human Services, Public Health Service, Centers for Disease Control and Prevention. HIV/AIDS Surveillance Report. Vol. 6, No. 1 (1994). U.S. Department of Health and Human Services, Public Health Service, Centers for Disease Control and Prevention, National Center for Infectious Diseases. Unpublished data on blind HIV testing of newborns in 44 states and the District of Columbia. Atlanta: 1993. Foster Care: Parental Drug Abuse Has Alarming Impact on Young Children (GAO/HEHS-94-89, Apr. 4, 1994). Childhood Immunization: Opportunities to Improve Immunization Rates at Lower Cost (GAO/HRD-93-41, Mar. 24, 1993). Drug Abuse: The Crack Cocaine Epidemic: Health Consequences and Treatment (GAO/HRD-91-55FS, Jan. 30, 1991). Drug-Exposed Infants: A Generation at Risk (GAO/HRD-90-138, June 28, 1990). Foster Care: Incomplete Implementation of Reforms and Unknown Effectiveness (GAO/PEMD-89-17, Aug. 14, 1989). Pediatric AIDS: Health and Social Service Needs of Infants and Children (GAO/HRD-89-96, May 5, 1989). The first copy of each GAO report and testimony is free. Additional copies are $2 each. Orders should be sent to the following address, accompanied by a check or money order made out to the Superintendent of Documents, when necessary. Orders for 100 or more copies to be mailed to a single address are discounted 25 percent. U.S. General Accounting Office P.O. Box 6015 Gaithersburg, MD 20884-6015 Room 1100 700 4th St. NW (corner of 4th and G Sts. NW) U.S. General Accounting Office Washington, DC Orders may also be placed by calling (202) 512-6000 or by using fax number (301) 258-4066, or TDD (301) 413-0006. Each day, GAO issues a list of newly available reports and testimony. To receive facsimile copies of the daily list or any list from the past 30 days, please call (301) 258-4097 using a touchtone phone. A recorded menu will provide information on how to obtain these lists. | Pursuant to a congressional request, GAO provided information on the health-related services needed and received by young children in foster care, focusing on: (1) the relationship between the receipt of health-related services and foster care placements with relatives versus placements with nonrelatives; and (2) how responsible agencies are ensuring that foster children are receiving needed health-related services. GAO found that: (1) despite foster care agency regulations requiring comprehensive routine health care, an estimated 12 percent of young foster children receive no routine health care, 34 percent receive no immunizations, and 32 percent have some identified health needs that are not met; (2) an estimated 78 percent of young foster children are at high risk for human immunodeficiency virus (HIV) as a result of parental drug abuse, yet only about 9 percent of foster children are tested for HIV; (3) young foster children placed with relatives receive fewer health-related services than children placed with nonrelative foster parents, possibly since relative caregivers receive less monitoring and assistance from caseworkers; (4) the number of young children placed with relatives increased 379 percent between 1986 and 1991, which resulted in the lower likelihood of these children receiving services associated with kinship care; and (5) the Department of Health and Human Services has not designated any technical assistance to assist states with health-related programs for foster children and does not audit states' compliance with health-related safeguards for foster children. |
Internal control is not one event, but a series of actions and activities that occur throughout an entity’s operations and on an ongoing basis. Internal control should be recognized as an integral part of each system that management uses to regulate and guide its operations rather than as a separate system within an agency. In this sense, internal control is management control that is built into the entity as a part of its infrastructure to help managers run the entity and achieve their goals on an ongoing basis. Section 3512 (c), (d) of Title 31, U.S. Code, commonly known as the Federal Managers’ Financial Integrity Act of 1982 (FMFIA), requires agencies to establish and maintain internal control. The agency head must annually evaluate and report on the control and financial systems that protect the integrity of federal programs. The requirements of FMFIA serve as an umbrella under which other reviews, evaluations, and audits should be coordinated and considered to support management’s assertion about the effectiveness of internal control over operations, financial reporting, and compliance with laws and regulations. Office of Management and Budget (OMB) Circular No. A-123, Management’s Responsibility for Internal Control, provides the implementing guidance for FMFIA, and sets out the specific requirements for assessing and reporting on internal controls consistent with the internal control standards issued by the Comptroller General of the United States. The circular defines management’s responsibilities related to internal control and the process for assessing internal control effectiveness, and provides specific requirements for conducting management’s assessment of the effectiveness of internal control over financial reporting. The circular requires management to annually provide assurances on internal control in its performance and accountability report, and for each of the 24 Chief Financial Officers Act agencies to include a separate assurance on internal control over financial reporting, along with a report on identified material weaknesses and corrective actions. The circular also emphasizes the need for integrated and coordinated internal control assessments that synchronize all internal control-related activities. FMFIA requires GAO to issue standards for internal control in the federal government. The Standards for Internal Control in the Federal Government (i.e., internal control standards) provides the overall framework for establishing and maintaining effective internal control and for identifying and addressing major performance and management challenges and areas at greatest risk of fraud, waste, abuse, and mismanagement. As summarized in the internal control standards, the minimum level of quality acceptable for internal control in the government is defined by the following five standards, which also provide the basis against which internal controls are to be evaluated: Control environment: Management and employees should establish and maintain an environment throughout the organization that sets a positive and supportive attitude toward internal control and conscientious management. Risk assessment: Internal control should provide for an assessment of the risks the agency faces from both external and internal sources. Control activities: Internal control activities help ensure that management’s directives are carried out. The control activities should be effective and efficient in accomplishing the agency’s control objectives. Information and communications: Information should be recorded and communicated to management and others within the entity who need it and in a form and within a time frame that enables them to carry out their internal control and other responsibilities. Monitoring: Internal control monitoring should assess the quality of performance over time and ensure that the findings of audits and other reviews are promptly resolved. The third control standard—control activities—helps ensure that management’s directives are carried out. Control activities are the policies, procedures, techniques, and mechanisms that enforce management’s directives. In other words, they are the activities conducted in the everyday course of business that are intended to accomplish a control objective, such as ensuring IRS employees successfully complete background checks prior to being granted access to taxpayer information and receipts. As such, control activities are an integral part of an entity’s planning, implementing, reviewing, and accountability for stewardship of government resources and achievement of effective results. A key objective in our annual audits of IRS’s financial statements is to obtain reasonable assurance about whether IRS maintained effective internal controls with respect to financial reporting, including safeguarding of assets, and compliance with laws and regulations. While we use all five internal control standards as a basis for evaluating the effectiveness of IRS’s internal controls, we place a heavy emphasis on testing control activities. Our evaluations and tests have resulted in the identification of issues in certain internal controls over the years and recommendations for corrective action. To accomplish our objectives, we evaluated the effectiveness of IRS’s corrective actions implemented in response to open recommendations during fiscal year 2007 as part of our fiscal years 2007 and 2006 financial audits. To determine the current status of the recommendations, we (1) obtained IRS’s reported status of each recommendation and corrective action taken or planned as of April 2008, and (2) compared IRS’s reported status to our fiscal year 2007 audit findings to identify any differences between IRS’s and our conclusions regarding the status of each recommendation. In order to determine how these recommendations fit within IRS’s management and internal control structure, we compared the open recommendations, and the issues that gave rise to them, to the control activities listed in the internal control standards and to the list of major factors and examples outlined in our Internal Control Management and Evaluation Tool. We also considered how the recommendations and the underlying issues were categorized in our prior reports; whether IRS had addressed, in whole or in part, the underlying control issues that gave rise to the recommendations; and other legal requirements and implementing guidance, such as OMB Circular No. A-123; FMFIA; and the Federal Information System Controls Audit Manual (FISCAM). Our work was performed from December 2007 through May 2008 in accordance with generally accepted government auditing standards. We requested comments on a draft of this report from the Commissioner of Internal Revenue or his designee on June 9, 2008. We received comments from the Commissioner on June 24, 2008. IRS continues to make progress addressing its significant financial management challenges. Over the years since we first began auditing IRS’s financial statements in fiscal year 1992, IRS has taken actions enabling us to close over 200 of our financial management-related recommendations. This includes 18 recommendations we are closing based on actions IRS took during the period covered by our fiscal year 2007 financial audit. At the same time, however, our audits continue to identify additional internal control issues, resulting in our making further recommendations for corrective action, including 24 new financial management-related recommendations resulting from our fiscal year 2007 financial audit. These internal control issues, and the resulting recommendations, can be directly traced to the control activities in the internal control standards. As such, it is essential that they be fully addressed and resolved to strengthen IRS’s overall financial management and to assist it in efficiently and effectively achieving its goals and mission. In June 2007, we issued a report on the status of IRS’s efforts to implement corrective actions to address financial management recommendations stemming from our fiscal year 2006 and prior year financial audits and other financial management-related work. In that report, we identified 75 audit recommendations that at that time remained open and thus required corrective action by IRS. A significant number of these recommendations had been open for several years, either because IRS had not taken corrective action or because the actions taken had not yet fully and effectively resolved the issues that gave rise to the recommendations. IRS continued to work to address many of the internal control issues to which these open recommendations relate. In the course of performing our fiscal year 2007 financial audit, we identified numerous actions IRS took to address many of its internal control issues. On the basis of IRS’s actions, which we were able to substantiate through our audit, we are able to close 18 of these prior years’ recommendations. IRS considers another 23 of the prior years’ recommendations to be effectively addressed. However, we still consider them to be open either because we had not yet been able to verify the effectiveness of IRS’s actions—they occurred subsequent to completion of our audit testing and thus have not been verified, which is a prerequisite to our closing a recommendation—or because the actions taken did not fully address the issue that gave rise to the recommendation. However, continued efforts are needed by IRS to address its internal control issues. While we are able to close 18 financial management recommendations made in prior years, 57 recommendations from prior years remain open, a significant number of which have been outstanding for several years. In some cases, IRS may have effectively addressed the issues that gave rise to the recommendations subsequent to our fiscal year 2007 audit testing. However, in many cases, we determined based on the work performed for our fiscal year 2007 audit that IRS’s actions taken to date had not yet fully and effectively addressed the underlying internal control issues. Additionally, during our audit of IRS’s fiscal year 2007 financial statements, we identified additional issues that require corrective action by IRS. In a recent management report to IRS, we discussed these issues, and made 24 new recommendations to IRS to address them. Consequently, a total of 81 financial management-related recommendations were open at the end of fiscal year 2007 and need to be addressed by IRS. While most of our open recommendations can be addressed in the short term, a few recommendations, particularly those concerning IRS’s automated systems, are complex and will require several more years to fully and effectively address. We consider 71 recommendations to be short-term and 10 to be long-term. In addition to the 81 open recommendations from our financial audits and other financial management-related work, we have 76 open recommendations as a result of our assessment of IRS’s information security controls over key financial systems, data, and interconnected networks at IRS’s critical data processing facilities. One of those open recommendations relates to IRS’s need to implement an agencywide information security program, the lack of which was a key reason for the material weakness in IRS’s information systems security controls over its financial and tax processing systems. Unresolved, previously reported recommendations and newly identified ones related to information security increase the risk of unauthorized disclosure, modification, or destruction of financial and sensitive taxpayer data. Recommendations resulting from of the information security portion our annual audits of IRS’s financial statements are reported separately and are not included in this report primarily because of the sensitive nature of some of these issues. Linking the open recommendations from our financial audits and other financial management-related work, and the issues that gave rise to them, to internal control activities that are central to IRS’s tax administration responsibilities provides insight regarding their significance. The internal control standards define 11 control activities. These control activities can be further grouped into three broad categories: Safeguarding of assets and security activities: physical control over vulnerable assets, segregation of duties, controls over information processing, and access restrictions to and accountability for resources and records. Proper recording and documenting of transactions: appropriate documentation of transactions and internal control, accurate and timely reporting of transactions and events, and proper execution of transactions and events. Effective management review and oversight: reviews by management at the functional or activity level, establishment and review of performance measures and indicators, management of human capital, and top-level reviews of actual performance. Each of the open recommendations from our financial audits and financial management-related work, and the underlying issues that gave rise to them, can be traced back to 1 of the 11 control activities (grouped into three broad categories). Table 1 presents a summary of the open recommendations, each of which is categorized by the control activity to which it best relates. As table 1 indicates, 21 recommendations (26 percent) relate to issues associated with IRS’s lack of effective controls over safeguarding of assets and security activities. Another 33 recommendations (41 percent) relate to issues associated with IRS’s inability to properly record and document transactions. The remaining 27 open recommendations (33 percent) relate to issues associated with the lack of effective management review and oversight. On the following pages, we group the 81 open recommendations under the control activity to which the condition that gave rise to them most appropriately fits. We first define each control activity as presented in the internal control standards and briefly identify some of the key IRS operations that fall under that control activity. Although not comprehensive, the descriptions are intended to help explain why actions to strengthen these control activities are important for IRS to efficiently and effectively carry out its overall mission. For each recommendation, we also indicate whether it is a short-term or long-term recommendation. Given IRS’s mission, the sensitivity of the data it maintains, and its processing of trillions of dollars of tax receipts each year, one of the most important control activities at IRS is the safeguarding of assets. Internal control in this important area should be designed to provide reasonable assurance regarding prevention or prompt detection of unauthorized acquisition, use, or disposition of an agency’s assets. We have grouped together the four control activities in the internal control standards that relate to safeguarding of assets (including tax receipts) and security activities (such as limiting access to only authorized personnel): (1) physical control over vulnerable assets, (2) segregation of duties, (3) controls over information processing, and (4) access restrictions to and accountability for resources and records. Internal control standard: an agency must establish physical control to secure and safeguard vulnerable assets. Examples include security for and limited access to assets such as cash, securities, inventories, and equipment which might be vulnerable to risk of loss or unauthorized use. Such assets should be periodically counted and compared to control records. IRS is charged with collecting trillions of dollars in taxes each year, a significant amount of which is collected in the form of checks and cash accompanied by tax returns and related information. IRS collects taxes both at its own facilities as well as at lockbox banks that operate under contract with the Department of the Treasury’s Financial Management Service (FMS) to provide processing services for certain taxpayer receipts for IRS. IRS acts as custodian for (1) the tax payments it receives until they are deposited in the General Fund of the U.S. Treasury and (2) the tax returns and related information it receives until they are either sent to the Federal Records Center or destroyed. IRS is also charged with controlling many other assets, such as computers and other equipment, but IRS’s legal responsibility to safeguard tax returns and the confidential information taxpayers provide on tax returns makes the effectiveness of its internal controls with respect to physical security essential. IRS receives cash and checks mailed to its service centers or lockbox banks with accompanying tax returns and information or payment vouchers and payments made in person at its offices. While effective physical safeguards over receipts should exist throughout the year, it is especially important during the peak tax filing season. Each year during the weeks preceding and shortly after April 15, an IRS service center campus (SCC) or lockbox bank may receive and process daily over 100,000 pieces of mail containing returns, receipts, or both. The dollar value of receipts each service center and lockbox bank processes increases to hundreds of millions of dollars a day during the April 15 time frame. Of our 81 open recommendations, the following 9 open recommendations are designed to improve IRS’s physical controls over vulnerable assets. All are short-term in nature. (See table 2.) Internal control standard: Key duties and responsibilities need to be divided or segregated among different people to reduce the risk of error or fraud. This should include separating the responsibilities for authorizing transactions, processing and recording them, reviewing the transactions, and handling any related assets. No one individual should control all key aspects of a transaction or event. IRS employees are responsible for processing trillions of dollars of tax receipts each year, of which hundreds of billions are received in the form of cash or checks, and for processing hundreds of billions of dollars in refunds to taxpayers. Consequently, it is critical that IRS maintain appropriate separation of duties to allow for adequate oversight of staff and protection of these vulnerable resources so that no single individual would be in a position of causing an error or irregularity, potentially converting the asset to personal use, and then concealing it. For example, when an IRS field office or lockbox bank receives taxpayer receipts and returns, it is responsible for depositing the cash and checks in a depository institution and forwarding the related information received to an SCC for further processing. In order to adequately safeguard receipts from theft, the person responsible for recording the information from the taxpayer receipts on a voucher should be different from the individual who prepares those receipts for transmittal to the SCC for further processing. Also, for procurement of goods and services, the person who places an order for goods and services should be different from the person who receives the goods and services. Such separation of duties will help to prevent the occurrence of fraud, theft of IRS assets, or both. The following three open recommendations would help IRS improve its separation of duties, which will in turn strengthen its controls over tax receipts and refunds and procurement activities. All are short-term in nature. (See table 3.) Internal control standard: A variety of control activities are used in information processing. Examples include edit checks of data entered, accounting for transactions in numerical sequences, and comparing file totals with control totals. There are two broad groupings of information systems control—general control (for hardware such as mainframe, network, end-user environments) and application control (processing of data within the application software). General controls include entitywide security program planning, management, and backup recovery procedures and contingency and disaster planning. Application controls are designed to help ensure completeness, accuracy, authorization, and validity of all transactions during application processing. IRS relies extensively on computerized systems to support its financial and mission-related operations. To efficiently fulfill its tax processing responsibilities, IRS relies extensively on interconnected networks of computer systems to perform various functions, such as collecting and storing taxpayer data, processing tax returns, calculating interest and penalties, generating refunds, and providing customer service. As part of our annual audits of IRS’s financial statements, we assess the effectiveness of IRS’s information security controls over key financial systems, data, and interconnected networks at IRS’s critical data processing facilities that support the processing, storage, and transmission of sensitive financial and taxpayer data. From that effort over the years, we have identified information security control weaknesses that impair IRS’s ability to ensure the confidentiality, integrity, and availability of its sensitive financial and taxpayer data. As of January 2008, there were 76 open recommendations from our information security work designed to improve IRS’s information security controls. As discussed previously, recommendations resulting from our information security work are reported separately and are not included in this report primarily because of the sensitive nature of these issues. However, the following open short-term recommendation is related to systems limitations and IRS’s need to enhance its computer programs. (See table 4.) Internal control standard: Access to resources and records should be limited to authorized individuals, and accountability for their custody and use should be assigned and maintained. Periodic comparison of resources with the recorded accountability should be made to help reduce the risk of errors, fraud, misuse, or unauthorized alteration. Because IRS deals with a large volume of cash and checks, it is imperative that it maintain strong controls to appropriately restrict access to those assets, the records that track those assets, and sensitive taxpayer information. Although IRS has a number of both physical and information system controls in place, some of the issues we have identified in our financial audits over the years pertain to ensuring that those individuals who have direct access to these cash and checks are appropriately vetted before being granted access to taxpayer receipts and information and to ensuring that IRS maintains effective access security control. The following eight open short-term recommendations would help IRS improve its access restrictions to assets and records. (See table 5.) Proper Recording and Documenting of Transactions One of the largest obstacles continuing to face IRS management is the agency’s lack of an integrated financial management system capable of producing the accurate, useful, and timely information IRS managers need to assist in making well-informed day-to-day decisions. While IRS is making progress in modernizing its financial management capabilities, it nonetheless continues to face many pervasive internal control weaknesses related to its long-standing systems deficiencies that we have reported each year since we began auditing its financial statements in fiscal year 1992. These deficiencies can only be addressed as part of a longer-term effort to overhaul and integrate IRS’s financial management system structure. Because of the long-standing, pervasive nature of these deficiencies, their resolution is likely to require more than 2 additional years. Nevertheless, IRS also has a number of internal control issues that relate to recording transactions, documenting events, and tracking the processing of taxpayer receipts or information, which do not depend upon longer-term efforts to overhaul and integrate its information systems. We have grouped three control activities together that relate to proper recording and documenting of transactions: (1) appropriate documentation of transactions and internal controls, (2) accurate and timely recording of transactions and events, and (3) proper execution of transactions and events. Internal control standard: Internal control and all transactions and other significant events need to be clearly documented, and the documentation should be readily available for examination. The documentation should appear in management directives, administrative policies, or operating manuals and may be in paper or electronic form. All documentation and records should be properly managed and maintained. IRS collects and processes trillions of dollars in taxpayer receipts annually both at its own facilities and at lockbox banks under contract to process taxpayer receipts for the federal government. Therefore, it is important that IRS maintain effective controls to ensure that all documents and records are properly and timely recorded, managed, and maintained both at its facilities and at the lockbox banks. IRS must adequately document and disseminate its procedures to ensure that they are available for IRS employees. IRS must also document its management reviews of those controls, such as those regarding refunds and returned checks, credit card purchases, and reviews of TACs. Finally, to ensure future availability of adequate documentation, IRS must ensure that its systems, particularly those now being developed and implemented, have appropriate capability to trace transactions. The following 12 open recommendations would assist IRS in improving its documentation of transactions and internal control procedures. Eleven of these recommendations are short-term, and one is long-term. (See table 6.) Internal control standard: Transactions should be promptly recorded to maintain their relevance and value to management in controlling operations and making decisions. This applies to the entire process or life cycle of a transaction or event from the initiation and authorization through its final classification in summary records. In addition, control activities help to ensure that all transactions are completely and accurately recorded. IRS is responsible for maintaining taxpayer records for tens of millions of taxpayers in addition to maintaining its own financial records. To carry out this responsibility, IRS often has to rely on outdated computer systems or manual work-arounds. Unfortunately, some of IRS’s recordkeeping difficulties we have reported on over the years will not be addressed until it can replace its aging systems, which is a long-term effort and depends on future funding. The following 18 open recommendations would strengthen IRS’s recordkeeping abilities. (See table 7.) Twelve of these recommendations are short-term, and 6 are long-term. They include specific recommendations regarding requirements for new systems for maintaining taxpayer records. Several of the recommendations listed affect financial reporting processes, such as subsidiary records and appropriate allocation of costs. Some of the issues that gave rise to several of our recommendations directly affect taxpayers, such as those involving duplicate assessments, errors in calculating and reporting manual interest, errors in calculating penalties, and recovery of trust fund penalty assessments. About 38 percent of these recommendations are 5 years or older and 1 is over 10 years old, reflecting the complex nature of the underlying system issues that must be resolved to fully address of some of these issues. Internal control standard: Transactions and other significant events should be authorized and executed only by persons acting within the scope of their authority. This is the principal means of ensuring that only valid transactions to exchange, transfer, use, or commit resources and other events are initiated or entered into. Authorizations should be clearly communicated to managers and employees. IRS employs tens of thousands of people in its 10 SCCs, three computing centers, and numerous field offices throughout the United States. In addition, the number of staff increases significantly during the peak of the tax filing season. Because of the significant number of personnel involved, IRS must maintain effective control over which employees are authorized to either view or change sensitive taxpayer data. IRS’s ability to establish access rights and permissions for information systems is a critical control. Each year, IRS pays out hundreds of billions of dollars in tax refunds, some of which are distributed to taxpayers manually. IRS requires that all manual refunds be approved by designated officials. However, weaknesses in the authorization of such approving officials expose the federal government to losses because of the issuance of improper refunds. Likewise, the failure to ensure that employees obtain appropriate authorizations to use purchase cards or initiate travel similarly leave the government open to fraud, waste, or abuse. The following three open short-term recommendations would improve IRS’s controls over its manual refund, purchase card, and travel transactions. (See table 8.) Effective Management Review and Oversight All personnel within IRS have an important role in establishing and maintaining effective internal controls, but IRS’s managers have additional review and oversight responsibilities. Management must set the objectives, put control activities in place, and monitor and evaluate controls to ensure that they are followed. Without effective monitoring by managers, internal control activities may not be carried out consistently and on time. We have grouped three control activities together related to effective management review and oversight: (1) reviews by management at the functional or activity level, (2) establishment and review of performance measures and indicators, and (3) management of human capital. Although we also include the control activity “top-level reviews of actual performance” in this grouping, we do not have any open recommendations to IRS related to this internal control activity. Internal control standard: Managers need to compare actual performance to planned or expected results throughout the organization and analyze significant differences. IRS has over 71,000 full-time employees and hires over 23,000 seasonal personnel to assist during the tax filing season. In addition, as discussed earlier, Treasury’s Financial Management Service contracts with banks to process tens of thousands of individual receipts, totaling hundreds of billions of dollars. At any organization, management oversight of operations is important, but with an organization as vast in scope as IRS, management oversight is imperative. The following 18 short-term and one long-term open recommendations would improve IRS’s management oversight of lockbox banks, courier services, user fees, penalty calculations, issuance of manual refunds, and the timely release of liens. (See table 9.) Many of these recommendations were made to correct instances where an internal control activity either does not exist or where an established control is not being adequately or consistently applied. However, a number of these recommendations are aimed at enhancing IRS’s own assessment of its internal controls over financial reporting in accordance with the requirements of the revised OMB Circular No. A-123. Internal control standard: Activities need to be established to monitor performance measures and indicators. These controls could call for comparisons and assessments relating different sets of data to one another so that analyses of the relationships can be made and appropriate actions taken. Controls should also be aimed at validating the propriety and integrity of both organizational and individual performance measures and indicators. IRS’s operations include a vast array of activities encompassing educating taxpayers, processing of taxpayer receipts and data, disbursing hundreds of billions of dollars in refunds to millions of taxpayers, maintaining extensive information on tens of millions of taxpayers, and seeking collection from individuals and businesses that fail to comply with the nation’s tax laws. Within its compliance function, IRS has numerous activities, including identifying businesses and individuals that underreport income, collecting from taxpayers that do not pay taxes, and collecting from those receiving refunds for which they are not eligible. Although IRS has at its peak over 94,000 employees, it still faces resource constraints in attempting to fulfill its duties. Because of this, it is vitally important for IRS to have sound performance measures to assist it in assessing its performance and targeting its resources to maximize the government’s return on investment. However, in past audits we have reported that IRS did not capture costs at the program or activity level to assist in developing cost-based performance measures for its various programs and activities. As a result, IRS is unable to measure the costs and benefits of its various collection and enforcement efforts to best target its available resources. The following three long-term open recommendations are designed to assist IRS in evaluating its operations, determining which activities are the most beneficial, and establishing a good system for oversight. (See table 10.) These recommendations call for IRS to measure, track, and evaluate the costs, benefits, or outcomes of its operations—particularly with regard to identifying its most effective tax collection activities. Internal control standard: Effective management of an organization’s workforce—its human capital—is essential to achieving results and an important part of internal control. Management should view human capital as an asset rather than a cost. Only when the right personnel for the job are on board and are provided the right training, tools, structure, incentives, and responsibilities is operational success possible. Management should ensure that skill needs are continually assessed and that the organization is able to obtain a workforce that has the required skills that match those necessary to achieve organizational goals. Training should be aimed at developing and retaining employee skill levels to meet changing organizational needs. Qualified and continuous supervision should be provided to ensure that internal control objectives are achieved. Performance evaluation and feedback, supplemented by an effective reward system, should be designed to help employees understand the connection between their performance and the organization’s success. As a part of its human capital planning, management should also consider how best to retain valuable employees, plan for their eventual succession, and ensure continuity of needed skills and abilities. IRS’s operations cover a wide range of technical competencies with specific expertise needed in tax-related matters; financial management; and systems design, development, and maintenance. Because IRS has tens of thousands of employees spread throughout the country, it is imperative that management keeps its guidance up-to-date and its staff properly trained. The following five open short-term recommendations would assist IRS in its management of human capital. (See table 11.) For several years, we have reported material weaknesses, a significant deficiency, noncompliance with laws and regulations, and other control issues in our annual financial statement audits and related management reports. To assist IRS in addressing those control issues, Appendix II provides summary information regarding the primary issue to which each open recommendation is related. To compile this summary, we analyzed the nature of the open recommendations to relate them to the material weaknesses, significant deficiency, compliance issues, and other control issues not associated with a material weakness or significant deficiency identified as part of our financial statement audit. Increased budgetary pressures and an increased public awareness of the importance of internal control require IRS to carry out its mission more efficiently and more effectively while protecting taxpayers’ information. Sound financial management and effective internal controls are essential if IRS is to efficiently and effectively achieve its goals. IRS has made substantial progress in improving its financial management since its first financial audit, as evidenced by consecutive clean audit opinions on its financial statements for the past 8 years, resolution of several material internal control weaknesses, and actions taken resulting in the closure of hundreds of financial management recommendations. This progress has been the result of hard work by many individuals throughout IRS and sustained commitment of IRS leadership. Nonetheless, more needs to be done to fully address the agency’s continuing financial management challenges. Further efforts are needed to address the internal control deficiencies that continue to exist. Effective implementation of the recommendations we have made and continue to make through our financial audits and related work could greatly assist IRS in improving its internal controls and achieving sound financial management. While we recognize that some actions—primarily those related to modernizing automated systems—will take a number of years to resolve, most of our outstanding recommendations can be addressed in the short-term. In commenting on a draft of this report, IRS expressed its appreciation for our acknowledgment of the agency’s progress in addressing its financial management challenges as evidenced by our closure of 18 open financial management recommendations from GAO’s prior year report. IRS also commented that it is commited to implementing appropriate improvements to ensure that the IRS maintains sound financial management practices. We will review the effectiveness of further corrective actions IRS has taken or will take and the status of IRS’s progress in addressing all open recommendations as part of our audit of IRS’s fiscal year 2008 financial statements. We are sending copies of this report to the Chairmen and Ranking Members of the Senate Committee on Appropriations; Senate Committee on Finance; Senate Committee on Homeland Security and Governmental Affairs; and Subcommittee on Taxation, IRS Oversight and Long-Term Growth, Senate Committee on Finance. We are also sending copies to the Chairmen and Ranking Members of the House Committee on Appropriations; House Committee on Ways and Means; the Chairman and Vice Chairman of the Joint Committee on Taxation; the Secretary of the Treasury; the Director of OMB; the Chairman of the IRS Oversight Board; and other interested parties. Copies will be made available to others upon request. In addition, the report will be available at no charge on GAO’s Web site at http://www.gao.gov. If you have any questions concerning this report, please contact me at (202) 512-3406 or [email protected]. Contact points for our Offices of Congressional Relations and Public Affairs may be found on the last page of this report. GAO staff who made major contributions to this report are listed in appendix IV. Open. The Internal Revenue Service’s (IRS) Exam Policy has expanded its action plan to include short-term actions for fiscal year 2008. By June 30, 2008, it plans to issue a memorandum to emphasize the importance of training employees who calculate interest and outline available training modules. By September 30, 2008, it plans to offer assistance reviews as requested to verify adherence to procedures, and to improve the process for employees to elevate issues to the program office for resolution. By January 1, 2009, Exam Policy will coordinate additional interest-related training to target field exam and collection personnel. Open. In testing a statistical sample of 45 manual interest transactions recorded during fiscal year 2006, we found eight errors relating to the calculation and recording of manually calculated interest. Based on this, we estimated that 18 percent of IRS’s manual interest population contains errors and concluded that IRS’s controls over this area remain ineffective. The ineffectiveness of these controls contributes to errors in taxpayer records, which is a major component of the material weakness in IRS’s unpaid assessments. During fiscal year 2007, IRS did not make any significant improvements to controls related to manual interest calculations. We will continue to evaluate IRS’s corrective actions in future audits. Internal Revenue Service: Immediate and Long-Term Actions Needed to Improve Financial Management (GAO/AIMD-99-16, Oct. 30, 1998) Open. IRS’s Small Business/Self- Employed (SB/SE) Division began a Trust Fund Recovery Penalty (TFRP) Database Cleanup Initiative in September 2006 that involved a combined systemic clean-up and systemically-assisted, manual cleanup. SB/SE completed the clean-up initiative in January 2008. According to IRS, one of the accomplishments of the clean-up initiative was to reduce cross- reference errors by 32.4 percent. IRS will continue to identify and submit work requests to address current programming shortfalls, corrections and enhancements to the Automated Trust Fund Recovery (ATFR) program and database. The Work Request Tracking System will improve the Area Office, Control Point Monitoring, and Campus Compliance components of the database. These enhancements and improvements include but are not limited to minimizing accounts requiring manual intervention, providing increased managerial oversight through the creation of various reports and improvements to the current inventory delivery system. Open. IRS has taken several actions to strengthen controls and correct programming or procedural deficiencies in the cross-referencing of payments. To ensure quality, timeliness, and accuracy of the TFRP process, IRS recently completed a quality review process that improved the accuracy rate of cross-references recorded in its master files. Additionally, IRS continues to monitor the accuracy and effectiveness of the TFRP process and all corrective actions already in place. However, IRS’s actions have not been completely successful in addressing this issue. As part of our fiscal year 2007 financial audit, we reviewed a statistical sample of 76 TFRP payments, made on accounts created since August 2001. We found nine instances in which IRS did not properly record the payments to all related taxpayer accounts. We estimate that 11.8 percent of these payments may not be properly recorded. Thus, we conclude that IRS’s controls over this area remain ineffective. The ineffectiveness of these controls contributes to errors in taxpayer records, which is a major component of our reported material weakness in IRS’s unpaid assessments. We will continue to review IRS’s corrective actions to address this issue during our fiscal year 2008 audit. Internal Revenue Service: Immediate and Long-Term Actions Needed to Improve Financial Management (GAO/AIMD-99-16, Oct. 30, 1998) Open. IRS is developing the Custodial Detailed Data Base (CDDB), which it believes will ultimately address many of the outstanding financial management recommendations. IRS implemented the first phase of the CDDB during fiscal year 2006. In fiscal year 2007, IRS enhanced the CDDB to process a larger percentage of accounts associated with unpaid payroll taxes and began journalizing unpaid assessment information from CDDB to the Interim Revenue and Accounting Control System (IRACS) weekly; the first step in establishing CDDB to serve as the subsidiary ledger for unpaid assessments. For fiscal year 2008, IRS is continuing to enhance the CDDB in order to process an even larger percentage of accounts associated with unpaid payroll taxes. Open. IRS’s development and use of CDDB has improved its ability to analyze and classify related taxpayer accounts associated with unpaid payroll taxes. However, CDDB is currently not able to analyze and classify 100 percent of such cases. In fiscal year 2007, IRS implemented CDDB programs to begin journalizing tax debt information from its master files to its general ledger weekly, a first step in establishing CDDB’s capability to serve as a subsidiary ledger for unpaid tax debt. However, IRS is presently unable to use CDDB as its subsidiary ledger for posting tax debt information to its general ledger in a manner that ensures reliable external reporting. Specifically, to report balances for taxes receivables and other unpaid tax assessments in its financial statements and required supplemental information, IRS must continue to apply statistical sampling and estimation techniques to master file data processed through CDDB at year-end. Even though CDDB is capable of analyzing master file data weekly to produce tax debt information classified into the various financial reporting categories (taxes receivables, compliance assessments, and write-offs), this information contains material inaccuracies. For example, over $20 billion in adjustments to the year-end gross taxes receivable balance produced by CDDB were needed to correct for errors. Full operational capability of CDDB is several years away and depends in part on the successful implementation of future system releases through 2009. The lack of a fully functioning subsidiary ledger capable of producing accurate, useful, and timely information with which to manage and report externally is a major component of our reported material weakness in IRS’s unpaid assessments. We will continue to monitor IRS’s development of CDDB during our fiscal year 2008 and future audits. Internal Revenue Service: Physical Security Over Taxpayer Receipts and Data Needs Improvement (GAO/AIMD-99-15, Nov. 30, 1998) Closed. Recommendation is no longer directly applicable to IRS’s current business operations. The Wage and Investment (W&I) Division is no longer organized by districts, and no longer has teller functions. The operations aspect of the recommendation has been addressed with procedures and processes in recommendation 99-22. Managerial aspects of the control logs and reviews are addressed in recommendations 02-16 and 05-33, where IRS addresses its monitoring activities and efforts to improve its current state of compliance. Closed. The original report issued in November 1998 directs the intent of this recommendation to the Customer Service Units at district offices that collected walk-in payments. Since that time IRS reorganized its operations into four operating divisions with particular responsibility for the collection of individual and corporate taxes, examination of returns, and taxpayer assistance. Specifically, the W&I Division’s Taxpayer Assistance Centers (TACs) now handle the collection of walk-in payment receipts. Therefore, we agree that recommendations 99-22, 02-16 and 05-33 address the substance of the weaknesses reported in the November 1998 report. We will continue to monitor those recommendations to assess IRS’s corrective actions. Internal Revenue Service: Custodial Financial Management Weaknesses (GAO/AIMD-99-193, Aug. 4, 1999) Open. IRS implemented the Area Office (AO) ATFR Web application. This implementation included the Web version of the Control Point Monitoring (CPM) portion of the application. The CPM acts as the conduit from the AO to the Campus for assessment. IRS drafted new Internal Revenue Manual (IRM) procedures to complement the CPM AO Web processing, and is currently testing these procedures. IRS plans to assess the results of the test and implement the IRM procedures as appropriate. IRS continues to identify and submit Work Requests and Information Technology Assets Management System tickets to enhance the assessment process and provide for efficiencies in the CPM process. These include but are not limited to the systemic generation of the Form 5942, redefining the current inventory assignment system and creating inventory and management reports. Open. To ensure quality, timeliness, and accuracy of the TFRP process, the IRS initiated a quality review process that focused on two primary areas, the first being consolidation of all TFRP work to one campus. Consolidation of all SB/SE ATFR work to the Ogden Campus was completed in September 2005. All W&I business unit TFRP work was transferred to SB/SE Campuses as of January 2006. The second area IRS undertook was the task of rewriting the ATFR area office user component to provide system flexibility that better replicates the realities of the current trust fund investigation/proposal process. IRS continues to monitor the accuracy and effectiveness of the TFRP process and all corrective actions already in place. According to IRS, it completed consolidation of ATFR work at its Ogden Campus by September 2005. However, during our fiscal year 2007 audit, we continued to find long delays in IRS’s processing and posting of TFRP assessments. In one case, we noted that IRS did not record the assessment against the responsible officer until 4 years after it made the determination that the officer was responsible for the TFRP. In another case, IRS did not record the TFRP assessment against the officer until almost 3 years after it made the determination that the officer was responsible for the TFRP. Such delays in recording taxpayer information contribute to errors in taxpayer records, which is a major component of our reported material weakness in IRS’s unpaid assessments. We will continue to review IRS’s corrective actions related to this issue as part of our fiscal year 2008 audit. Internal Revenue Service: Custodial Financial Management Weaknesses (GAO/AIMD-99-193, Aug. 4, 1999) Closed. All IRS field offices continue to provide training and to perform reviews to strengthen controls over remittances. The Large and Mid- sized Business (LMSB) requires each field executive to certify that each group either had in its possession or was able to obtain the stamp. LMSB obtained certifications from the LMSB Industry Headquarter Offices that field groups are maintaining and using the US Treasury stamps, and that they are covering these procedures periodically in group meetings or through issuance of memorandums. LMSB implemented a training module on July 28, 2006 on the responsibilities and procedures for payment processing and check handling. SB/SE collection group managers have been instructed to periodically review remittance packages transmitted by revenue officers and designated clerical employees using a random selection process. In addition, territory managers review the group manager’s control of those reviews. SB/SE Headquarters will be addressing this in interviews with territory managers as part of their operational reviews. Tax Exempt and Government Entities (TE/GE) continues to perform reviews to ensure adherence to the IRM procedures and to require managers to confirm that each group either had in its possession or was able to obtain the stamp. Open. The objective of this recommendation was to create a mechanism for IRS to monitor the status of pervasive weaknesses in controls over taxpayer receipts and information that we have found at IRS’s field offices over the years. The purpose of this monitoring is to facilitate the timely detection and effective resolution of issues and to verify the effectiveness of new and existing policies and procedures on an ongoing basis. During our fiscal year 2007 audit, we identified one instance at an SB/SE unit where employees did not have access to stamps needed to overstamp improper payee lines. Also, at five SB/SE field offices we found that there was no system in place or evidence maintained to track acknowledged document transmittals. Had IRS periodically reviewed the effectiveness of these controls in field offices as we recommended, these issues might have been detected and corrected. In addition, during our review of IRS’s response to this recommendation, we asked IRS to provide a list and blank copies of the reviews that are performed within the LMSB, SBSE, and TEGE business units that address key controls over (1) physical security, (2) procedural safeguards, and (3) the transfer of taxpayer receipts and information. While IRS provided extensive explanations of the various procedures and reviews that are performed, IRS did not provide copies of the reviews covering all three business units for our evaluation to assess the adequacy and frequency of these reviews. We will continue to assess IRS’s actions during our fiscal year 2008 audit. Internal Revenue Service: Custodial Financial Management Weaknesses (GAO/AIMD-99-193, Aug. 4, 1999) Open. The IRS is continuing to develop CDDB. Each release is providing more detail for unpaid assessments, and new functionality will be added for revenue and refunds in fiscal year 2008 to reduce the reliance on master file extracts and ad hoc procedures. The Chief Financial Officers (CFO) office has hired three additional staff and is cross-training existing staff to perform more of the ad hoc procedures to reduce the work on Modernization & Information Technology Services for financial reporting purposes. IRS continues to have contractor support to ensure that master file extracts and other ad hoc procedures are in place to continually develop reliable balances for financial reporting purposes while it finalizes CDDB and develops the IRACS redesign to be a compliant general ledger. Open. We will continue to assess IRS’s actions during our fiscal year 2008 audit. Internal Revenue Service: Serious Weaknesses Impact Ability to Report on and Manage Operations (GAO/AIMD-99-196, Aug. 9, 1999) Open. IRS now has 3 complete years of fully allocated cost data in the Integrated Financial System (IFS). The Statement of Net Costs is now produced from the cost accounting module of IFS. IRS also initiated a project in fiscal year 2007 to identify the issues associated with developing a methodology for determining the costs of performance measures within IRS. Open. We confirmed that IRS continued to improve its cost accounting capability in fiscal year 2007. However, while the cost accounting module of IFS successfully produced the Statement of Net Costs, it still does not provide IRS with the ability to produce full cost information for its performance measures. IRS states that it initiated a strategy to develop cost data for performance measures. We will continue to review and assess IRS’s initiatives during our fiscal year 2008 audit. Internal Revenue Service: Serious Weaknesses Impact Ability to Report on and Manage Operations (GAO/AIMD-99-196, Aug. 9, 1999) Closed. IRS continues to strengthen internal controls and procedures to enhance its ability to account for P&E in IFS. P&E, including capital leases, are recorded as assets when purchased. During fiscal year 2007, IRS revised the dollar threshold for review of P&E accounting transactions and conducted intensive reviews of the large-dollar transactions, increasing the accuracy of P&E reporting. IRS also improved its capability to capitalize assets or expense other items and to properly account for Business System Modernization costs in internal use software. Open. Our fiscal year 2007 P&E valuation testing revealed problems with the linking of the purchase of assets recorded in the general ledger system to the P&E inventory system, which indicates that IRS’s detailed P&E records do not yet fully reconcile to the financial records. We will continue to monitor IRS’s strategy in addressing these financial management system issues. Internal Revenue Service: Recommendations to Improve Financial and Operational Management (GAO- 01-42, Nov. 17, 2000) Open. IRS has developed a workload delivery model that integrates the work plans of each source of assessment to evaluate the overall impact on downstream collection operations. IRS is continuing to look at case delivery practices from an overall perspective and make recommendations for changes to case routing and assignment priorities. IRS is also monitoring the nonfiler strategy and work plans to improve the identification of and selection of nonfiler cases to balance the working of nonfiler inventory with balance- due inventory. Additionally, IRS is also continuing the project to enhance its decision analytical models used for selecting cases based on their predicted collection potential to apply decision analytics to both delinquent accounts and unfiled returns; apply decision analytics to all categories of taxpayer not just small business, self- employed; expand the use of internal and external data sources to increase the portion of cases predicted by the models; ultimately develop alternative treatment strategies based on the least costly treatment indicated by the models; and update definitions for complex cases to improve routing to field collection. Open. According to IRS, SB/SE has initiated several projects to build additional decision analytical models to increase its ability to route cases to the appropriate resource. These projects utilize more sophisticated computer modeling and risk assessment techniques to improve the targeting of cases to pursue. The Collection Governance Council was established to ensure the inventory is balanced and resources are expended appropriately. IRS has estimated several billion dollars in additional tax collections have been realized through the use of the collection approach developed from the projects. Although these efforts have helped IRS target cases for collection, its ability to assess the relative merits of these efforts continues to be hindered by its inability to reliably measure how much it collects as a result of these efforts, relative to their associated costs. In addition, these efforts are primarily focused on SB/SE, thus they do not represent an integrated agencywide systemic approach to managing the collection of unpaid taxes across the scope of IRS’s activities. IRS has made some improvements in prioritizing its inventory of collection cases; but more needs to be done by IRS to address the full range of cost- benefit considerations. We will continue to review IRS’s initiatives to manage resource allocation levels for its collection efforts. Internal Revenue Service: Recommendations to Improve Financial and Operational Management (GAO- 01-42, Nov. 17, 2000) Open. IRS continues to address and correct issues that cause late lien releases through a Lien Release Action Plan, and conducting reviews as a part of A-123. In April 2007 IRS’s review of lien releases found it had improved the timely release of liens to 88 percent, a 19 percentage point increase from the 69 percent timeliness rate in fiscal year 2006. IRS added new action items and corrective actions to address new and repeat issues. IRS’s goal is to reduce overall lien release error rates to below 5 percent by September 30, 2009. Open. IRS has taken a number of actions over the past several years to address this issue. IRS developed an action plan to incorporate the requirements of the revised OMB Circular No. A-123. The overall action addresses untimely lien releases, including identification of causes and where they occur organizationally. For example, IRS centralized all lien processing at its Cincinnati Service Center Campus in 2005. Additionally, in July 2006, IRS enhanced various lien-processing exception reports to include a cumulative listing of unresolved lien releases, allowing it to more readily track the release status and take corrective action. However, during our fiscal year 2007 audit, we continued to find delays in the release of liens. In its OMB No. A-123 testing of lien releases, IRS found 7 instances out of 59 cases tested in which it did not release the applicable federal tax lien within the statutory period. The time between the satisfaction of the liability and release of the lien ranged from 35 days to 135 days. Based on its sample, IRS estimated that for about 12 percent of unpaid tax assessment cases in which it had filed a tax lien that were resolved in fiscal year 2007, it did not release the lien within 30 days. IRS is 95 percent confident that the percentage of cases in which the lien was not released within 30 days does not exceed 21 percent. IRS’s ineffective controls over this area results in its non-compliance with Internal Revenue Code section 6325 which requires IRS to release its tax liens within 30 days of the date the related tax liability was fully satisfied, had become legally unenforceable, or the Secretary of the Treasury has accepted a bond for the assessed tax. We will continue to assess the affect of IRS’s actions and continue to review IRS’s testing of tax lien releases as part of our fiscal year 2008 audit. Internal Revenue Service: Recommendations to Improve Financial and Operational Management (GAO- 01-42, Nov. 17, 2000) Open. IRS has taken steps to screen and examine Earned Income Tax Credit (EITC) claims and to address the collection of AUR and CAWR as part of the workload delivery model. For EITC IRS is pursuing estimating the full cost of these programs, and in the interim IRS is using information such as annual error rate estimates and high-level return on investment (ROI) computations for EITC base compliance activities and initiatives to make sound decisions about resource investments. IRS employs a ROI estimate for compliance activities that uses labor costs associated with protecting revenue for both pre-refund and post-refund activities. Since labor represents approximately 73 percent of the total IRS budget (2007) and 91 percent of the EITC budget, ROI calculations using labor costs provide valid cost/benefit data which are used, along with other data and program considerations, to make sound program decisions. The IRS released two reports that include ROI discussions and it is in the process of finalizing a summary report on the 3-year test to assess investments in a certification requirement versus other potential compliance investments. SB/SE is monitoring the nonfiler strategy and work plans to improve the identification of and selection of non- filer cases to balance the working of nonfiler inventory with balance-due inventory. SB/SE continues to review this model to ultimately develop alternative treatment strategies based on the least costly treatment indicated by the models. The CFO also initiated a cost pilot during fiscal year 2007 to determine the costs of several performance measures within AUR, and will share this information at the conclusion of the cost pilot. Open. In fiscal year 2008, we will continue to follow up on IRS’s progress on the various initiatives taken as well as IRS’s progress in estimating the full cost of these programs. Internal Revenue Service: Recommendations to Improve Financial and Operational Management (GAO- 01-42, Nov. 17, 2000) Closed. IRS continues to strengthen internal controls and procedures to enhance its ability to account for P&E in IFS. P&E, including capital leases, are recorded as assets when purchased. During fiscal year 2007, IRS revised the dollar threshold for review of P&E accounting transactions and conducted intensive reviews of the large-dollar transactions, increasing the accuracy of P&E reporting. IRS also improved its capability to capitalize assets or expense other items and to properly account for Business System Modernization costs in internal use software. Currently, IRS does not have a subsidiary ledger for leasehold improvements. A subsidiary ledger requires an enhancement to IFS. Funding for enhancements was denied for fiscal years 2007, 2008 and 2009. Depending on the amount of any future funding and prioritization of enhancements, it is not known when or if IRS can accomplish what was originally agreed to. Considering the age of this report and the long-term unknowns, IRS considers this action closed until further follow-up is required. Open. IRS implemented the first release of IFS on November 10, 2004, which allowed recording leasehold improvements as assets when purchased. A subsidiary ledger for leasehold improvements has not been developed. According to IRS, it lacks the funding to make the enhancements to IFS that are needed to develop a subsidiary ledger for leasehold improvements. Until it determines the amount of its future funding and prioritization of IFS enhancements, IRS will remain unsure of any additional actions it will take to accomplish this recommendation. We will continue to evaluate IRS’s efforts to enhance its ability to account for P&E assets, including leasehold improvements. Management Letter: Improvements Needed in IRS’s Accounting Procedures and Internal Controls (GAO-01-880R, July 30, 2001) Closed. The CFO implemented IFS on November 10, 2004 which included a cost module. The cost module currently has 3 years of data which provide managers with basic cost data for decision making in relation to their activities. IRS continues to improve the allocation methodology so that it can determine the detail behind the allocated costs. Open. We confirmed that IRS has procedures for costing reimbursable agreements that provide the basic framework for the accumulation of both direct and indirect costs at the necessary level of detail. IRS has improved its methodology for allocating its costs of operations to its business units. However, further actions are needed for it to accumulate and report actual costs associated with specific reimbursable projects. We will continue to monitor IRS’s efforts to fully implement its cost accounting system and, once it has been fully implemented, evaluate the effectiveness of IRS’s procedures for developing cost information for its reimbursable agreements. Internal Revenue Service: Progress Made, but Further Actions Needed to Improve Financial Management (GAO- 02-35, Oct. 19, 2001) Open. IRS is exploring other system- based ways of capturing both time and costs associated with its projects and activities and does not anticipate implementing the requirement for employees to itemize their time in the near future. Open. IRS states that it is exploring other system-based ways of capturing both time and costs associated with its projects and activities and does not anticipate implementing the requirement for employees to itemize their time in the near future. We will continue to monitor IRS’s efforts to fully implement its cost accounting system. Once it has been fully implemented, we will evaluate the effectiveness of IRS’s procedures for developing cost information to use in resource allocation decisions, which is the underlying basis for our making this recommendation. Internal Revenue Service: Progress Made, but Further Actions Needed to Improve Financial Management (GAO- 02-35, Oct. 19, 2001) Closed. IRS now allocates all costs, both personnel and nonpersonnel, to the major program areas described in the Statement of Net Costs on a monthly basis. Open. We confirmed that IRS has improved its cost accounting capabilities by developing and implementing procedures for allocating its costs of operations to its business units and to the cost categories in its Statement of Net Cost on a monthly basis. However, the cost categories on the Statement of Net Cost are at a higher level than specific programs and activities. Therefore, further actions are still needed to enable IRS to allocate nonpersonnel costs to the detailed level of specific programs and activities. We will continue to monitor IRS’s efforts to fully implement its cost accounting system and, once it has been fully implemented, evaluate the effectiveness of IRS procedures for developing cost information for specific programs and activities to use in resource allocation decisions. Management Report: Improvements Needed in IRS’s Accounting Procedures and Internal Controls (GAO-02-746R, July 18, 2002) Open. During fiscal year 2007, IRS conducted Operational Reviews of its W&I Field Assistance area groups. These reviews included compliance with this recommendation. While groups were generally in compliance, IRS recognized the need for additional training. Field Assistance is conducting Filing Season Readiness training for Managers in fiscal year 2008 that includes remittance and security training. The fiscal year 2008 performance commitments address remittance security and shared responsibility for operational reviews. Operational reviews at all levels will be conducted during fiscal year 2008 to ensure consistency. Open. During our fiscal year 2007 audit, we visited 10 TACs and identified weaknesses over the payment processing and TAC managerial reviews that would address this recommendation at all 10 locations. We will review IRS’s additional planned corrective actions during our fiscal year 2008 audit. Management Report: Improvements Needed in IRS’s Accounting Procedures and Internal Controls (GAO-02-746R, July 18, 2002) Closed. SETS data are reviewed on a bi-weekly basis to detect and correct errors. Monitoring SETS falls across a broad group of Chief Human Capital and Agency-Wide Shared Services (AWSS) staff. IRS provided guidance in November 2007 to all involved staff reminding them to monitor SETS systemic issues and immediately elevate those issues for NFC correction. Until a SETS replacement is developed, continuous monitoring will occur. Open. During our fiscal year 2007 audit, we continued to identify technical limitations and weaknesses with the SETS database. Specifically, during our analysis of the SETS data, we found multiple instances where (1) employees entered on duty either prior to the Office of Personnel Management completing their fingerprint check, IRS receiving their fingerprint check results, or both and (2) employees entered on duty with expired fingerprint check results (over 180 days old). The guidance provided to staff in November 2007 was subsequent to the completion of our fiscal year 2007 audit. We will evaluate IRS’s additional corrective actions during our fiscal year 2008 audit. Management Report: Improvements Needed in IRS’s Internal Controls and Accounting Procedures (GAO-04- 553R, April 26, 2004) Closed. IRS continues to conduct on-site reviews looking at logs for desk and work area, date stamp, cash, candling, shred, and mail. IRS uses the data collection instrument (DCI) entitled “Processing-Internal Controls” and uses the results of these reviews to roll them into a calculation to determine each bank’s score in the new bank performance measurement process. In addition, lockbox personnel are required to perform similar reviews monthly and report results to the lockbox field coordinators. The report must contain the date of review, shifts reviewed, results of the review (even when no items are found) and include a reviewer and site manager’s initials; a signature as required by the Lockbox Processing Guidelines (LPG); or both. Additional reviews are performed on the monthly F9535/Discovered Remittance, candling log, disk checks/audits, and shred reports received from the lockbox site by the lockbox field coordinators. Closed. We verified that IRS established and implemented a Processing Internal Controls and Physical Security DCIs. These DCIs are used to assess the required managerial reviews that are performed at each lockbox bank. Management Report: Improvements Needed in IRS’s Internal Controls and Accounting Procedures (GAO-04- 553R, April 26, 2004) Closed. IRS continues to perform monthly unannounced testing of guard response to alarms, and documentation from these reviews is maintained at each service center campus. Roll-up documentation from Physical Security Area managers is provided to the Program, Planning, and Policy Office (PPPO) for reports to higher-level management. PPPO also conducts random unannounced spot checks when on-site at campuses and computing centers. Open. During our fiscal year 2007 audit, we identified instances at two of five SCCs we visited in which security guards did not respond properly to alarms. We will evaluate IRS’s corrective actions during our fiscal year 2008 audit. Management Report: Review of Controls over Safeguarding Taxpayer Receipts and Information at the Brookhaven Service Center Campus (GAO-05-319R, Mar 10, 2005) Closed. Accounts Management is enforcing adherence to existing instructions for securing access to restricted areas through trained security monitors at consolidated sites. These clerks receive training annually, as well as periodic briefings, on the issuance and inventory of badges and the security of taxpayer information and receipts. Candling procedures are reinforced through training and team meetings. Local management ensures that correct procedures are followed when reviewing equipment and candling logs. Open. During our fiscal year 2007 audit, we identified instances at one SCC we visited with reduced submission processing functions where (1) neither the door monitor nor the payment processing supervisor in the receipt and control area inspected visitors’ belongings when they exited the restricted area and (2) the inside envelope of the 3210 transmittal package did not contain a statement indicating that the information inside is for limited official use. We will continue to assess IRS’s actions during our fiscal year 2008 audit. Management Report: Review of Controls over Safeguarding Taxpayer Receipts and Information at the Brookhaven Service Center Campus (GAO-05-319R, Mar 10, 2005) Closed. IRS has developed and implemented a methodology for estimating mail volumes and resource requirements for use in future submission processing consolidations. IRS used the prior campus consolidation experiences from both Brookhaven and Memphis in its projections for the Philadelphia Campus Support Department. Closed. During our fiscal year 2007 audit, IRS W&I staff provided us with a methodology and estimation for anticipated rapid changes in mail volume at future SCCs selected for significant reductions in their submission processing functions. Management Report: Improvements Needed in IRS’s Internal Controls (GAO-05-247R, Apr 27, 2005) Closed. PPPO issued notification in February 2007 reminding Physical Security area directors that required documentation from contracting officers’ technical representatives is needed to support the issuance of identification media before granting staff-like access to contractors, and that all forms must remain on file. The Audit Management Checklist is also used to ensure that proper documentation is received and filed. All IRMs have been updated and renumbered. IRM 10.2.5 Identification Card specifies that Form 5519, 13716-A or similar identification request form (13760), and the interim or final background investigation letter must be retained and filed in the identification media file on each contractor for the life of the identification card. Open. During our fiscal year 2007 audit, we identified four contractors at one of five SCCs we visited who were granted staff-like access before background investigations had been completed. Also, we obtained and reviewed SCC contractor background investigation data from all 10 SCCs and found that 3 SCCs permitted five contractors staff-like access before their background investigations had been completed. In addition, IRM series 10.2 mentioned in IRS’s response to this recommendation is currently in draft, under review, and waiting to be finalized. We will evaluate IRS’s corrective actions during our fiscal year 2008 audit. Management Report: Improvements Needed in IRS’s Internal Controls (GAO-05-247R, Apr 27, 2005) Closed. PPPO issued notification in February 2007 reminding Physical Security area directors that documentation from the contracting officer’s technical representative is needed to support the issuance of identification media before granting staff-like access to contractors, and that all forms remain on file. The Audit Management Checklist is also used to ensure that proper documentation is received and filed. All IRMs have been updated and renumbered. IRM 10.2.5 Identification Card specifies that Form 5519, 13716-A or similar identification request form (13760), and the interim or final background investigation letter must be retained and filed in the identification media file on each contractor for the life of the identification card. Open. As of the time of our audit, the IRM 10.2 series was in draft, under review, and waiting to be finalized. We will monitor its final implementation and continue to evaluate IRS’s policies and procedures related to background investigations for contractors during our fiscal year 2008 audit. Management Report: Improvements Needed in IRS’s Internal Controls (GAO-05-247R, Apr 27, 2005) Closed. Submission Processing issued an annual reminder memorandum to the courier contractors on February 27, 2007. Additionally, the lockbox banks security team verified that all lockbox bank sites issued an annual reminder memorandum to courier contractors reminding them to adhere to all courier service procedures in the Lockbox Security Guidelines (LSG). Closed. We verified that reminder memorandums were issued to the SCC and lockbox bank couriers. Management Report: Improvements Needed in IRS’s Internal Controls (GAO-05-247R, Apr 27, 2005) Closed. Submission Processing revised the LSG 2.5 during 2007 to provide for periodic verification that couriers adhere to IRS policy while transporting taxpayer receipts and information. In IRS’s campuses, IRS ensures couriers sign, date, and note the time of pickup on Form 10160, Receipt for Transport of IRS Deposit. When the couriers drop off the deposit, IRS ensures Form 10160 is date and time stamped. Each campus reviews the form and notes any time discrepancies. Couriers are questioned if discrepancies are found and the information is noted in the Courier Incident Log. If inconsistencies are noted, the centers use their discretion to determine whether it is necessary to trail the couriers. Closed. We verified that IRS revised its LSG to include provisions for periodic verification that couriers adhere to IRS procedures for transporting taxpayer receipts and information. We also noted that procedures were established at the campuses involving the review of the returned Form 10160. Management Report: Improvements Needed in IRS’s Internal Controls (GAO-05-247R, Apr 27, 2005) Open. SB/SE revised IRM 5.1.2, 1.4.50, 4.20.3, and 4.20.4 to address this recommendation. The Director, Examination sent a memorandum to all Examination area directors on October 17, 2006 reminding them of the payment processes outlined in IRM 5.1.2, and requiring periodic reviews of payment processing procedures during their group operational reviews. Although SB/SE believes its current field payment processing procedures sufficiently addresses segregation of duties, it is currently conducting a risk assessment to identify potential weaknesses. Open. The status information provided by IRS did not clearly address segregation of duties within the SB/SE business units. When we issued this recommendation, we noted that (1) individuals responsible for preparing payment posting vouchers were the same individuals who recorded the information from those vouchers on the document transmittal and mailed those forms to the IRS service center and (2) there was no independent review or reconciliation of documents or payments before they were mailed by their preparer. During our recent visits to selected SB/SE units in March 2008, we found that this condition continued to exist. Duties involving the preparation of payment posting vouchers, document transmittal forms, and transmittal packages were not segregated. Employees informed us that there was no related requirement in the IRM. Management Report: Improvements Needed in IRS’s Internal Controls (GAO-05-247R, Apr 27, 2005) Open. W&I Field Assistance has taken a number of actions to emphasize the requirement for including a document transmittal form listing the Daily Report of Collection Activity forms in transmittal packages, and ensuring that they are reconciled and reviewed by the secretary, initial assistant representative, or manager in offices where these positions are located. Territory managers review and discuss the monthly Trends and Patterns reports with the group manager. Results of the reviews are forwarded to the area director. Operational reviews at all levels will be conducted annually to ensure that field offices comply with the requirement to prepare Form 3210, which lists all Forms 795 being shipped to the Submission Processing Center. Open. During our visits to several SB/SE business units, we found that a document transmittal form was not being used to transmit multiple Daily Report of Collection Activity forms to the respective service center campus. We will continue to assess IRS’s actions during our fiscal year 2008 audit. Beginning in March 2008 Collection began annual reviews of a sample of groups in each area to ensure the reviews described in IRM 1.4.50 are taking place. The results of the headquarters review will be documented in the area operational review. SB/SE is currently reviewing the language in IRM 1.4.50, Collection Group Manager, Territory Manager and Area Director Operational Aid to determine if clarification is needed. Management Report: Improvements Needed in IRS’s Internal Controls (GAO-05-247R, Apr 27, 2005) Closed. The procedures to prevent the generation or disbursement of refunds associated with AUR accounts are in place and included in IRM 3.8.45. Employees are required to conduct Integrated Data Retrieval System (IDRS) research after receiving an unidentified remittance to determine if there is an open account that allows for posting of the remittance. Submission Processing issued a Hot Topic on January 25, 2007, which added procedures to IRM 3.17.10 to check for cases that can be identified as an AUR payment and research IDRS for CP2000 Indicators: TC 922, “F” Freeze Code, and campus under reporter programs. Closed. We confirmed that IRS updated IRM 3.8.45 and IRM 3.17.10 to include the requirement that employees conduct IDRS research after receiving unidentified remittances. Management Report: Improvements Needed in IRS’s Internal Controls (GAO-05-247R, Apr 27, 2005) Closed. IRS issued its annual memorandum in August 2007 and received the annual list of authorized signatures by October 31, 2007, per IRM 3.17.79.3.5(4)(d). Submission Processing completed a sample review as part of the Monthly Security Review Checklist per 3.17.79.3.5(3), and completed a 100 percent review of the new annual list in November 2007. Open. During our fiscal year 2007 audit, we continued to find that the documentation requirements on memorandums, which are submitted to the manual refund units listing officials authorized to approve manual refunds, were incomplete. The annual memorandums issued, the annual list of authorized signatures, and the reviews performed noted in IRS’s response to this recommendation were subsequent to our fieldwork. We will follow up on IRS’s efforts to improve the documentation requirements during our fiscal year 2008 audit. Management Report: Improvements Needed in IRS’s Internal Controls (GAO-05-247R, Apr 27, 2005) Closed. IRS issued guidance on enforcing requirements for monitoring accounts and reviewing monitoring of accounts via Hot Topics on April 30, 2007 and again on July 13, 2007. Department managers provided subordinate managers and the employees refresher training using IRM 21.4.4 and 3.17.79 as reference materials to reinforce the monitoring requirements. Accounts Management completed refresher training at all campuses from January through May 2007. SB/SE Campus Compliance Services (CCS) continues to stress the importance of following all IRM procedures for the manual refunds. To ensure that the campuses continue to comply with all IRM provisions for manual refunds, the CCS directors are covering this topic in both filing & payment compliance and campus reporting compliance operations during their fiscal year 2008 campus reviews. The Taxpayer Advocate Service (TAS) has specific IRM requirements and controls for all employees and managers to monitor the posting of manual refunds to prevent duplicate refunds, and to document in the Taxpayer Advocate Management Information System (TAMIS) that all actions were completed. TAS also updated its manual refund training on March 12, 2007, re-emphasizing the requirement to monitor manual refunds to prevent duplicate refunds. Open. We verified that IRS issued the Hot Topics, which included providing managers and the employees training to reinforce monitoring requirements. However, during our fiscal year 2007 audit, we continued to find instances where the manual refund initiators, leads, or both did not monitor accounts to prevent duplicate refunds. We also found that some of the supervisors did not review the initiators’ or leads’ work to ensure that the monitoring of accounts was performed. We will continue to review IRS’s monitoring and review efforts during our fiscal year 2008 audit. Management Report: Improvements Needed in IRS’s Internal Controls (GAO-05-247R, Apr 27, 2005) Closed. Submission Processing (SP) issued guidance on enforcing requirements for monitoring accounts and reviewing monitoring of accounts via Hot Topics on April 30, 2007 and again on July 13, 2007. Department managers provided subordinate managers and the employees refresher training using IRM 21.4.4 and 3.17.79 as reference materials to reinforce the monitoring requirements. Accounts Management completed refresher training at all campuses from January through May 2007. IRS continues to use the Manual Refund Check Sheet and monthly security reviews to ensure compliance with IRM requirements, and these reviews are forwarded monthly to SP headquarters for consolidation and review by headquarters analysts and management. The SB/SE Campus Compliance Services continues to stress the importance of following all IRM procedures for the manual refunds. To ensure that the campuses continue to comply with all IRM provisions for manual refunds, the CCS directors are covering this topic in both filing & payment compliance and campus reporting compliance operations during their fiscal year 2008 campus reviews. The TAS has specific IRM requirements and controls for all employees and managers to monitor the posting of manual refunds until posted to prevent duplicate refunds, and to document in TAMIS that all actions were completed. TAS also updated its manual refund training on March 12, 2007, re-emphasizing the requirement to monitor manual refunds to prevent duplicate refunds. Open. We verified that IRS issued the Hot Topics, which included providing managers and employees training to reinforce the monitoring requirements. However, during our fiscal year 2007 audit, we continued to find instances where the requirement for documenting monitoring actions and documenting supervisory review were not enforced. We will continue to review IRS’s monitoring and review efforts during our fiscal year 2008 audit. Management Report: Improvements Needed in IRS’s Internal Controls (GAO-05-247R, Apr 27, 2005) Closed. IRS issued a Hot Topic on January 10, 2007 and again on March 30, 2007 as a reminder to ensure adherence to the existing process of enforcing the requirement that command code profiles be reviewed at least once annually. The Manual Refund Unit has included a signed and dated copy of the Command Code: RSTRK input (action performed through the use of IDRS in the file with the authorization memorandums to verify compliance with IRM 3.17.79.1.7. The Monthly Security Review Checklist was updated to add this review. Closed. During our fiscal year 2007 audit, we found that the requirements that command code profiles be reviewed at least once annually were enforced. Management Report: Improvements Needed in IRS’s Internal Controls (GAO-05-247R, Apr 27, 2005) Closed. IRS updated IRM 10.8.34 IDRS Security Handbook replacing the IDRS Security Law Enforcement Manual (LEM) 25.10.3. Section 10.8.34.5.3.1 (3) – (6) prohibits managers from being in the same IDRS unit as the employees they review. Section 10.8.34.8.2.2.5 (2) (f) requires managers to review reports monthly to ensure profiles have appropriate restrictions. Section 10.8.34.8.2.2.5 (2) (m) prohibits employees from reviewing their own profile or any other report data pertaining to themselves. IRS also updated the IDRS section of the annual FMFIA Self-Assessment Tool for Managers with item 4.50 requiring the quarterly review of IDRS user profiles in accordance with the IRM, and item 4.52 requiring managers to indicate that they completed a review of IDRS security reports and appropriate action has been taken to correct weaknesses. Closed. During our fiscal year 2007 audit, we found no instances of staff members reviewing their own command codes. We verified that IRS has updated IRM 10.8.34 IDRS Security Handbook, which has replaced IDRS Security LEM 25.10.3. We also verified that section 10.8.34.5.3.1 (3) – (6) prohibits managers from being in the same IDRS unit as the employees they oversee; section 10.8.34.8.2.2.5 (2) (f) requires managers to review reports monthly to ensure that profiles have appropriate restrictions; and section 10.8.34.8.2.2.5 (2) (m) prohibits employees from reviewing their own profile or any other report data pertaining to themselves. Management Report: Improvements Needed in IRS’s Internal Controls (GAO-06-543R, May 12, 2006) Open. W&I’s Accounts Management will confirm during the site operational reviews that managers are performing a follow-up and documentation acknowledgement of receipt of Form 3210. This item will be monitored during the fiscal year 2008 quarterly reviews. During fiscal year 2007, IRS completed conference calls prior to each directorates filing season readiness (FSR) certification, and will continue to provide directions during the fiscal year 2008 FSR conference calls to enforce management controls to complete, review, approve, and follow up on receipt of Forms 3210 in Accounts Management. Open. We will continue to evaluate IRS’s corrective actions during our fiscal year 2008 audit. Management Report: Improvements Needed in IRS’s Internal Controls (GAO-06-543R, May 12, 2006) Open. LMSB has issued procedures to the field on the responsibilities for using receipt transmittals. LMSB employees are reminded annually through executive memorandum of Form 3210 procedures and responsibilities. LMSB has also issued memos to the field to remind and reinforce the use of Form 3210 and establishment of a follow-up system for unacknowledged 3210s. A Closing Checklist for LMSB Cases which includes Form 3210 requirement reminders was created to assist LMSB employees when transmitting cases. LMSB Technical training has certified that Form 3210 procedures and responsibilities are included in revenue agent training materials. LMSB Human Capital Office has included the requirement that Industry Territory Managers review Form 3210 utilization and follow-up procedures during operational reviews in a memorandum dated December 13, 2006. Open. During our fiscal year 2007 audit, we identified instances at one SCC and four TACs where there was no system in place or evidence maintained to track acknowledged document transmittals. We will continue to evaluate IRS’s corrective actions during our fiscal year 2008 audit. IRMs 21.3.4.7 and 1.4.11.19.1 were revised during 2007 to provide procedures for requiring TACs to follow-up with SP centers when acknowledgements are not received within 10 days. Similarly, W&I Accounts Management revised IRMs 21.5.4.2 and 1.4.16 for this requirement. W&I Field Assistance will conduct operational reviews during and after filing season to monitor compliance, and is currently enhancing the existing TAC Security and Remittance Review Database to provide more comprehensive and quantitative data for analysis. Reviews conducted during 2007 showed that offices transmitting receipts have a system to track acknowledged copies of document transmittals. Planned reviews will enforce existing requirements for both organizations. Management Report: Improvements Needed in IRS’s Internal Controls (GAO-06-543R, May 12, 2006) Closed. LMSB has issued procedures to the field on the responsibilities for using receipt transmittals. LMSB employees are reminded annually through executive memorandum of Form 3210 procedures and responsibilities. LMSB has also issued memos to the field to remind and reinforce the use of Form 3210 and establishment of a follow-up system for unacknowledged 3210s. A closing checklist for LMSB cases was created to assist LMSB employees when transmitting cases. LMSB technical training has certified that Form 3210 procedures and responsibilities are included in revenue agent training materials. LMSB Human Capital Office has included the requirement that Industry Territory Managers review Form 3210 utilization and follow-up procedures during operational reviews in a memorandum dated December 13, 2006. Closed. During our fiscal year 2007 audit, we verified that the IRM includes procedures for LMSB and TE/GE units to follow up with the destination sites if remittance transmittals are not returned within 10 days or if all remittances were not marked with a distinctive checkmark. Also, we verified that the IRM contains Field Assistance (TAC) procedures for monitoring document transmittal acknowledgements. IRMs 21.3.4.7 and 1.4.11.19.1 were revised to provide procedures for requiring TACs to follow-up with SP centers when acknowledgements are not received within 10 days. IRM 1.4.11.19.1 Maintaining Form 795/795A Centralized Files provides instruction to document follow-up of unacknowledged document transmittals. To help reinforce the importance of the follow-up managers are required to attend classroom training. New and acting managers attended “Managing a TAC” training in 2007, and all managers attend a filing season readiness workshop. W&I Accounts Management revised IRMs 21.5.4.2 and 1.4.16 for this requirement. Planned reviews will enforce existing requirements. Management Report: Improvements Needed in IRS’s Internal Controls (GAO-06-543R, May 12, 2006) Closed. LMSB has issued procedures to the field on the responsibilities for using receipt transmittals. LMSB employees are reminded annually through executive memorandum of Form 3210 procedures and responsibilities. LMSB has also issued memos to the field to remind and reinforce the use of Form 3210 and establishment of a follow-up system for unacknowledged 3210s. A closing checklist for LMSB cases was created to assist LMSB employees when transmitting cases. LMSB technical training has certified that Form 3210 procedures and responsibilities are included in revenue agent training materials. LMSB Human Capital Office has included the requirement that Industry Territory Managers review Form 3210 utilization and follow-up procedures during operational reviews in a memorandum dated December 13, 2006. Open. During our fiscal year 2007 audit, we identified instances at seven TACs where there was no evidence of managerial review of document transmittals and one instance at one of five SCCs we visited in which one Refund Inquiry Unit manager did not document his review of the document transmittals. We will continue to evaluate IRS’s corrective actions during our fiscal year 2008 audit. IRM 1.4.11.19.5 Field Assistance Manager Review outlines instructions for managers to perform a minimum of two reviews per quarter per employee for payment processing and reconciliation procedures that include 3210 and 795 segregation of duties. A certification template has been created and placed in the IRM 1.4.11-10 for managers to confirm the review being conducted. To help reinforce the importance of the follow-up managers are required to attend classroom training. New and acting managers attended “Managing a TAC” training in 2007 and all managers will attend a Filing Season Readiness Workshop. During the training the requirement to conduct reviews and document results will be emphasized. W&I Accounts Management revised IRMs 21.5.4.2 and 1.4.16 for this requirement. Management Report: Improvements Needed in IRS’s Internal Controls (GAO-06-543R, May 12, 2006) Open. W&I Field Assistance (FA) and AWSS are currently implementing plans to correct security and control access issues in TACs. Field Assistance identified 120 locations and AWSS completed a detailed analysis on each one. Most locations were identified as space and design issues that require implementation of the TAC Model Design. For locations that were not space and design issues, AWSS provided the funding and implemented corrective actions. Most of the security and control access issues affect small TACs. FA and AWSS have developed a strategic TAC Model implementation plan and the new “Mini TAC Model Design” to correct security and control access issues in the remaining offices. Open. During our fiscal year 2007 audit, we identified instances at two TACs where the controlled area was not equipped with physical security controls adequate to deter and prevent unauthorized access to restricted areas or office space occupied by other IRS units. We will continue to evaluate IRS’s corrective actions during our fiscal year 2008 audit. Management Report: Improvements Needed in IRS’s Internal Controls (GAO-06-543R, May 12, 2006) Open. Effective November 27, 2007, FA managers are no longer required to document visits to outlying TACs by using a checklist. Instead, new processes were implemented that will better gauge managers’ adherence to remittance and physical security internal controls. The new process includes the following: (1) A performance commitment for each level of FA management (director, area director, territory manager (TM), and TAC manager). The commitment requires managers to conduct and document reviews to ensure protection of data and equipment and ensure compliance with remittance and security procedures. (2) Implementation of a tiered operational review approach. This will allow FA to determine if TAC managers are performing required reviews, conducting periodic visits, and focusing on actions that mitigate control weaknesses. Headquarters (HQ) reviews focus on the Area Offices, Area Office operational reviews focus on TMs, and TM reviews focus on each TAC manager. (3) TAC managers and TMs using DCIs to conduct physical security and remittance reviews. (4) TAC managers inputting review results into the TAC Security and Remittance Review Database. Database information will be analyzed at the headquarters level to identify top issues needing attention and to develop corrective actions. Open. IRS no longer requires TAC managers to document their visits to outlying TACs by using a checklist but has implemented new procedures involving FA managers at all levels to ensure that periodic reviews are performed and centrally documented. However, these changes occurred subsequent to our fiscal year 2007 audit. We will assess, during our fiscal year 2008 audit, whether the new procedures will effectively mitigate the risks that the previous recommendation of documenting supervisory visits was originally designed to address. Management Report: Improvements Needed in IRS’s Internal Controls (GAO-06-543R, May 12, 2006) Closed. In January 2006, the lockbox bank LSG 2.2.3.1.5 (6) was revised to add the requirement that banks maintain a logbook of incident reports and any applicable supporting documentation, and note corrective follow-up actions taken on each incident. IRS reinforced the requirement to maintain a logbook in sequential date order in the 2007 LSG. For SCCs, the requirement for all activations of alarms to be logged in security console logs has been on the Audit Management Checklist since June 2006. Interim IRM 1.16.12A Security Guard Service and Explosive Detection Dogs, issued in November 2006, states the requirement for the guard console blotter/event log to be annotated to record and document the guard force response to each alarm activation exercise. Draft IRM 10.2.14 Methods of Providing Protection (awaiting finalization) states, “A record of all instances involving the activation of any alarm regardless of the circumstances that may have caused the activation, must be documented in a Daily Activity Report/Event Log, or other log book and maintained for two-years.” The IRM 1.16 series is being changed to 10.2. Open. As of the time of our audit, the IRM changes were in draft, under review, and waiting to be finalized. During our fiscal year 2007 audit, we identified three instances at one of four lockbox banks we visited in which the activation of intrusion alarms were not recorded by security guards. We will continue to evaluate IRS’s corrective actions during our fiscal year 2008 audit. Management Report: Improvements Needed in IRS’s Internal Controls (GAO-06-543R, May 12, 2006) Closed. W&I issued a memorandum on April 5, 2007, to address this issue. Additionally, a letter was issued to the Director, Security and Law Enforcement of Homeland Security, to ensure that security officers are aware of their duties and responsibilities at key post of duty. Closed. We did not identify any instances where key posts of duty were left unattended by security guards during our fiscal year 2007 audit. Management Report: Improvements Needed in IRS’s Internal Controls (GAO-06-543R, May 12, 2006) Closed. IRS continues to use the Security Review Check List to document the effectiveness of the initial and final candling process, and to talk to employees who perform initial and final candling as part of the monthly campus and national office security reviews. Closed. We verified that IRS revised its Security Review Checklist to document, through observation, the effectiveness of the initial and final candling process. During our fiscal year 2007 audit, we non-statistically selected and reviewed several campus security review reports and found no instances where the reports did not document the number of employees who were questioned about their knowledge of candling procedures and the responses received from the employees. Management Report: Improvements Needed in IRS’s Internal Controls (GAO-06-543R, May 12, 2006) Closed. As of January 1, 2007, IRS revised LSG section 2.2.3.1(6) k to restrict access of all delivery personnel. The IRS Lockbox Security Review Team observed the lockbox site’s process of delivery personnel while on-site to ensure compliance with the LSG requirement. In addition, section 2.2.2.13.1 (CCTV Cameras) (2)g of the LSG was revised to add that cameras must capture images of all persons entering and exiting perimeter doors and other critical ingress/egress points, including but not limited to the computer room and closets containing main utility feeds. AWSS continues to complete compliance reviews, risk assessments, and quarterly audit management checklist reviews. Since April 2006, the service center campuses have been providing quarterly verification that all guards have been reminded to inspect and scrutinize all badges of personnel accessing IRS facilities. During the past year, IRS has accessed closed- circuit television (CCTV) capabilities and is currently taking corrective actions to allow the unobstructed surveillance of campus fence lines and the facility perimeters. Closed. We verified that IRS refined the scope and nature of its periodic security reviews by (1) performing periodic tests of whether lockbox personnel are only allowing authorized individuals to access the facility and verifying that CCTVs are capturing key areas and (2) conducting quarterly assessments of the integrity of perimeter access controls. Management Report: Improvements Needed in IRS’s Internal Controls (GAO-06-543R, May 12, 2006) Closed. IRM 1.16.12 was revised and documents the requirements to test, document, report and follow-up on service center campus intrusion detection alarms. Physical Security area directors began implementing the new procedures in January 2007. Test results are rolled-up to PPPO for quarterly reports for upper management. Open. IRS officials informed us that the IRM section is in draft and currently in the review stage. We will follow up on the finalization of this IRM and continue to assess IRS’s actions during our fiscal year 2008 audit. Management Report: Improvements Needed in IRS’s Internal Controls (GAO-06-543R, May 12, 2006) Closed. This recommendation remains closed, as IRS reported in fiscal year 2006. AWSS reports that the re-engineered process is working as intended. Aging record reports are monitored monthly, and AWSS staff follows up on disposal actions to identify issues or problems. Closed. During fiscal year 2006, IRS re-engineered the P&E asset retirement and disposal process. The new process generates exception reports that enable management to monitor the aging of transactions during the disposal process. Our fiscal year 2007 review of P&E internal controls showed that anomaly reports are now being generated when an asset remains in a disposal code for an extended period of time. Management Report: Improvements Needed in IRS’s Internal Controls (GAO-06-543R, May 12, 2006) Closed. This recommendation remains closed as IRS reported in fiscal year 2006. AWSS reports that the reengineered process is working as intended. Aging record reports are monitored monthly and AWSS staff follows up on disposal actions to identify issues or problems. Open. During fiscal year 2006, IRS re- engineered the P&E asset retirement and disposal process. The new process generates exception reports that enable management to monitor the aging of transactions during the disposal process. While our fiscal year 2007 review of P&E internal controls showed that anomaly reports are now being generated when an asset remains in a disposal code for an extended period of time, our audit testing revealed that disposals are still not being recorded in a timely manner. Our inquiries of IRS management revealed that management is not always reviewing the anomaly reports as required by the reengineered process. We will continue to evaluate IRS’s corrective actions during our fiscal year 2008 audit. Management Report: Improvements Needed in IRS’s Internal Controls (GAO-07-689R, May 11, 2007) Open. IRS is currently evaluating this recommendation to determine the best means to safeguard (e.g. encryption) and/or retain taxpayer data. To assist in the evaluation process, IRS plans to complete a cost-benefit analysis to determine the best solution. The tentative date for completion of the cost-benefit analysis and any resulting solution is September 30, 2008. In the interim, to mitigate the risk of losing personally identifiable information (PII), IRS plans to incorporate specific guidelines in the calendar year 2008 LSG to clearly require that all lockbox sites store backup media containing PII in locked containers. The calendar year 2008 LSG was issued on December 19, 2007. Open. During our fiscal year 2007 audit, we identified instances at all four lockbox banks we visited where backup data tapes containing federal taxpayer information were not encrypted. We will evaluate IRS’s planned corrective actions during our fiscal year 2008 audit. Management Report: Improvements Needed in IRS’s Internal Controls (GAO-07-689R, May 11, 2007) Open. IRS is currently evaluating this recommendation to determine the best means to safeguard (e.g. encryption) and/or retain taxpayer data. To assist in the evaluation process, IRS plans to complete a cost- benefit analysis to determine the best solution. The tentative date for completion of the cost-benefit analysis and any resulting solution is September 30, 2008. In the interim, to mitigate the risk of losing PII, IRS plans to incorporate specific guidelines in the calendar year 2008 LSG to clearly require that all lockbox sites store backup media containing PII in locked containers. The calendar year 2008 LSG was issued in December 19, 2007. Open. During our fiscal year 2007 audit, we identified instances at all four lockbox banks we visited where backup media containing federal taxpayer information was not stored at an off-site location. We will evaluate IRS’s planned corrective actions during our fiscal year 2008 audit. Management Report: Improvements Needed in IRS’s Internal Controls (GAO-07-689R, May 11, 2007) Open. IRS is currently evaluating this recommendation to determine the best means to safeguard (e.g. encryption) and/or retain taxpayer data. To assist in the evaluation process, IRS plans to complete a cost-benefit analysis to determine the best solution. The tentative date for completion of the cost-benefit analysis and any resulting solution is September 30, 2008. In the interim, to mitigate the risk of losing PII, IRS plans to incorporate specific guidelines in the calendar year 2008 LSG to clearly require all lockbox sites store backup media containing PII in locked containers. The calendar year 2008 LSG was issued in December 19, 2007. For the Lockbox Electronic Network (LEN), it electronically transmits all transactional data, including federal taxpayer information, from the lockbox banks to IRS via the Martinsburg Computing Center, which is currently going to the Tennessee Computing Center. The electronic transmission securely transmits the data through the use of Virtual Private Network devices like the devices used at the computing centers which will encrypt the data as it is being transmitted. Effective March 2008, the LEN is being used to transmit the data to the SP centers. Cartridges will only be used in the event of an emergency or contingency situation where the LEN transmission fails. Open. We will continue to evaluate IRS’s corrective actions during our fiscal year 2008 audit. Management Report: Improvements Needed in IRS’s Internal Controls (GAO-07-689R, May 11, 2007) Open. All SCCs conducted an assessment of the CCTV systems concerning unobstructed views of fence lines and perimeter, and identified problems that were documented in an action plan developed in May 2007 and completed by February 2008. Open. During our fiscal year 2007 audit, we identified instances at three of five SCCs we visited where security cameras did not provide an unobstructed view of the entire perimeter of the facility. We will evaluate IRS’s corrective actions during our fiscal year 2008 audit. Management Report: Improvements Needed in IRS’s Internal Controls (GAO-07-689R, May 11, 2007) Closed. Procedures were implemented requiring Physical Security analysts to document issues/problems during quarterly reviews, establish corrective action due dates, and track progress to ensure implementation of all corrective actions. The new procedures and reporting formats were implemented in June 2007. Compliance with the procedures is monitored during Physical Security area director operational reviews and random sampling by PPPO. Closed. We verified that IRS revised its procedures and reporting formats to require its Physical Security analysts to (1) document concerns identified during quarterly physical security reviews, (2) establish corrective action implementation dates, and (3) track those actions to ensure and monitor implementation. Management Report: Improvements Needed in IRS’s Internal Controls (GAO-07-689R, May 11, 2007) Closed. Employees have been instructed to recognize only IRM 3.17.79 and IRM 21 as the official authoritative guidance for processing manual refunds. Submission Processing (SP) conducted a conference call with designated campus planning and analysis staff, SP Headquarters staff and the IRM owner for 21.4.4, and issued a Hot Topic on April 30, 2007. SP also provided sites with this information and contacted authors of IRM 21.4.4 and IRM 4.4.19. Accounts Management and SB/SE Compliance will review the IRM to ensure that instructions are correct and that related training course modules are correct. Closed. IRS’s action satisfies the intent of this recommendation. Management Report: Improvements Needed in IRS’s Internal Controls (GAO-07-689R, May 11, 2007) Closed. W&I reinforced IRM 3.17.79.0 and 21.4.4 as the official authoritative guidance for processing manual refunds. SP provided sites with this information and also contacted authors of IRM 21.4.4 and IRM 4.4.19. The Account Management analyst and the SB/SE Compliance analyst will review the IRM to ensure that instructions are correct and that related training course modules are accurate. Closed. IRS’s action satisfies the intent of this recommendation. Management Report: Improvements Needed in IRS’s Internal Controls (GAO-07-689R, May 11, 2007) Open. All W&I business functions conducted training by July 2007, except for Compliance, which is planned to be completed by April 2008. SP management reviews history sheets annotated with taxpayer identification numbers, tax period, transaction code, date, and initials of initiator. SP conducted team refresher training by July 30, 2007. This refresher training will also be included in fiscal year 2008 continuing professional education. A manual refunds refresher course was distributed by the Accounts Management Program Management/Process Assurance and training was completed by June 2007. The course emphasized the required monitoring of manual refunds and the documentation of monitoring actions. Accounts Management will conduct additional training by July 15, 2008, for employees who initiate manual refunds. Open. We will review IRS’s records of training during our fiscal year 2008 audit. Management Report: Improvements Needed in IRS’s Internal Controls (GAO-07-689R, May 11, 2007) Closed. IRS submitted a work request on June 26, 2007, to update its computer programs to check for outstanding liabilities associated with both the primary and secondary Social Security numbers on a joint tax return and offsetting to any outstanding TFRP liability before issuance of a refund. The programming change was implemented on January 20, 2008. Open. The programming change was initiated after our fiscal year 2007 audit was complete. We will evaluate the effectiveness of IRS’s corrective action during our fiscal year 2008 audit. Management Report: Improvements Needed in IRS’s Internal Controls (GAO-07-689R, May 11, 2007) Closed. IRS counsel said that it was acceptable for the revenue officer to also freeze the refund of any spouse at the time of approval of recommendation for a TFRP assessment or at the time the TFRP assessment is made, Therefore, IRS’s SB/SE issued interim guidance on July 23, 2007, for input of transaction code 130 to freeze potential individual master file refunds for all individuals determined responsible for the TFRP. Closed. Based on our review of the IRS interim guidance issued on July 23, 2007, we verified that IRS instructed revenue officers making TFRP assessments to research whether responsible officers are filing jointly with their spouses and to place refund freezes on the joint accounts. Management Report: Improvements Needed in IRS’s Internal Controls (GAO-07-689R, May 11, 2007) Closed. IRS implemented a system change in January 2007 to correct the penalty calculation program. Open. We will evaluate the effectiveness of IRS’s corrective action during our fiscal year 2008 audit. Management Report: Improvements Needed in IRS’s Internal Controls (GAO-07-689R, May 11, 2007) Closed. IRS implemented a system change in January 2007 that corrected debit balance taxpayer accounts affected by the programming error. Open. We will evaluate the effectiveness of IRS’s corrective action during our fiscal year 2008 audit. Management Report: Improvements Needed in IRS’s Internal Controls (GAO-07-689R, May 11, 2007) Open. The Deputy Commissioner for Services and Enforcement issued a memorandum to all functions titled “Service wide Action to Prevent Late Lien Releases,” in January 2007. The memorandum directed manual lien releases when systemic processes do not release liens. Based on the memorandum, IRS revised several IRM sections. In addition, IRS plans to revise IRM 5.1.2 by May 2008 to include all four elements contained in this recommendation. Open. During our fiscal year 2007 audit, we identified issues that resulted in the untimely release of a tax lien. We will continue to review IRS’s corrective actions to address this issue during our fiscal year 2008 audit. Management Report: Improvements Needed in IRS’s Internal Controls (GAO-07-689R, May 11, 2007) Open. IRS completed programming changes in January 2007 that allow lien releases regardless of freeze codes. In addition, the Deputy Commissioner for Services and Enforcement issued a memorandum to all functions titled “Service wide Action to Prevent Late Lien Releases,” in January 2007. The memorandum directed manual lien releases when systemic processes do not release liens. Based on the memorandum IRS revised several IRM sections. Finally, IRS plans to revise IRM 5.1.2 by May 2008 to include all of the elements contained in this recommendation. Open. During our fiscal year 2007 audit, we identified issues that resulted in the untimely release of a tax lien. We will continue to review IRS’s corrective actions to address this issue during our fiscal year 2008 audit. Management Report: Improvements Needed in IRS’s Internal Controls (GAO-07-689R, May 11, 2007) Open. In order to facilitate timely lien releases, IRS put a new “My Eureka” report in place for the Centralized Insolvency Office. IRS generates and resolves issues on this report weekly. IRS revised IRM 5.9.17.11.6 in March 2007 to reference the report and request manual lien releases. Campus Compliance analysts conduct reviews quarterly to ensure appropriate actions are taken. However, IRS’s fiscal year 2007 OMB Circular No. A-123 review of its lien release process identified two lien release errors associated with bankruptcy discharges. Therefore, IRS has added new action items to the Lien Release Action Plan, to establish new controls and oversight by management in CIO and Field Insolvency to ensure that IRM guidelines are followed and new procedures for Field Insolvency. In addition, IRS identified an instance where Field Insolvency failed to release a lien after an Exempt/Abandoned Asset review. Therefore, Collection Policy will review Field Insolvency by June 30, 2008, and consider the addition of new corrective actions to reduce lien errors based on this issue. Open. During our fiscal year 2007 audit, we identified issues that resulted in the untimely release of a tax lien. We will continue to review IRS’s corrective actions to address this issue during our fiscal year 2008 audit. Management Report: Improvements Needed in IRS’s Internal Controls (GAO-07-689R, May 11, 2007) Closed. The IRM for the Centralized Lien Unit (CLU) provides specific direction to date stamp and maintain billing support vouchers (BSVs) as evidence of timely releases of federal tax liens. In November 2006 CLU began a new process of scanning BSVs, and associating BSVs with Specific Lien Identification (SLID) numbers in order to ensure that BSVs are retrievable and show that liens were timely released. IRS trained employees on this process as it was rolled out. In May 2007 IRS completed the 2007 OMB Circular No. A-123 review on the timeliness of lien releases. The review found that BSVs were stamped appropriately in all cases reviewed. Closed. In our review of IRS’s fiscal year 2007 OMB circular No. A-123 lien testing results, we verified that IRS was able obtain the date stamped billing vouchers for all of its sample items. Management Report: Improvements Needed in IRS’s Internal Controls (GAO-07-689R, May 11, 2007) Closed. The collection activity reports (CAR) capture data each month on installment agreement activity. The number of installment agreements, number of user fees paid and user fee dollar amounts are extracted from the installment agreement reports. These reports are utilized by Headquarters to conduct month-to-month and year- to-year comparisons for trend analysis. Headquarters will monitor collections on the CAR and balance those collections against what is projected and what is in the financial system, and use historical trends to identify issues. Open. IRS’s actions to monitor and analyze installment agreement user fee collections at headquarters were initiated after our fiscal year 2007 audit was completed. We will review and evaluate IRS’s efforts to monitor installment agreement user fee activity during our fiscal year 2008 audit. Management Report: Improvements Needed in IRS’s Internal Controls (GAO-07-689R, May 11, 2007) Open. A sweep process that collects paid fees and records them in the user fee account has been established. Effective January 2008, the sweep is run weekly to ensure accurate and more timely accounting of fee dollars. Open. The action described in IRS’s response does not fully ensure that recorded installment agreement user fees correctly reflect user fees earned and collected from taxpayers because it is not designed for that purpose. IRS’s sweep (recovery) process is designed to identify and correct for unrecorded user fees collected with the initial installment agreement payment but incorrectly posted against the taxpayer’s debt (tax module). We will continue to review and evaluate IRS’s efforts to address issues related to installment agreement user fees during our fiscal year 2008 audit. Management Report: Improvements Needed in IRS’s Internal Controls (GAO-07-689R, May 11, 2007) Closed. Steps to ensure appropriate assessment and collection of user fees are already in place. The user fee category on the Installment Agreement Accounts Listing (IAAL) compares unpaid and overpaid user fee money and makes adjustments accordingly. The IAAL for W&I is consolidated at one site. For both W&I and SBSE, the IAAL is subjected to Planning and Analysis Support, Managerial, Operations and Headquarters review. Open. IRS was in the process of updating its operating procedures to account for and record new installment agreement user fee amounts when we completed our fiscal year 2007 audit. We will review and evaluate IRS’s use of the IAAL and Managerial, Operations, and Headquarters review processes during our fiscal year 2008 audit. Management Report: Improvements Needed in IRS’s Internal Controls (GAO-07-689R, May 11, 2007) Open. IRS is identifying locations that need additional secured storage space and will obtain the necessary space as appropriate. Scheduled completion date is October 1, 2009. Processes and procedures are in place for business units to request space, either secured or non- secured. AWSS negotiated processes and procedures with the business units that are now part of AWSS’s Senior Commissioner Representative Handbook. Business units needing secured space must follow established guidance. Also, processes have been set for business units to approve and fund their space requests. Open. IRS has implemented a plan to obtain additional secured storage space as deemed necessary, with a scheduled completion date of October 1, 2009. We will monitor IRS’s corrective actions during our fiscal years 2008 and 2009 audits. Management Report: Improvements Needed in IRS’s Internal Controls (GAO-07-689R, May 11, 2007) Closed. IRS updated the IRM in September 2007 and sent a reminder to those with acquisition authority about the IRS acquisition procedures developed in December 2002. The update included reference to Policy and Procedures Memorandum No. 46.5, “Receipt, Quality Assurance and Acceptance,” reiterating requirements for separation of duties. Open. Our fiscal year 2007 review of internal controls over property and equipment revealed that at least one IRS employee was permitted to place orders with vendors and perform receipt and acceptance functions when the orders were delivered. We will continue to evaluate IRS’s corrective actions during our fiscal year 2008 audit. Management Report: IRS’s First Year Implementation of the Requirements of the Office of Management and Budget’s (OMB) Revised Circular No. A-123 (GAO-07- 692R, May 18, 2007) Open. In the fiscal year 2007 A-123 cycle, IRS expanded its A-123 guidance, improved review procedures, and improved training. As IRS prepares for the fiscal year 2008 A-123 cycle, it plans to continue to further enhance its in- house training and has instituted procedures to address the clarity and completeness of its explanations. Open. We will follow up during future audits to assess IRS’s progress in implementing its OMB Circular No. A- 123 review procedures. Management Report: IRS’s First Year Implementation of the Requirements of the Office of Management and Budget’s (OMB) Revised Circular No. A-123 (GAO-07- 692R, May 18, 2007) Open. In fiscal year 2007, IRS made progress on this recommendation by adding a requirement to test plan templates to document audits reviewed. During the fiscal year 2008 planning phase, IRS plans to fully document the existing reviews and audits. Open. We will follow up during future audits to assess IRS’s progress in implementing its OMB Circular No. A- 123 review procedures. Management Report: IRS’s First Year Implementation of the Requirements of the Office of Management and Budget’s (OMB) Revised Circular No. A-123 (GAO-07- 692R, May 18, 2007) Open. IRS plans to continue to work with the Department of the Treasury and GAO to fully implement OMB Circular No. A-123 requirements for evaluating controls over information technology relating to financial statement reporting. Open. We will follow up during future audits to assess IRS’s progress in implementing its OMB Circular No. A- 123 review procedures. Management Report: IRS’s First Year Implementation of the Requirements of the Office of Management and Budget’s (OMB) Revised Circular No. A-123 (GAO-07- 692R, May 18, 2007) Open. IRS is piloting a limited set of fiscal year 2008 test plans, which include an analysis of the design for each transaction control set tested, with full implementation expected in the fiscal year 2009 A-123 cycle. Open. We will follow up during future audits to assess IRS’s progress in implementing its OMB Circular No. A- 123 review procedures. Management Report: IRS’s First Year Implementation of the Requirements of the Office of Management and Budget’s (OMB) Revised Circular No. A-123 (GAO-07- 692R, May 18, 2007) Open. In fiscal year 2007, IRS established an internal crosswalk between A-123 tests and laws and regulations significant to financial reporting. IRS plans to further refine this linkage for the fiscal year 2008 A-123 process. Open. We will follow up during future audits to assess IRS’s progress in implementing its OMB Circular No. A- 123 review procedures. Management Report: IRS’s First Year Implementation of the Requirements of the Office of Management and Budget’s (OMB) Revised Circular No. A-123 (GAO-07- 692R, May 18, 2007) Open. Although implementation of such procedures is not necessary until elimination of the outstanding material weaknesses, IRS plans to develop follow-up procedures that provide assurance for the last 3 months of the fiscal year. Open. We will follow up during future audits to assess IRS’s progress in implementing its OMB Circular No. A- 123 review procedures. Management Report: IRS’s First Year Implementation of the Requirements of the Office of Management and Budget’s (OMB) Revised Circular No. A-123 (GAO-07- 692R, May 18, 2007) Open. IRS has enhanced training at the beginning of each A-123 cycle to include an external course designed for financial auditors on preparing workpapers. IRS evaluated results from fiscal year 2007 and has incorporated improvements to the fiscal year 2008 training to ensure its curriculum addresses issues in testing approach, testing methodology, workpaper reviews, and lessons learned. Open. We will follow up during future audits to assess IRS’s progress in implementing its OMB Circular No. A- 123 review procedures. Management Report: Improvements Needed in IRS’s Internal Controls (GAO-08-368R, June 2008) Because this is a recent recommendation, GAO did not obtain information on IRS’s status in addressing it. Open: This is a recent recommendation. We will review IRS’s corrective actions during future audits. Management Report: Improvements Needed in IRS’s Internal Controls (GAO-08-368R, June 2008) Because this is a recent recommendation, GAO did not obtain information on IRS’s status in addressing it. Open: This is a recent recommendation. We will review IRS’s corrective actions during future audits. Management Report: Improvements Needed in IRS’s Internal Controls (GAO-08-368R, June 2008) Because this is a recent recommendation, GAO did not obtain information on IRS’s status in addressing it. Open: This is a recent recommendation. We will review IRS’s corrective actions during future audits. Management Report: Improvements Needed in IRS’s Internal Controls (GAO-08-368R, June 2008) Because this is a recent recommendation, GAO did not obtain information on IRS’s status in addressing it. Open: This is a recent recommendation. We will review IRS’s corrective actions during future audits. Management Report: Improvements Needed in IRS’s Internal Controls (GAO-08-368R, June 2008) Because this is a recent recommendation, GAO did not obtain information on IRS’s status in addressing it. Open: This is a recent recommendation. We will review IRS’s corrective actions during future audits. Management Report: Improvements Needed in IRS’s Internal Controls (GAO-08-368R, June 2008) Because this is a recent recommendation, GAO did not obtain information on IRS’s status in addressing it. Open: This is a recent recommendation. We will review IRS’s corrective actions during future audits. Management Report: Improvements Needed in IRS’s Internal Controls (GAO-08-368R, June 2008) Because this is a recent recommendation, GAO did not obtain information on IRS’s status in addressing it. Open: This is a recent recommendation. We will review IRS’s corrective actions during future audits. Management Report: Improvements Needed in IRS’s Internal Controls (GAO-08-368R, June 2008) Because this is a recent recommendation, GAO did not obtain information on IRS’s status in addressing it. Open: This is a recent recommendation. We will review IRS’s corrective actions during future audits. Management Report: Improvements Needed in IRS’s Internal Controls (GAO-08-368R, June 2008) Because this is a recent recommendation, GAO did not obtain information on IRS’s status in addressing it. Open: This is a recent recommendation. We will review IRS’s corrective actions during future audits. Management Report: Improvements Needed in IRS’s Internal Controls (GAO-08-368R, June 2008) Because this is a recent recommendation, GAO did not obtain information on IRS’s status in addressing it. Open: This is a recent recommendation. We will review IRS’s corrective actions during future audits. Management Report: Improvements Needed in IRS’s Internal Controls (GAO-08-368R, June 2008) Because this is a recent recommendation, GAO did not obtain information on IRS’s status in addressing it. Open: This is a recent recommendation. We will review IRS’s corrective actions during future audits. Management Report: Improvements Needed in IRS’s Internal Controls (GAO-08-368R, June 2008) Because this is a recent recommendation, GAO did not obtain information on IRS’s status in addressing it. Open: This is a recent recommendation. We will review IRS’s corrective actions during future audits. Management Report: Improvements Needed in IRS’s Internal Controls (GAO-08-368R, June 2008) Because this is a recent recommendation, GAO did not obtain information on IRS’s status in addressing it. Open: This is a recent recommendation. We will review IRS’s corrective actions during future audits. Management Report: Improvements Needed in IRS’s Internal Controls (GAO-08-368R, June 2008) Because this is a recent recommendation, GAO did not obtain information on IRS’s status in addressing it. Open: This is a recent recommendation. We will review IRS’s corrective actions during future audits. Management Report: Improvements Needed in IRS’s Internal Controls (GAO-08-368R, June 2008) Because this is a recent recommendation, GAO did not obtain information on IRS’s status in addressing it. Open: This is a recent recommendation. We will review IRS’s corrective actions during future audits. Management Report: Improvements Needed in IRS’s Internal Controls (GAO-08-368R, June 2008) Because this is a recent recommendation, GAO did not obtain information on IRS’s status in addressing it. Open: This is a recent recommendation. We will review IRS’s corrective actions during future audits. Management Report: Improvements Needed in IRS’s Internal Controls (GAO-08-368R, June 2008) Because this is a recent recommendation, GAO did not obtain information on IRS’s status in addressing it. Open: This is a recent recommendation. We will review IRS’s corrective actions during future audits. Management Report: Improvements Needed in IRS’s Internal Controls (GAO-08-368R, June 2008) Because this is a recent recommendation, GAO did not obtain information on IRS’s status in addressing it. Open: This is a recent recommendation. We will review IRS’s corrective actions during future audits. Management Report: Improvements Needed in IRS’s Internal Controls (GAO-08-368R, June 2008) Because this is a recent recommendation, GAO did not obtain information on IRS’s status in addressing it. Open: This is a recent recommendation. We will review IRS’s corrective actions during future audits. Management Report: Improvements Needed in IRS’s Internal Controls (GAO-08-368R, June 2008) Because this is a recent recommendation, GAO did not obtain information on IRS’s status in addressing it. Open: This is a recent recommendation. We will review IRS’s corrective actions during future audits. Management Report: Improvements Needed in IRS’s Internal Controls (GAO-08-368R, June 2008) Because this is a recent recommendation, GAO did not obtain information on IRS’s status in addressing it. Open: This is a recent recommendation. We will review IRS’s corrective actions during future audits. Management Report: Improvements Needed in IRS’s Internal Controls (GAO-08-368R, June 2008) Because this is a recent recommendation, GAO did not obtain information on IRS’s status in addressing it. Open: This is a recent recommendation. We will review IRS’s corrective actions during future audits. Management Report: Improvements Needed in IRS’s Internal Controls (GAO-08-368R, June 2008) Because this is a recent recommendation, GAO did not obtain information on IRS’s status in addressing it. Open: This is a recent recommendation. We will review IRS’s corrective actions during future audits. Management Report: Improvements Needed in IRS’s Internal Controls (GAO-08-368R, June 2008) Because this is a recent recommendation, GAO did not obtain information on IRS’s status in addressing it. Open: This is a recent recommendation. We will review IRS’s corrective actions during future audits. IRS does not have financial management systems adequate to enable it to accurately generate and report, in a timely manner, the information needed to both prepare financial statements and manage operations on an ongoing basis. To overcome these systemic deficiencies with respect to preparation of its annual financial statements, IRS was compelled to employ extensive compensating procedures. Specifically, IRS (1) did not have an adequate general ledger system for tax-related transactions, and (2) was unable to readily determine the costs of its activities and programs and did not have cost-based performance information to assist in making or justifying resource allocation decisions. As a result, IRS does not have real-time data needed to assist in managing operations on a day-to-day basis and to provide an informed basis for making or justifying resource allocation decisions. IRS has serious internal control issues that affected its management of unpaid tax assessments. Specifically, (1) IRS lacked a subsidiary ledger for unpaid tax assessments that would allow it to produce accurate, useful, and timely information with which to manage and report externally, and (2) IRS experienced errors and delays in recording taxpayer information, payments, and other activities. IRS does not, at present, have agencywide cost-benefit information, related cost-based performance measures, or a systematic process for ensuring it is using its resources to maximize its ability to collect what is owed and minimize the disbursements of improper tax refunds in the context of its overall mission and responsibilities. These deficiencies inhibit IRS’s ability to appropriately assess and routinely monitor the relative merits of its various initiatives and adjust its strategies as needed. This, in turn, can significantly affect both the level of tax revenue collected and the magnitude of improper refunds paid. Significant weaknesses in information security controls continue to threaten the confidentiality, integrity, and availability of IRS’s financial processing systems and information. IRS has weaknesses in controls for protecting access to systems and information, as well as other information security controls that affect key financial systems—particularly IFS and IRACS. For example, sensitive information, including user identification, passwords, and software code for mission-critical applications, was accessible on an internal Web site to anyone who could connect to IRS’s internal network—without having to log in to the network. The information gained through this access could be used to alter data flowing to and from IFS. In addition, configuration flaws in the mainframe allowed users unrestricted access to all programs and data on the mainframe, including IRACS. Because this access was not controlled by the security system, no security violation logs would be created, reducing IRS’s ability to detect unauthorized access. Weaknesses also existed in other areas, such as protecting against unauthorized physical access to sensitive computer resources and patching servers to protect against known vulnerabilities. Material Weakness: Controls over Information Systems Security Although IRS has made some progress in addressing previous weaknesses we identified in its information systems security controls and physical security controls, these and new weaknesses in information systems security continue to impair IRS’s ability to ensure the confidentiality, integrity, and availability of financial and tax-processing systems. As of January 2008, there were 76 open recommendations from our information systems security work designed to help IRS improve its information systems security controls. Our recommendations resulting from our information systems security work are reported separately and are not included in this report primarily because of the sensitive nature of some of those issues. IRS manually processes hundreds of billions of dollars of hard-copy taxpayer receipts and related taxpayer information at its service center campuses, field office taxpayer assistance centers, other field office units, and commercial lockbox banks. However, we have identified weaknesses in IRS’s controls designed to safeguard these taxpayer receipts and information which increase the risk that receipts in the form of checks, cash, and the like could be misappropriated or that the information could be compromised. IRS did not always release the applicable federal tax lien within 30 days of the tax liability being either paid off or abated, as required by the Internal Revenue Code. The Internal Revenue Code grants IRS the power to file a lien against the property of any taxpayer who neglects or refuses to pay all assessed federal taxes. The lien serves to protect the interest of the federal government and as a public notice to current and potential creditors of the government’s interest in the taxpayer’s property. Under section 6325 of the Internal Revenue Code, IRS is required to release federal tax liens within 30 days after the date the tax liability is satisfied or has become legally unenforceable or the Secretary of the Treasury has accepted a bond for the assessed tax. The recommendations listed below do not rise to the level of a significant deficiency or a material weakness. However, these issues do represent weaknesses in various aspects of IRS's control environment that should be addressed. In addition to the contact named above, the following individuals made major contributions to this report: William J. Cordrey, Assistant Director; Gloria Cano; Stephanie Chen; Nina Crocker; John Davis; Charles Ego; Charles Fox; Valerie Freeman; Ted Hu; Delores Lee; John Sawyer; Angel Sharma; Peggy Smith; Cynthia Teddleton; and Gary Wiggins. | In its role as the nation's tax collector, the Internal Revenue Service (IRS) has a demanding responsibility in annually collecting trillions of dollars in taxes, processing hundreds of millions of tax and information returns, and enforcing the nation's tax laws. Since its first audit of IRS's financial statements in fiscal year 1992, GAO has identified a number of weaknesses in IRS's financial management operations. In related reports, GAO has recommended corrective action to address those weaknesses. Each year, as part of the annual audit of IRS's financial statements, GAO not only makes recommendations to address any new weaknesses identified but also follows up on the status of weaknesses GAO identified in previous years' audits. The purpose of this report is to (1) assist IRS management in tracking the status of audit recommendations and actions needed to fully address them and (2) demonstrate how the recommendations relate to control activities central to IRS's mission and goals. IRS has made significant progress in improving its internal controls and financial management since its first financial statement audit in 1992, as evidenced by 8 consecutive years of clean audit opinions on its financial statements, the resolution of several material internal control weaknesses, and actions resulting in the closure of over 200 financial management recommendations. This progress has been the result of hard work throughout the agency and sustained commitment at the top levels of the agency. However, IRS still faces financial management challenges. At the beginning of GAO's audit of IRS's fiscal year 2007 financial statements, 75 financial management-related recommendations from prior audits remained open because IRS had not fully addressed the issues that gave rise to them. During the fiscal year 2007 financial audit, IRS took actions that enabled GAO to close 18 of those recommendations. At the same time, GAO identified additional internal control issues resulting in 24 new recommendations. In total, 81 recommendations remain open at the end of fiscal 2007. To assist IRS in evaluating and improving internal controls, GAO categorized the 81 open recommendations by various internal control activities, which, in turn, were grouped into three broad control categories. The continued existence of internal control weaknesses that gave rise to these recommendations represents a serious obstacle that IRS needs to overcome. Effective implementation of GAO's recommendations can greatly assist IRS in improving its internal controls and achieving sound financial management and can help enable it to more effectively carry out its tax administration responsibilities. Most can be addressed in the short term (the next 2 years). However, a few recommendations, particularly those concerning IRS's automated systems, are complex and will require several more years to fully and effectively address. |
State is authorized to designate acceptance facilities—in addition to its own passport offices—to provide passport execution services to the American public. The majority of passport applications are submitted at acceptance facilities nationwide; these include post offices; federal, state, and probate courts; some public libraries and public universities; and a variety of other county, township, and municipal offices. Agents at these facilities are responsible for, among other things, verifying that the applicant’s identification documents (driver’s license, for example) and photo are authentic and match the person standing before the agent. Acceptance facilities retain the execution fee for this service. Figure 1 depicts the execution process. State reported that there were 8,583 active acceptance facilities nationwide as of September 30, 2006 (see table 1)—post offices comprised almost two-thirds of all active facilities. According to consular officials, for fiscal year 2006, post offices executed about 72 percent of applications for minors and for adults applying for the first time; nonpostal facilities executed about 25 percent. The remainder (3 percent) were executed by 14 of State’s passport offices. In recent years, State has expanded its network of acceptance facilities to accommodate increasing passport demand. We reported previously that there were approximately 7,000 acceptance facilities as of March 2005. In fiscal year 2006, State added 753 new locations to its network of acceptance facilities, of which 636 are post offices, and 117 are nonpostal facilities. State requires that acceptance agents be U.S. citizens, permanent employees, 18 years or older, and have successfully completed a training program. We reported in July 2007 that State has taken a number of measures to ensure the security and quality of passports, including establishing internal control standards and quality assurance measures and training of acceptance agents. However, we found that State lacks a program for oversight of passport acceptance facilities and made a number of recommendations to improve this oversight. State indicated that it has begun to take actions that would address our recommendations. The Secretary of State prescribes fees for passport services that State provides and has some discretion in setting and collecting passport fees. The Chief Financial Officers Act of 1990 requires, and Office of Management and Budget (OMB) guidance in Circular A-25 advises, that agencies review the fees for their programs biennially. According to OMB A-25 guidance, fees should be sufficient to recover the full cost to the federal government of providing the service, resource, or good. “Full cost” includes all direct and indirect costs to the federal government, such as direct and indirect personnel costs, including salaries and fringe benefits such as medical insurance and retirement; physical overhead, material, and supply costs; rents; and management and supervisory costs. In addition, State and USPS signed a formal, interagency agreement in 2000, which sets forth the terms and conditions of the execution services that USPS provides on State’s behalf. The agreement states, among other things, that State will consider the results of any USPS analyses of passport execution costs and, that before changes in the execution fee are finalized, State and USPS will mutually agree upon the new amount. Further, the agreement states that this partnership is voluntary—if, at any time, State and USPS do not mutually agree to the new fee, either party is free to consider other options, including ending their partnership. Based on recommendations from the 9/11 Commission, Congress, in 2004, mandated the development and implementation of a plan that requires U.S. citizens to have a passport or other document that demonstrates their identity and citizenship when entering the United States from any foreign country or territory. Prior to this legislation, U.S. citizens did not need a passport to enter the United States if they were traveling from Canada, Mexico, the Caribbean, or Bermuda. DHS and State implemented this requirement for airports on January 23, 2007, and are to implement the requirement for land and sea ports before June 1, 2009 (see fig. 2 for key dates in WHTI implementation). The departments have indicated that they will begin to phase in the requirement for land and sea ports in 2008. The current passport book fee is $97 for first time, adult applicants (16 years and older). State reported that there are circumstances where, due to reasons of both cost and ease of use, the traditional book-style U.S. passport may not be the optimal solution for international travelers along the northern and southern land borders of the United States, or international sea travel between the United States and Canada, Mexico, the Caribbean, and Bermuda. Thus, in October 2006, State announced plans to produce a passport card as a lower cost means of establishing citizenship and identity for U.S. citizens. For the passport card, State has proposed to charge $45, which includes a $25 execution fee. The current execution fee is $30 for passport books. The proposed reduction of $5 applies to the execution fee for both passport documents because acceptance agents will follow the same procedures regardless of the type of document. Table 2 shows the current passport book fees, as well as the proposed fees for the passport book and card. According to State, passport cards, like passport books, would be issued for a 10-year validity period for U.S. citizens 16 years and older and for a 5-year validity period for U.S. citizens under 16 years of age. State considered several factors, including congressional interest in having a low-cost travel document and its own estimated execution costs, when setting the proposed execution fee. Based on an interagency agreement, State also reviewed information from USPS on its estimated passport execution costs. According to State, the information from its cost of service study supported the fee-setting process in 2006, but the proposal to reduce the execution fee was not based solely on full cost recovery considerations. Consular officials told us that they considered several factors when setting the proposed execution fee. These include: Commitment to Congress to issue a low-cost document. According to consular officials, the department made a commitment to issue an alternative document to meet WHTI requirements that would be, at most, one-half the cost of the passport book, which currently costs $97. State’s estimates of its passport execution costs. State, through an independent contractor, conducts cost studies for its consular services, including passport execution, to determine the full costs for providing these services. Consular officials stated that the department’s policy is to review these fees on a periodic basis, rather than biennially, due to the length of time it takes to complete the cost of service studies. State’s most recent cost of service study estimated the full costs for execution services to the department for fiscal years 2004 and 2005 to be $24.36. Because OMB guidance states that subject to exceptions, user charges will be sufficient to recover the full cost to the federal government, consular officials told us that the department decided to not lower the execution fee below the amount estimated in the most recent cost of service study. Maintaining State’s network of acceptance facilities. According to consular officials, State wanted to ensure that, while the cost of the passport card was lower than the cost for the current passport book, that its execution fee was not so low that it jeopardized State’s relationship with its network of acceptance facilities, on which the department depends to provide passport services to U.S. citizens. State has seen an increase in passport demand from a base level of 7 million passports issued in 2003 to an expected more than 17 million issuances in fiscal year 2007. Based, in part, on these data, consular officials concluded that, even with the reduced execution fee, the department and its acceptance facilities could continue to expect additional funds from passport services. Figure 3 shows that, historically, passport execution fees have been higher than State’s estimated costs. For example, in 2002, State set the execution fee at $30 based on a cost estimate of $16.20. Consular officials told us that, based on policy considerations, there are certain services for which State does not charge a fee or the fee covers only a portion of the cost of the service. For example, State may not charge a passport fee from certain relatives of a deceased member of the Armed Forces proceeding abroad to visit the grave or to attend a funeral or memorial service for that member. Consular officials stated that their general management practice has been to round cost estimates for some services up to cover the cost of those services for which the public is not charged. In 2005, State kept the passport execution fee at $30 based on the $24.36 cost of service study estimate. For the passport card, State only rounded up its cost estimate to the nearest dollar to help reduce the total cost of the card. Based on a 2000 interagency agreement, consular officials consider cost information from USPS in setting passport execution fees. In a fiscal year 2001 internal cost study, USPS estimated that its costs were about $13 per passport. In April 2006, using this study as a baseline, USPS notified Congress that its projected costs for fiscal year 2005 had increased to about $19 per passport. According to consular officials, over the next several months, State and USPS met to discuss the Service’s estimated passport execution costs. Then, in early August 2006, USPS sent a letter to State to notify the department that its initial estimate of $19 did not include a contribution to institutional costs that USPS applies to postal and nonpostal products and services. According to USPS, its average contribution to institutional costs was approximately 76 percent of directly attributed costs. Using this average, USPS told State that its full costs for passport execution for fiscal year 2005 would total about $33 per execution (see table 3)—about $19 for costs directly attributable to passport execution and $14 for institutional cost coverage. USPS’s 2001 study did not address institutional costs. Consular officials stated that State did not receive more detailed information about USPS’s internal cost study or how the cost estimates were developed. A number of factors affecting costs may have changed since USPS’s 2001 cost study, and USPS did not take these changes into account when projecting passport execution costs for fiscal year 2005. For example, the estimates that USPS provided to Congress and State did not account for the projected increase in passport application volume or the growth in active postal acceptance facilities. As a result, it is unclear whether USPS’s estimate accurately reflects its costs. In late August 2006, State notified USPS that it had decided to propose a $25 execution fee, which was higher than the directly attributable costs for passport execution services that USPS reported to Congress in April 2006 (see fig. 4 for a time line of communication involving State and USPS on this issue). Regarding the additional contribution to institutional overhead, USPS officials told us that they have some flexibility in the percentage of institutional costs that the Service assigns to each of its products, in general, including the percentage used to calculate the passport execution cost estimate provided to State, specifically. For example, in fiscal year 2006, USPS charged an additional 14 percent of its direct and indirect costs for insured services to cover the institutional cost assigned to this service, and 197 percent for presorted, first class letter mail. As of August 2007, USPS officials stated that they have agreed, in principle, to State’s proposed $25 execution fee. State notified its network of acceptance facilities in early 2006 that the department would be proposing a lower execution fee. However, State did not seek cost information from nonpostal acceptance facilities. According to State officials, nonpostal acceptance facilities are not organized in a way that would make systematic data collection feasible. Thus, State relied on information that these facilities provided to the department through the public comment period following the publication of the proposed passport card rule in the Federal Register. We found that State’s most recent cost of service study, which the department considered when establishing the reduced passport execution fee, lacked documentation of several of the contractor’s key decisions. State is in the initial stages of a new study of fiscal year 2007 costs. We have previously reported that cost estimates are well documented when they can be easily repeated or updated and can be traced to original sources through auditing. Rigorous documentation increases the credibility of an estimate and helps support an organization’s decision- making process. In particular, the documentation should explicitly identify the primary methods, calculations, results, rationales or assumptions, and sources of the data used to generate each cost element. Regarding the passport execution fee, State considered execution cost estimates from its 2004 cost of service study as part of the fee-setting process for the passport card. We found that this study lacked documentation to justify key decisions the contractor made when estimating passport execution costs. We found the following examples: Estimates of the resources associated with passport execution (both direct and indirect costs) were integral to the contractor’s calculation of State’s cost of providing this service. At the time of the 2004 cost of service study, however, State’s financial systems and processes did not provide managerial cost information for its activities, such as the full cost of the department’s passport activities. Thus, State was not able to obtain necessary cost information directly from the department’s financial system and made numerous assumptions to estimate the aggregate cost of consular activities, including the passport execution costs. State’s contractor used baseline obligations data from fiscal year 2002 to estimate passport execution costs for fiscal years 2004 and 2005 ($24.36). The contractor’s final report, however, did not indicate that there may be limitations in using this information as opposed to actual expenditure data. The estimated time associated with passport execution was another important component of the contractor’s methodology. To determine how much time was spent on passport services and develop a time estimate, the contractor conducted surveys of State’s consular staff . We requested documentation from State on the contractor’s sampling plan and survey results, but officials were not able to provide additional details about the survey’s sample design, results by office, or how the data was used to arrive at the final estimated time State officials spend on passport execution. In the study’s survey of State’s domestic passport agencies, the tasks for executing and adjudicating a passport were combined into one activity. Therefore, to estimate the time generally associated with execution services that State provides, the contractor visited several post offices in the Washington, D.C., area, and performed time in motion studies at these facilities. Using the time estimates gathered at the post offices as a proxy, the contractor concluded that it took State an average of 7.63 minutes for each passport execution. However, State could not provide documentation regarding the number, type, and location of post offices visited or detailed results of the contractor’s time in motion studies. This methodology supported the specific costs allocated to the passport execution. State is beginning a new cost of service study, according to consular officials, which will estimate fiscal year 2007 costs for all consular services, including passport book and card execution. State considered several factors in proposing to reduce the execution fee by $5, most notably its commitment to Congress to create a lower cost document for U.S. citizens that would comply with WHTI documentation requirements; State’s proposal achieves this commitment. State’s passport execution cost estimates, while not the sole factor that the department considered when setting this fee, are important data, as OMB guidance encourages agencies to recover the full costs of the services they provide. However, State did not ensure adequate documentation of key aspects of the study’s assumptions, methodology, and limitations. In addition, USPS did not provide detailed information regarding its estimated passport execution costs, which were based on a fiscal year 2001 study. Better documentation would increase the credibility of State’s estimate and help support its fee-setting process. Given the potential impact on a significant number of U.S. citizens, it is imperative that State have a transparent process for setting the passport execution fee to ensure that passport execution cost estimates can be used as a reliable basis for decisions. To improve the transparency of the passport execution fee-setting process, we are recommending that the Secretary of State instruct the department’s contractor to provide additional documentation in its forthcoming fee study to support key methodologies, assumptions, and limitations. Such documentation should clarify survey and other work performed, disclose all sources of cost information being used, and identify potential limitations and uncertainties associated with the cost figures and other data. The study should also document the extent to which State’s contractor incorporated estimated passport execution costs from USPS and other acceptance facilities. We received written comments from State, which we have reprinted in appendix III. State agreed with our recommendation and stated that the department is working with its contractor for State’s new cost of service study to ensure that the final report identifies primary methods, calculations, and rationales for any assumptions made. State and USPS also provided technical comments, which we have incorporated into the report, as appropriate. As agreed with your offices, unless you publicly announce the contents of this report earlier, we plan no further distribution until 30 days from the report date. At that time, we will send copies of this report to the Secretary of State and the Postmaster General and other interested Members of Congress. We also will make copies available to others upon request. In addition, the report will be available at no charge on the GAO Web site at http://www.gao.gov. If you or your staff have any questions about this report, please contact me at (202) 512-4128 or [email protected]. Contact points for our Offices of Congressional Relations and Public Affairs may be found on the last page of this report. GAO staff who made major contributions to this report are listed in appendix IV. To determine the process by which the Department of State (State) set the proposed passport execution fee, we reviewed current laws and regulations that authorize the setting of fees, as well as guidance to agencies on the fee-setting process from the Office of Management and Budget, and State’s procedures as outlined in the Foreign Affairs Manual. We also collected and analyzed documentation and interviewed officials from State’s Bureau of Consular Affairs, which is responsible for determining the passport card fees, to determine the factors that State considered. To determine how the execution cost data that State considered was developed, we reviewed data on State’s estimated execution costs as outlined in the bureau’s June 2004 consular cost of service study and interviewed consular officials regarding the study’s scope and methodology. We also reviewed State’s audited consolidated financial statements of net costs for the fiscal years 2006, 2005, 2002, and 2001. In addition, we analyzed data on the U.S. Postal Service’s (USPS) estimated passport execution costs and interviewed USPS officials responsible for cost analysis and pricing to determine the process USPS uses to estimate passport execution costs. In particular, we reviewed USPS’s September 2001 passport execution cost study report, as well as information on its costs and revenue. We also examined USPS’s audited consolidated financial statements of net costs for the fiscal years 2006 and 2001. We did not evaluate the validity of State and USPS’s cost estimates. We conducted our work between May and August 2007 in accordance with generally accepted government auditing standards. Under U.S. law, the Secretary of State has the authority to issue passports. Once a passport application has been received by one of the 17 domestic passport-issuing offices, a passport examiner must examine each application to determine, through a process called adjudication, whether the applicant should be issued a passport. Adjudication requires the examiner to scrutinize identification and citizenship documents presented by applicants to verify their identity and U.S. citizenship. Once the passport examiner has determined that an applicant is eligible for a passport, State personalizes the passport with the applicant’s information and delivers it to the applicant (see fig. 5). According to State’s proposed notice on the passport card in the Federal Register, the basis of the passport card application fee is to be the direct costs of producing passport cards, the card stock, technology, adjudicating the application, printing the biographic information on the card, and priority mail return of the card. In addition to the individual named above, John Brummet, Assistant Director; Robert Owens, Assistant Director; Kathryn H. Bernet; Richard Cambosos; Joseph Carney; Esther Cha; Peter B. Grinnell; Jeffrey Isaacs; and Grace Lui made key contributions to this report. | As early as January 31, 2008, U.S. citizens will be required to present a passport or other approved document to enter the United States at all ports of entry. The Department of State (State) is developing a "passport card" as a means of establishing U.S. citizenship for individuals crossing U.S. land borders or arriving by sea from Canada, Mexico, the Caribbean, or Bermuda. State proposes to charge $45 for the card, which would include a $25 execution fee. Acceptance facilities, including State's passport offices, as well as post offices and state courts, execute passport applications on State's behalf, and retain this fee. GAO was asked to examine (1) the factors State considered when setting the proposed fee and (2) how execution cost data were developed. GAO reviewed current laws that authorize the setting of fees and met with State officials to determine how they set the execution fee. GAO also met with officials from State and the U.S. Postal Service (USPS) to discuss acceptance facility execution costs and how these costs were estimated. State considered several factors, including congressional interest in having a low-cost travel document, when setting the proposed passport execution fee. State has proposed to reduce the current execution fee from $30 to $25, which would help the department to issue a lower cost passport card that meets the new documentation requirements. Consular officials told GAO that State made a commitment to Congress to issue a document that would be, at most, one-half the price of the current passport book, which costs $97 for first time, adult applicants. To do this, State needed to reduce its fees, including the execution fee. Consular officials stated that State did not want to reduce the execution fee below $25 because it wanted to recover its costs, which it estimated at $24.36 per execution. In addition, the fee needed to be high enough to avoid jeopardizing State's relationship with acceptance facilities, on which State depends to provide passport services. State concluded that $25 would compensate acceptance facilities based, in part, on data from USPS that initially indicated its passport execution costs were about $19, as well as a projected increase in application volume. USPS later told State that the $19 figure did not include additional indirect costs. GAO found that State's most recent cost of service study, which estimated passport execution costs, lacked documentation of key decisions. Rigorous documentation increases an estimate's credibility and helps support an organization's decision-making process. Documentation of cost estimates should explicitly identify the primary methods, calculations, results, and rationales or assumptions. State was not able to provide documentation of critical components of the study's methodology. For example, consular officials could not provide details of its survey used to estimate the time it takes to execute a passport, including how the data was used to arrive at the final time estimate. State has begun a new cost study that will provide updated estimates of execution costs. |
According to SSA, 84 percent of households with someone 65 or older received Social Security benefits in 2014. To qualify for benefits, an individual must typically earn at least 40 credits, based on earnings on which they and their employer pay Social Security payroll taxes. According to SSA, as of 2015, 69 percent of the population age 20 and over had earned 40 credits. The amount of initial monthly retirement benefits depends on the beneficiary’s earnings history and the age at which he or she chooses to begin receiving benefits. SSA figures monthly retirement benefits by calculating the individuals’ average indexed monthly earnings (AIME) during his or her highest 35 years of earnings, with earnings from past years adjusted to reflect the growth in average wage levels over time. (If the individual has earnings in less than 35 years, non-earning years count as zeroes in the AIME calculation.) Retirement benefits are then determined by a formula that converts an individual’s AIME into a Primary Insurance Amount (PIA). The PIA is the monthly benefit a claimant receives if he or she chooses to begin benefits at the FRA (see fig. 1). Benefits are generally adjusted based on inflation each year. Up to 85 percent of retirement benefits are also potentially subject to income tax, depending on total income. The FRA has risen from 65 originally to 66 for individuals born from 1943 to 1954, and it will be 67 for individuals born in 1960 or later. Beneficiaries may generally elect to begin receiving Social Security benefits as early as age 62; however, an age-62 claimer will receive less each month than if he or she waited to claim until reaching FRA. As the FRA has risen, so has the reduction in benefits for pre-FRA claiming, relative to PIA. An eligible individual with an FRA of 66 who claims at 62 would receive a monthly benefit equal to 75 percent of PIA (see fig. 2). Future retirees with an FRA of 67 who claim at 62 will receive 70 percent of PIA. Although SSA uses the term “full retirement age” to refer to the age at which workers receive unreduced benefits (sometimes called “full benefits”), those who wait to claim benefits beyond their FRA receive “delayed retirement credits” that boost monthly benefits to more than 100 percent of PIA. An eligible claimant born in 1943 or later can receive delayed retirement credits equal to 8 percent of PIA per year past FRA until age 70. For example, a claimant with an FRA of 66 who claims at age 70 receives 32 percent higher monthly benefits than PIA. Thus, a retiree with an age 66 FRA and a PIA of $1,000 per month would receive $750 per month if claiming at age 62, $1,000 per month if claiming at age 66, or $1,320 if claiming at age 70. Individuals who claim benefits at ages in between would receive a monthly benefit between $750 and $1,320. According to SSA, someone who lives to an average life expectancy should receive about the same amount in lifetime benefits irrespective of when they claim benefits because the lower monthly benefit amount and earlier start date would offset each other. However, several factors affect the tradeoffs of claiming at different ages. For example, how long a person expects to live, based on family history or current health status, can affect when he or she claims. For married couples, the longevity of both spouses could affect the lifetime household benefits received because Social Security pays survivors benefits to widowed spouses. Increasing life expectancy and years spent in retirement raise the potential cost to retirees of receiving lower monthly benefit amounts from claiming earlier. According to the 2016 Social Security Trustees report, average life expectancy at age 65 has increased from 12.7 years in 1940 for men to 19.1 in 2015, and from 14.7 to 21.5 years for 65-year-old women. However, lower-income individuals have shorter-than-average life expectancy, which means that, on average, they can expect to receive Social Security benefits for substantially fewer years than higher-income individuals who have longer-than-average life expectancy. Moreover, disparities in life expectancy by income have grown, according to studies that examined trends over time. Interest rates also affect the tradeoffs of claiming early versus later. When market interest rates exceed price inflation by less than usual, delaying claiming may become more financially attractive for those with the ability to continue working or to live off of other financial resources. Several studies that have examined the Social Security benefit formula and claiming decision process show that many people would receive higher lifetime benefits by delaying claiming benefits. A spouse, ex-spouse, or surviving spouse of an eligible worker can receive benefits based on the primary worker’s earnings, if this benefit exceeds the benefit he or she would receive based on their own earnings history. Spousal benefits generally amount to 50 percent of the primary worker’s PIA, if the spouse is at FRA when claiming them. For survivors, the age at which the primary worker claims benefits can potentially affect the monthly benefit of the surviving spouse. A spouse can generally claim as early as age 62, and survivors may begin receiving benefits as early as age 60 (50 for disabled survivors); to qualify for benefits at age 50, a surviving spouse must be disabled under the Disability Insurance program rules. As with regular benefits, both spousal and survivors benefits are reduced if the spouse or survivor begins receiving them prior to their FRA. Unlike with regular benefits, spouses and survivors do not receive delayed retirement credits if the spouses or survivors delay claiming beyond their FRA. Individuals who claim benefits before their FRA but continue to work for pay face a retirement earnings test, with earnings above a certain limit resulting in a temporary reduction of monthly benefits. In 2016, SSA withholds $1.00 of benefits for every $2.00 of earnings above $15,720 for someone younger than FRA for the full year. In the year the claimant reaches FRA, the earnings limit rises to $41,880 (for 2016), and $1.00 of benefits is withheld for every $3.00 in earnings in the months prior to the claimant reaching FRA. Benefits withheld under the earnings test are not forfeited, but are really deferred, and are, on average, paid back later with interest. In addition, every year after the initial claim for benefits, any new earnings the worker has are reflected in a recomputation of the AIME and a potential increase in the PIA. Many other rules can potentially complicate claiming decisions, creating challenges in understanding key information for claimants and their spouses. For example, there are rules covering eligibility for dependent children (or grandchildren) and for maximum family benefits, to name a few. Over time, changes have been made to eligibility ages, the retirement earnings test, the FRA, and other important factors affecting claiming. The Bipartisan Budget Act of 2015 recently eliminated two complex strategies utilized by some married couples. One allowed a person at or older than FRA to file for benefits, but then immediately suspend this claim so that no benefit would be paid. This “file-and- suspend” strategy allowed that person’s spouse to claim spousal benefits on the suspender’s record, while the primary worker’s benefit accrued delayed retirement credits in suspension. Another strategy allowed a person at FRA or older to file a claim only for spousal benefits based on the earnings record of a primary worker who had claimed benefits. This allowed the spouse to receive a benefit while allowing the spouse’s own benefit to grow, then later switch to their own benefit as late as age 70. The 2015 act eliminated the file-and-suspend strategy, effective April 30, 2016, by no longer allowing anyone to claim benefits on another person’s record while the primary claimant’s benefits are suspended. It also eliminated spousal-only claims for anyone born after January 1, 1954. SSA pays retirement benefits from the Old Age and Survivors Insurance (OASI) Trust Fund. The fund receives revenue from, among other sources, Social Security payroll taxes paid by current workers, and pays current beneficiaries. Workers and employers currently each pay a payroll tax of 6.2 percent of an employee’s covered earnings, for a combined total tax rate of 12.4 percent, into the Social Security Trust Funds. This payroll tax applies only to workers’ earnings up to an annual limit ($118,500 for 2016); this limit changes each year with changes in average wages and has generally increased each year. According to the 2016 report of the Social Security Trustees, the OASI Trust Fund is projected to become depleted in 2035, at which point payroll taxes of current workers are estimated to be enough to pay only 77 percent of promised benefits. Our review of survey reports and academic studies, and interviews with people with Social Security expertise, suggest that most individuals do not understand important rules and details that could affect their retirement benefits or the benefits of their spouses and survivors. Specifically, many people approaching retirement age are unclear on how claiming age affects the amount of monthly benefits, how earnings (both before and after claiming) affect benefits, the availability of spousal benefits, and other factors that may influence their claiming decision. Understanding this key information is central to making informed decisions about when to claim Social Security benefits because they concern the tradeoffs of claiming benefits (and perhaps retiring) earlier versus later—generally permanent decisions—and ultimately affect the amount of lifetime benefits and people’s retirement security. GAO recognizes that financial literacy is critical to empowering and helping individuals and families to stay financially healthy and stable and the role the federal government plays in promoting financial literacy. It also has highlighted financial security for older Americans as a key issue, including the importance of ensuring financial literacy in understanding the key factors that can affect their retirement income. Seven of the surveys we reviewed found that some of the respondents are aware that their benefits would increase if they wait until FRA to claim; however, many do not have a good sense of how much and thus may not understand the tradeoffs of claiming earlier versus later. Claiming at younger ages means an earlier start to benefits, but at the expense of the permanently higher monthly benefit amounts that come with claiming at an older age. For example, in a phone survey of 2,000 individuals ages 25-65, the Financial Literacy Center found that when asked to estimate their monthly benefit at their planned claiming age and what they might expect if they waited two years, 62 percent of respondents seemed to understand their monthly benefit would increase if they delayed claiming. However, 36 percent of respondents indicated they did not understand how their benefits would be adjusted depending on claiming age or incorrectly believed that their monthly benefit would be the same no matter when they claimed. Greenwald & Associates conducted for Financial Engines an on-line survey with over 1,000 near claimants and current beneficiaries between the ages of 55 and 70 and found that many respondents did not understand the extent to which benefits can increase between ages 62 and 70. For example, only 40 percent gave estimates that approximated the real monthly increase that would result from a 2- year delay. In an AARP study that surveyed over 2,000 individuals ages 52-70, when participants were asked what would be the earliest age at which they should claim benefits to maximize the monthly amount, only 29 percent responded with the correct age of 70. The three surveys that asked the respondents about the number of years in the benefit calculation found that most do not know that benefits are based on their highest 35 years of earnings. If the individual has earnings in fewer than 35 years, non-earning years count as zeroes in the AIME calculation. Thus, some individuals could permanently raise their monthly benefits not only by delaying when they take benefits, but also by replacing zero or lower earning years with higher earning years in the “high-35” calculation. Three of the surveys we reviewed asked respondents how benefits are determined. The median respondent in an academic study that surveyed over 2,300 Social Security eligible individuals between ages 50 and 70 believed only the 10 highest years of earnings were counted. A study conducted by Greenwald & Associates for the Financial Literacy Center reported that only 23 percent of the 2,000 age 25-65 phone-survey respondents could correctly identify that benefits are calculated based on 35 years of earnings, and 27 percent of the respondents believed, incorrectly, that benefits are based on the last 5 years of earnings and the number of years worked. Another 23 percent thought benefits were based on the Social Security payroll taxes they paid and the interest earned on those taxes. An AARP survey of over 2,000 individuals age 52 through 70 who were eligible for Social Security benefits based on their own work asked respondents to select from a range of options the number of years of highest earnings used to calculate benefits. Only 7 percent selected the correct number of years. Results from five of the surveys and studies we reviewed that asked about spousal benefits indicate that many people may not know about spousal benefits based on a husband’s or wife’s earnings history. Only 48 percent of the more than 2,000 age 52-70 respondents to an AARP survey who were or ever had been married knew they could collect benefits based on their living spouse’s record. Similarly, an academic study found about 50 percent of the more than 2,300 survey respondents between ages 50 and 70 who were eligible for Social Security benefits incorrectly believed their spouse would not be eligible for benefits if the spouse had never been in the paid workforce. Given the lack of awareness about how claiming age affects benefits for the claiming worker, it is likely the case that claimants do not know how early claiming may reduce spousal benefits. Six of the studies we reviewed found their respondents had a general understanding of survivors benefits. However, two of the surveys show that some married respondents are not aware of the effect their claiming age potentially could have on their widowed spouses’ benefits, and one of the two studies also showed that just under half (48 percent) of married or ever married respondents were not aware of the additional effect the widowed spouse’s own claiming age has on that benefit. A collaborative study by AARP and the Financial Planning Association that surveyed more than 1,200 future Social Security beneficiaries ages 45-64 showed that, among ever-married respondents who knew they could receive survivors benefits, many did not know that the age the deceased spouse or the age the surviving spouse claimed could affect the monthly benefit amount of the surviving spouse. Each of the four surveys that asked about the retirement earnings test found that individuals, if they know of the retirement earnings test at all, do not understand fully how working and receiving benefits before FRA can affect their benefit amounts over time. An AARP survey of over 2,000 individuals age 52 through 70 who were eligible for Social Security benefits based on their own work found that while 76 percent of survey respondents understood benefits could be reduced by earnings depending on the amount of earnings, 71 percent incorrectly believed that the reduction would be permanent. In a 10-question survey of more than 1,500 individuals between ages 25 and 65, conducted on behalf of Massachusetts Mutual Life Insurance Company, more than half of respondents incorrectly believed that they could continue working while collecting all of their benefits regardless of their age. A minority of the over 2,300 respondents (40 percent) between age 50 and 70 in an academic study who were aware of the earnings test threshold understood correctly that any reduction for earnings up to FRA is offset by an increase of benefits after FRA. Understanding the retirement earnings test could prevent individuals erroneously thinking the earnings limit will result in a permanent loss of benefits. It might also prevent a claimant from seeing the earnings test as an incentive to retire and claim benefits at age 62 or reduce earnings to stay below the earnings threshold. Studies have pointed out that many claimants have earnings that cluster around the retirement earnings limit, suggesting they believe benefits withheld because of excess earnings are lost. Conversely, misunderstanding the earnings test could cause some individuals to delay claiming until FRA to avoid a perceived penalty. Understanding benefit taxation can affect retirement income planning and could, for some individuals, influence when they claim benefits. One study we reviewed that included a question on taxation of Social Security benefits in the phone-survey portion found that 42 percent of the 2,000 respondents ages 25-65 did not understand that benefits could be taxed. Several financial firms include information on taxation on their web pages that cover Social Security. Information on life expectancy and longevity risk is fundamental to the decision to claim benefits because a retiree receives benefits until death (and a surviving spouse might then continue to receive benefits until that spouse’s death). Increasing life expectancy, along with increased likelihood of living to advanced ages, and resulting increased time spent in retirement raise the potential cost to retirees of claiming early, and receiving reduced benefits for life, especially if in these later years they have spent down other sources of retirement income. According to SSA’s website, about one of every four 65-year-olds today will live past age 90, and one of 10 will live past age 95. At the same time, longevity depends on a claimant’s health and family history; shorter longevity expectations may cause someone to claim benefits earlier. Three of the surveys we reviewed asked about longevity, and each of those surveys indicated that individuals might not understand the probability of living to old age and why that is important in their decision to claim benefits. The Financial Literacy Center found that roughly 30 percent of those surveyed indicated they had little or no idea about how long they anticipated living in retirement. A Society of Actuaries survey of 1,600 individuals found that 4 in 10 respondents ages 45 and older underestimated average life-expectancy by 5 years or more. Our interviews with academics who have expertise in Social Security underscored the importance of understanding life expectancy and longevity risk, and in particular the likelihood of living to very old age. One Social Security expert we interviewed said that presenting people with average life expectancy figures may get them to focus on that number but not on the possibility of living well beyond that age. A second expert we spoke with emphasized that using “breakeven analysis”— calculating the age at which the cumulative higher monthly benefits starting later would equal the cumulative lower benefits from an earlier claiming date—is an unsound way to decide when to start benefits. Research shows that breakeven analysis can influence people to claim benefits earlier than they might otherwise, in part because people fear the potential loss of benefits if they die early more than they fear outliving their retirement savings. Breakeven analysis also ignores the insurance value of higher monthly Social Security benefits protecting against outliving one’s other retirement assets, and the potential benefit to a surviving spouse. The second expert said that Social Security is longevity insurance against outliving one’s assets, and therefore, like other insurance, one should base the decision to “purchase” (in this case, by forgoing benefits at a younger age in order to lock in permanently higher monthly benefits) on preventing a bad financial outcome and not necessarily on the likelihood of breaking even. Even if people have accurate and complete information, when to claim retirement benefits is a complex and personal decision. Personal circumstances such as health, perceived life expectancy, savings, employment, and other factors can influence when someone claims benefits. In addition, psychological factors can affect how people with similar knowledge and circumstances may make different decisions. For many people, financial need may make claiming benefits at 62 a necessity. Individuals who are laid off, particularly during periods of high unemployment, those who work in physically demanding jobs they can no longer perform, or those who suffer from poor health may retire earlier than other individuals. Many unemployed older workers may struggle to find new jobs and may face unique reemployment challenges, such as employer reluctance to hire older workers or out-of-date skills. If these older workers cannot find other or more suitable employment and are 62 or older, Social Security may provide their only option for regular income. As a result, they may claim benefits earlier than they had planned, especially if they have little saved for retirement and no pension benefits. On the other hand, among those that have savings, a decrease in their savings might induce them to delay their original claiming date; a 2010 study found that individuals more likely to have retirement savings retire later in response to weak financial markets. Beyond knowledge of benefit rules and financial need, psychological factors can influence when people claim benefits. Studies have shown that framing—how information is presented—may influence how people perceive Social Security choices, and ultimately have an impact on when they claim benefits. One 2010 study showed that when delaying claiming is framed as a gain (e.g., delaying claiming increases your benefits by $X) rather than claiming early framed as a loss (e.g., claiming earlier reduces your benefit by $X), individuals are more likely to report that they will delay claiming. Another factor that could lead individuals to claim early is loss aversion— people’s tendency to prefer avoiding losses to acquiring gains of a similar magnitude. If individuals think of Social Security benefits as money they are entitled to once they reach age 62, the loss from delaying claiming— foregone benefits—could carry more weight than a higher monthly benefit in the future if they were to delay. Under loss aversion, dying early without having claimed benefits, as opposed to living longer than expected with reduced benefits, could be seen as a risk to be avoided. Federal policy may also provide reference points or signals to individuals about the timing of claiming and retirement. The availability of Social Security benefits at age 62 and adjustments to benefits thereafter may give individuals mixed signals about when to claim benefits. A 2012 study found that spikes in retirement claims at the FRA move along with changes in the FRA itself, suggesting that people may see “full retirement age” as a reference point for when they should claim. Finally, uncertainty about future benefits may also influence when people claim. A 2011 study conducted an online survey and found that uncertainty may cause people to claim earlier than they might otherwise in order to lock in benefits. SSA provides, through various sources, comprehensive written information to help people decide when to claim retirement benefits. This information includes many of the items identified from our literature review and expert interviews including how claiming age affects monthly benefit amounts, how benefits are determined, details on spousal and survivors benefits, the retirement earnings test, information about life expectancy and longevity risk, and the taxation of benefits. The agency makes this information available through SSA’s website, publications on various topics (available in electronic and paper forms), interactive tools such as online calculators, and a personalized benefit statement mailed to individuals and made available online. The different formats allow this information to be presented in varying degrees of complexity, specificity, and personalization. SSA’s web pages and publications cover virtually all information that could inform a person’s decision to claim retirement benefits. For example, the publication When to Start Receiving Retirement Benefits provides an overview of information needed to make the claiming decision, including a discussion of the tradeoffs of claiming benefits earlier versus later, information on life expectancy and longevity risk, how claiming could affect spousal and survivors benefits, and the retirement earnings test. The SSA website also includes pages that cover these topics individually. In addition, the web pages have links to related topics, interactive calculators, and printed publications, making it possible for someone with access to the Internet and comfort with using it to get information on what they need to consider before deciding to claim benefits. Depending on the source, there are differences in how key information is presented. In the publication Your Retirement Benefit: How It’s Figured, SSA explains that benefits are based on the highest 35 years of indexed earnings, and includes a worksheet for estimating benefits. In Retirement Benefits, however, SSA says only that benefits are based on “lifetime earnings.” While it is reasonable that publications may present similar information in differing degrees of detail, such detail could be important for someone with less than 35 years of earnings. SSA covers longevity risk similarly. In some publications and web pages, SSA covers the personal nature of the claiming decision and notes that as many as one in three 65-year-olds today will live to age 90. At the same time, SSA says that lifetime benefits for anyone who lives to the average life expectancy will be the same regardless of what age they claim; this may run the risk of unintentionally conveying to claimants that the decision on when to claim does not matter. In contrast, when describing the retirement earnings test, a complicated and potentially critical piece of information for someone considering claiming prior to FRA, SSA explains consistently that monthly benefits will increase at FRA if any benefits were withheld due to the test. To further assist potential claimants, SSA provides 11 interactive calculators on its web site for users to estimate future benefits under varying scenarios, such as at different claiming ages and different earnings levels. These calculators also generally vary in the precision of their benefit estimates. One calculator—the Earnings Test Calculator— estimates the reduction in benefits for individuals who continue to work after claiming, and another—the Benefits for Spouses Calculator— estimates spousal benefits. Others provide FRA or likely life expectancy based on one’s date of birth. The Retirement Estimator, for example, asks users to enter some identifying information in order to use a secure interface that accesses their earnings history in SSA’s database. In contrast, the SSA online Calculator requires the user to enter earnings from each of their working years in order to determine their estimated monthly benefit. The instructions note the user should have his or her Social Security statement with earnings history available in order to complete the entries. Manually entering several decades of annual earnings can require considerable time, and carries more risk of inaccurate earnings information producing an inaccurate benefits estimate. Unlike the Retirement Estimator, though, the online Calculator gives users the option of having the estimated benefit amount given in either current or future dollars. Both calculators also can be used to estimate benefits at different retirement ages. Other calculators focus on more specific factors that can affect benefits. An Early or Late Retirement Calculator provides an estimate of how much less a user’s benefit would be if the user claimed earlier than FRA. Others focus on the effect of the retirement earnings test or the Government Pension Offset (GPO) or Windfall Elimination Provision (WEP), which affect benefits for an individual receiving a pension from a job that was not covered by Social Security. The Social Security statement is the most widespread piece of communication that SSA provides to individuals about their future benefits. It is a 4- to 6-page summary of personalized information that includes an estimate of the individual’s future benefit payable at age 62, FRA, and age 70, as well as estimates for the individual’s current disability and survivor benefit amounts. In 1995, SSA began mailing annual statements to individuals in selected age groups, beginning with those 60 and over. By 2000, statements were generally mailed to all eligible individuals 25 and older. In May 2012, SSA made the statement available electronically for those establishing an online account. Since September 2014, SSA has mailed printed statements to eligible individuals age 25, 30, 35, 40, 45, 50, 55, and 60 or older who have not created a personal online Social Security account. At age 60, SSA sends the statement annually. The statement has three versions, one each for those ages 25 to 34, 35 to 54, and 55 and older, with certain information tailored for each group. For example, the statement for the age 25-to-34 cohorts has a section titled “Why should I think about retirement now?” For those 55 and older, there is additional information on monthly benefit amounts at different claiming ages and working while receiving benefits. In addition to benefit estimates, the statement shows the individual’s history of earnings on which he or she paid Social Security (and Medicare) taxes, and total taxes paid. It also explains how people qualify for benefits, assumptions SSA uses in their benefit estimates, and information on the GPO and WEP provisions that generally apply to people who receive pensions from non-covered employment. For those 55 and older, a section on the retirement earnings test explains that some benefits can be withheld from workers under FRA who earn over a certain amount, but goes on to explain that at FRA the worker’s benefit amount will be increased to account for the benefits that were withheld. The statement does not, however, include some basic information that may help people understand some critical details about their benefits. Specifically, while the statement includes an example of how a claimant’s monthly benefits would differ based on age when claiming, it does not make clear that the monthly benefit amount at claiming is permanent, except for cost-of-living adjustments. An SSA official said that a common misunderstanding by statement recipients is that a claimant will receive higher amounts as they get older even if they claim benefits at 62. Further, even though a section of the statement is titled “How Your Benefits are Estimated,” it does not explain that benefits are calculated based on the individual’s highest 35 years of earnings. It also does not say that an individual’s claiming age affects not only his or her own benefit but potentially a spouse’s survivor benefit. Finally, the statement does not mention that benefits, once they are received, may be subject to income tax. According to various studies and surveys that looked at the statement, individuals who received the Social Security benefits statement were, in general, more knowledgeable about Social Security. According to SSA in 2012, surveys SSA has conducted found that 70 percent of respondents age 60 and older said they had enough information about Social Security from the benefits statement to plan for their financial future. However, SSA’s studies did not assess whether receipt of the statement changed behavior. A 2015 academic brief that reviewed additional studies reported they did not find that the Social Security statement affects claiming behavior. While SSA provides important information through its website and publications to help people make informed decisions about when to claim benefits, our observation of the online and in-person claims process found that some key information may not be consistently provided to potential claimants when they file, particularly during in-person interviews. SSA’s Program Operations Manual System (POMS) states that claims specialists are to provide information, and avoid giving advice, to claimants. The POMS also specifies that when taking an application for Social Security benefits, the claims specialist is responsible for explaining the advantages and disadvantages of filing an application so that the individual can make an informed filing decision. However, our observation of a nongeneralizable sample of 30 face-to-face claims interview at 7 SSA field offices found that claims specialists did not consistently provide key information to potential claimants, or ensure individuals were aware of such information when they applied for benefits. The SSA claims protocol follows a screen-by-screen process of questions and prompts to collect basic information from claimants, but does not prompt questions or discussion of some key information. Compared to the in-person process, online applicants have more consistent access to key information on the screen or through tabs and pop-up boxes as they complete the application. Even so, the online process also left out potentially important information that could inform an individual’s decision to claim benefits. Furthermore, for both face-to-face and online application methods, we found claimants were sometimes provided information that could inadvertently influence them to claim earlier than they might have otherwise. Over 36 percent of people claiming retirement benefits in 2015 did so in person at an SSA office. During the in-office claims we observed, claims specialists followed an automated step-by-step process for collecting and confirming basic information from potential claimants to ensure they qualify for Social Security benefits and to determine the benefit amount. Such information included confirmation of a claimant’s birth date, marital status, earnings history, and any receipt of pension benefits from an entity that did not participate in Social Security, among other information. This process also included prompts to provide information or ask questions about certain types of benefits, such as qualification for spousal benefits, and key program rules, such as the retirement earnings limit for claimants who are younger than FRA. However, in the in-office claims interviews we observed, the discussion did not include questions or prompts about other key program rules and information that could help inform the decision to claim benefits. For example, claimants were not consistently informed that monthly benefit amounts would be higher if the claimant waited, as specified in POMS. Similarly, the protocols did not prompt claims specialists to provide information on how working longer prior to claiming might raise monthly benefits, or how personal circumstances such as health, life expectancy, and longevity risk can factor into the decision on when to start benefits. Claims specialists generally provided accurate information about program rules and benefits and answered claimants’ questions. In some instances, however, they presented or omitted key information in a way that could confuse or even bias people’s claiming decisions. We discuss areas of key information, and how we observed they were covered in in-person claims, below: How claiming age affects monthly benefits: POMS states that claimants filing for benefits should be advised that higher benefits may be payable if filing is delayed. It also states that claimants should, if applicable, be provided with at least three monthly benefit amounts at three different claiming ages—at the earliest possible month for claiming, at FRA, and age 70. Claims specialists should provide amounts for other months as well if requested by the claimant. In 18 of 26 interviews we observed in which delaying claiming was a potential choice, the claims specialist mentioned that the claimant’s benefit amount would be higher if he or she delayed claiming. However, the remaining 8 did not discuss this option. Of the 18 interviews that mentioned delayed claiming, 13 claims specialists presented at least the three benefit amounts per POMS, while 5 did not. Surveys have shown that most individuals do not know how much monthly benefits can increase by waiting to claim, so offering benefit estimates at different ages is likely to provide information many claimants do not have. This information can influence the age at which they claim, and expert opinion and past GAO reports found that delayed claiming can be an important strategy to consider for most retirees. In 10 of the 30 observed interviews, claims specialists offered the opportunity to claim up to 6 months of retroactive benefits as a lump sum. SSA allows for up to 6 months of retroactive benefits when a claimant is at least FRA or has a “protective filing date”—a documented date within the 6 months prior to a claims appointment when a claimant first contacted SSA about filing a retirement claim. While retroactive benefits offer an attractive lump sum, taking it essentially means applying for benefits up to 6 months earlier, and results in a permanent reduction in the monthly benefit amount. POMS provides eligibility criteria for retroactive benefits. However, POMS does not instruct claims specialists to inform claimants that taking lump-sum retroactive benefits will result in permanently lower monthly benefits, compared to not taking retroactive benefits, a tradeoff claimants may not be aware of. The claims specialist explained this tradeoff in only 1 of the interviews we observed. In another interview, a claimant who initially said he wanted benefits to start later in the year changed his mind to start 6 months earlier after being offered a lump sum. During our observations, we also saw 6 instances in which a claims specialist presented a breakeven age—the age at which the cumulative higher monthly benefits starting later would equal the cumulative lower benefits from an earlier claiming date—to help a claimant compare claiming benefits now or waiting to claim. According to POMS, claims specialists “should no longer discuss with claimants,” and research shows that breakeven analysis can influence people to claim benefits earlier than they might otherwise. In some interviews, however, claims specialists not only offered a breakeven year, they added their conclusion that the analysis showed that claiming earlier was preferable. One claims specialist showed the claimant that it would take 11 and 1/2 years to make up the difference for waiting to claim, and added that “according to the actuaries, that is a reasonable choice.” Another claims specialist said the breakeven analysis showed “it pays to file early.” In a seventh interview, breakeven had been discussed before the claimant came into the local office. The claimant said he had been planning to wait until age 70 to claim, but had been told by an SSA representative over the phone that his breakeven age analysis suggested he should claim earlier. While our observations are not generalizable, they suggest that SSA may be inadvertently influencing people’s decisions on when to claim and lowering claimants’ monthly benefit amounts. The 2011 SSA Office of the Inspector General report concluded that SSA needed to better explain to its claims specialists why the agency believes breakeven points are not relevant to a claimant’s decision. How lifetime earnings affect benefits: We observed only 8 interviews in which a claims specialist mentioned that benefits are based on 35 years of earnings and that working longer could potentially raise benefits by boosting average lifetime earnings. While POMS does not require claims specialists to explain how earnings affect benefit amounts, the claims process could be modified to include prompts for claims specialists to inform claimants that benefits are based on 35 years of earnings— information that SSA already makes available on its website. By discussing how years of earnings are calculated to determine one’s benefit amounts, claims specialists might better inform claimants who are deciding when to claim, especially for those who have less than 35 years of earnings. Spousal benefits: The majority of claims specialists we observed compared the amount the claimant would receive as a spouse versus the amount based on his or her own earnings history, when applicable. However, in 8 of 15 interviews in which the claimant was potentially eligible to claim restricted spousal benefits or to file-and-suspend, the claims specialist did not mention these options. To their credit, 4 claims specialists we observed explained that while spousal benefits were currently lower than the claimant’s own benefit, taking the lower spouse benefit now and waiting to claim their own would increase the claimant’s own benefit by 8 percent per year after FRA and up to age 70. As a result of the explanation, 2 claimants decided to take their spousal benefits at or older than FRA and wait to take their own benefits at age 70. Retirement earnings test: In our observations, the step-by-step SSA claims process for a claimant younger than FRA included questions about plans to continue working. In the 18 interviews we observed in which a potential claimant was younger than FRA, 17 claims specialist explained, accurately, that the claimant would have benefits withheld if he or she earned more than the retirement earnings limit. However, in only 7 of these 17 interviews did the claims specialists explain that any benefits withheld due to earnings would be recalculated and result in higher benefit amounts after FRA. For the remaining interviews, the claims specialists mentioned only that earnings may result in lower benefits, or that the claimant cannot earn above the limit, perhaps inaccurately suggesting the earnings test would result in a permanent loss of benefits. In one interview, a claims specialist told the claimant she would be “penalized” if she earned over the limit. POMS states that, when applicable, the claims specialist should explain to claimants that earnings could be withheld based on the annual earnings test, but does not instruct claims specialists to explain that the earnings test is not a penalty or tax, or that withheld benefits are repaid. However, if claimants do not understand the full implications of the earnings test, they could erroneously think it will result in a permanent loss in benefits and, as a result, unnecessarily stop working or reduce their working income. This was made clear in one interview in which a claimant with earnings likely to be above the limit said she might have to quit one of her two jobs unless she waited until FRA to claim. Ultimately, the claimant decided to wait until she reached FRA and then start her benefits. This case illustrates the potential risks of SSA not making clear to claimants that the earnings test does not represent a permanent loss in benefits. Taxation of benefits: That Social Security benefits are potentially subject to income tax did not routinely come up in the interviews we observed. While some claimants asked about withholding taxes from their Social Security benefit checks, in only two instances did a claimant ask if benefits themselves are taxable. In these instances, the claims specialist told the claimant the benefits could be taxable. One claims specialist also suggested that the claimant discuss this issue with their tax professional. Furthermore, in both instances, the claimants did not realize that their benefits can be taxed. POMS states that claims specialists “will not answer questions about taxation,” and says they should refer individuals inquiring about taxation of benefits to IRS Publication 915, Social Security and Equivalent Railroad Retirement Benefits, for additional information. However, a general explanation of taxation can be provided as it relates to month of election and suspension or withholding of benefits to recover overpayment. A lack of information about the taxability of benefits could potentially affect the retirement planning of claimants. Life expectancy and longevity risk: Claims specialists are not prompted to ask for or provide any information to claimants about life expectancy or longevity risk. Only twice in our 30 observations did family health and longevity arise and how it might factor into when to claim benefits, both times because the claimant raised the subject. While claims specialists are not specifically required to discuss life expectancy and longevity risk, the POMS does state that information should be provided to help claimants make informed filing decisions. SSA also emphasizes the importance of considering life expectancy and longevity risk in information made available on its website. According to the American Academy of Actuaries and the Society of Actuaries, understanding how longevity, and in particular longevity risk, can impact retirement planning is an important aspect of preparing for a well-funded retirement. While time constraints may increase the pressure on claims specialists to manage their claims case load, we detected no systematic way that these constraints would push specialists to withhold key information from claimants. In general, the claims specialists we interviewed told us that they did not feel pressured by management to process a specific number of claims in a day, nor to limit the time they spent with claimants providing information and answering claimants’ questions. Field office managers told us that their offices faced monthly performance goals for processing claims efficiently and accurately; and both managers and claims specialists acknowledged that some days present time constraints in serving all potential claimants. However, managers and claims specialists said they did not feel pressure to convince any people to claim benefits when they came in for a claims interviews or inquiry. While we did not examine training in depth, SSA officials said claims specialists receive about four months of classroom training on processing claims and have a regular review of claims they handle during their first year. In addition, claims specialists have additional resources to help them if questions arise during claims interview or inquires, including ready access to POMS and the ability to ask questions of onsite SSA technical experts. Our observations confirmed that claims specialists were able to spend as much time as claimants required for answering questions. According to SSA, over 40 percent of people claiming retirement benefits in 2015 did so online through its website. SSA provided us a screen-by- screen demonstration of the online claiming process. In addition to collecting information from the claimant, the online process offers opportunities for the claimant to receive certain key information on the screen via links to SSA web pages and in pop-up boxes. In contrast to the in-person claims process, the online process includes screens that provide information on how claiming at different ages raises or lowers monthly benefits, and that any benefits withheld because of the retirement earnings test will raise monthly benefits after FRA. For example, one online screen asks the claimant to indicate when he or she would like to start taking benefits, and explains that if the claimant chooses to start receiving benefits early, before FRA, monthly benefits will be reduced. In another online screen, SSA explains that any benefits withheld because of the annual earnings test will raise monthly benefits after FRA. Similar to in-person interviews, however, the online application process does not inform claimants that benefits are based on the highest 35 years of earnings; that life expectancy and longevity risk are important considerations in deciding when to claim; and that benefits may be taxed. And, as with in-person claims, the online claims process may inadvertently influence people’s claiming age through the information it presents. For example, if a claimant has the option of starting benefits retroactively (i.e., taking a lump sum), and chooses not to, the online process asks the claimant to provide a reason. This step runs the risk of making the claimant believe he is making an unusual decision, or a mistake, by choosing a later claiming date. Many American retirees rely greatly on Social Security, making it imperative that they have the information they need to make wise claiming decisions. Therefore, it is important that claimants understand key SSA rules and consider other factors that can assist them in making informed decisions about when to claim. For many people, SSA may be their only source of information when making the important decision of when to claim retirement benefits. Though we found SSA’s claims process largely provides accurate information and avoids overt financial advice, certain key information is not provided or explained clearly during the claims process. POMS specifies that claims specialists should explain the advantages and disadvantages of filing for Social Security benefits to help individuals make informed filing decisions. However, because SSA is not fully operationalizing this guidance in the claims interviews, some claimants do not receive all the information that is critical to making informed claiming decisions. While SSA offers key retirement planning information on its website and in written publications, it cannot be assumed that potential claimants have obtained, read, or understood it when they actually claim benefits, especially given documented gaps in people’s knowledge about Social Security. Claims specialists we observed performed their jobs with professionalism and seemed very willing to help people navigate a complicated decision by providing accurate information and answering questions. However, in some areas, such as benefits of delayed filing and the inappropriate use of breakeven analysis, information was sometimes not provided consistent with POMS. Additionally, the claims interview could better inform claimants that benefits are based on 35 years of earnings, that benefits withheld due to the retirement earnings test are accounted for after FRA, that taking lump-sum retroactive benefits reduces future monthly benefits permanently, and that life expectancy and longevity risk should be a consideration in a person’s decision to claim. The claims process, either in person with a claims specialist or online, allows for SSA to add additional questions or prompts—potentially using language SSA already provides on its website and in publications. This information would help each individual receive the information they need to make an optimal decision. While we recognize that SSA claims specialists face time constraints in processing claims, providing such information would not necessarily add much time to a typical claim or inquiry. In some cases, such as with breakeven ages, claims specialists could actually save time by providing less information than they do. Given the near- universality and broad dependence on Social Security for retirement income, improving the claims process could have a significant impact on people’s retirement security. To ensure that key information provided by claims specialists to potential claimants of Social Security retirement benefits is clear and consistent with POMS, the Commissioner of the SSA should take steps to ensure: when applicable, claims specialists inform that delaying claiming will result in permanently higher monthly benefit amounts, and at least offer to provide claimants their estimated benefits at their current age, at FRA (unless the claimant is already older than FRA), and age 70; and claims specialists understand that they should avoid the use of breakeven analysis to compare benefits at different claiming ages. In addition, to ensure potential claimants are consistently provided with key information during the claiming process to help them make informed decisions about when to claim benefits, SSA should take steps to ensure that: when applicable, claims specialists inform claimants that monthly benefit amounts are determined by the highest (indexed) 35 years of earnings, and that in some cases, additional work could increase benefits; when appropriate, claims specialists clearly explain the retirement earnings test and inform claimants that any benefits withheld because of earnings above the earnings limit will result in higher monthly benefits starting at FRA; claims specialists explain that lump sum retroactive benefits will result in a permanent reduction of monthly benefits. For the online claiming process, SSA should evaluate removing or revising the online question that asks claimants to provide a reason for not choosing retroactive benefits; and the claims process include basic information on how life expectancy and longevity risk may affect the decision to claim benefits. We provided a draft of this report to SSA for review and comment. SSA generally agreed with our recommendations. SSA’s comments are reproduced in appendix IV. They correctly noted that some of our recommendations apply only to certain claimants; for example, additional information on the retirement earnings test would be important to provide only to a claimant who is younger than FRA and who intends to work after claiming. SSA emphasized that their claims specialists are not equipped to serve as financial advisors, and that claimants must select the age that is best for them based on their individual circumstances. We agree, and believe that our recommendations are consistent with the principle of providing important information—not financial advice—to claimants. To the extent that SSA can incorporate the information we recommend into the claims process, we believe that this will improve the likelihood that claimants consistently receive the information they need to decide their own optimal claiming decisions. SSA also provided technical comments, which we incorporated as appropriate. We are sending copies of this report to the Commissioner of the Social Security Administration, appropriate congressional committees, and other interested parties. In addition, this report is available at no charge on the GAO website at http://www.gao.gov. If you or your staff have any questions about this report, please contact me at (202) 512-7215 or [email protected]. Contact points for our Offices of Congressional Relations and Public Affairs may be found on the last page of this report. GAO staff who made contributions to this report are listed in appendix V. In this report, we examined: (1) the extent to which people understand Social Security rules affecting their benefits, and other factors that may influence when they claim retirement benefits; and (2) the information that the Social Security Administration (SSA) provides to individuals inquiring about claiming that enables them to make informed claiming decisions. We conducted this research from July 2015 to September 2016 in accordance with generally accepted government auditing standards. Those standards require that we plan and perform the audit to obtain sufficient, appropriate evidence to provide a reasonable basis for our findings and conclusions based on our audit objectives. We believe that the evidence we obtained provides a reasonable basis for our findings and conclusions based on our audit objectives. To address our objectives, we applied several methods for collecting and analyzing relevant information, as described below. We reviewed relevant federal laws and regulations for requirements relating to SSA providing the public with information about retirement benefits. Additionally, we reviewed relevant sections of the SSA Program Operations Manual System (POMS), a primary source of information used by SSA employees to process claims for Social Security benefits. We also interviewed SSA headquarters officials and District managers in seven field offices to learn how Social Security retirement benefit claims are processed. Using the Internet and expert referrals, we found and reviewed surveys and academic studies that assessed understanding of Social Security benefits and identified the factors that influence claiming. The search comprised publications from GAO reports, other government agencies, research organizations, scholarly journals, and the financial industry from 2010 to 2015. Of the studies we found, nine were most relevant to our work. These studies are described in appendix II. We also interviewed a judgmental selection of Social Security experts from academia, public policy organizations, and financial firms to obtain their views on how SSA could provide information to better inform people about claiming benefits. Based on our review of studies and on expert interviews, we identified key information categories that are central to making an informed decision about when to claim retirement benefits. We identified materials to review from our own examination and search of SSA’s website. We reviewed SSA’s publications, web pages, and calculators that provided information related to understanding and filing for retirement benefits, including how benefits are calculated. We reviewed each of the publications and web pages and assessed how they addressed each of the key information components we found from our literature review and expert interviews that were not well understood by prospective claimants. A second reviewer verified any initial assessments that were used in this report. We reviewed the calculators to see if, collectively, they addressed each of the key information categories. We observed a demonstration of SSA’s online retirement claims process and a nongeneralizable sample of 30 face-to-face claims applications and inquiries at 7 SSA field offices. We identified the local SSA offices where we would observe the retirement claims process, taking into consideration regional geographic diversity, income level, urban and rural composition, and the number of new claims each office processes. SSA headquarters provided local office data from each of the 10 SSA regions. After reviewing those data and considering logistical issues, we selected 7 offices in the Philadelphia, Chicago, and San Francisco regions. We used SSA data to identify local offices with high volumes of inquiries and visits. We then looked at the number of retirement claims those offices were processing and considered thoughts of SSA regional and field office officials about pros and cons of each local office we had preliminarily chosen, such as foot traffic or appointment schedules. Based on our discussions with SSA headquarters and regional officials, and our analysis of data on the field offices, we selected SSA field offices in Alexandria, VA; Winchester, VA; and Arlington, VA (Philadelphia region); San Francisco, CA and Santa Rosa, CA (San Francisco region); and Mount Prospect, IL and Hillside, IL (Chicago region). We conducted these site visits from March to May 2016. At our site visits, we observed SSA claims specialists handle claims intakes or inquiries from claimants for retirement benefits (including for survivors and spousal benefits). We noted the elements of the claims process and information the specialists provided to claimants during this process and evaluated what we observed against POMS guidance and to determine how specialists were addressing the six key information categories we identified from our literature review and expert interviews. We also interviewed managers and claims specialists at these offices about the process for completing retirement benefit claims, training on completing claims applications, and how claims specialists’ performance is evaluated. To learn about the online claims process for retirement benefits, we observed a screen-by-screen demonstration by an SSA official covering the steps of a retirement claim, and asked the official questions about the process and the information provided. We did not observe an actual online claim, but saw all the screens that potential claimants see and the steps that they follow when a retirement claim is filed online through SSA’s website. Michael Collins (Assistant Director), Mark Glickman (Assistant Director), Laurel Beedon, Lilia Chaidez, Susan Chin, and Joel Marus made significant contributions to this report. In addition, support was provided by Susan Aschoff, James Bennett, Deborah Bland, Scott Clayton, Alexander Galuten, Teresa Heger, Tom Moscovitch, Ardith Spence, Frank Todisco (Chief Actuary), and Walter Vance. Retirement Security: Low Defined Contribution Savings May Pose Challenges. GAO-16-408. Washington, D.C.: May 5, 2016. Retirement Security: Shorter Life Expectancy Reduces Projected Lifetime Benefits for Lower Earners. GAO-16-354. Washington, D.C.: March 25, 2016. Social Security’s Future: Answers to Key Questions. GAO-16-75SP. Washington, D.C.: October 27, 2015. Retirement Security: Federal Action Could Help State Efforts to Expand Private Sector Coverage. GAO-15-556. Washington, D.C.: September 10, 2015. Retirement Security: Most Households Approaching Retirement Have Low Savings. GAO-15-419. Washington, D.C.: May 12, 2015. Retirement Security: Challenges for Those Claiming Social Security Benefits Early and New Health Coverage Options. GAO-14-311. Washington, D.C.: April 23, 2014. Retirement Security: Trends in Marriage and Work Patterns May Increase Economic Vulnerability for Some Retirees. GAO-14-33. Washington, D.C.: January 15, 2014. Unemployed Older Workers: Many Experience Challenges Regaining Employment and Face Reduced Retirement Security. GAO-12-445. Washington, D.C.: April 25, 2012. Social Security Statements: Observations on SSA’s Plans for the Social Security Statement. GAO-11-787T. Washington, D.C.: July 8, 2011. Retirement Income: Ensuring Income throughout Retirement Requires Difficult Choices. GAO-11-400. Washington, D.C.: June 7, 2011. Social Security Reform: Raising the Retirement Ages Would Have Implications for Older Workers and SSA Disability Rolls. GAO-11-125. Washington, D.C.: November 18, 2010. | Many eligible individuals claim Social Security retirement benefits at the earliest eligibility age, even though they would receive higher benefits if they waited until older ages. In order to make an informed decision about when to claim, people need to understand how various Social Security rules and other factors affect benefit amounts. GAO was asked to examine these issues. This report examines (1) the extent to which people understand Social Security rules affecting their retirement benefits; and (2) what information SSA provides to individuals to enable them to make informed claiming decisions. GAO observed a demonstration of the online claims process and a nongeneralizable sample of 30 in-person claims applications and inquiries in 7 field offices; reviewed applicable federal laws, regulations, and agency documentation; reviewed surveys and academic studies, selected in part based on expert referrals and a comprehensive review of the research literature; and interviewed Social Security experts and agency officials. GAO's review of nine surveys and academic studies, and interviews with retirement experts, suggest that many individuals do not fully understand key details of Social Security rules that can potentially affect their retirement benefits. For example, while some people understand that delaying claiming leads to higher monthly benefits, many are unclear about the actual amount that benefits increase with claiming age. The studies and surveys also found widespread misunderstanding about whether spousal benefits are available, how monthly benefits are determined, and how the retirement earnings test works. Understanding these rules and other information, such as life expectancy and longevity risk, could be central to people making well-informed decisions about when to claim benefits. By having this understanding of retirement benefits, people would also be in a better position to balance other factors that influence when they should claim benefits, including financial need, poor health, and psychological factors. The Social Security Administration (SSA) makes comprehensive information on key rules and other considerations related to claiming retirement benefits available through its publications, website, personalized benefits statements, and online calculators. However, GAO observed 30 in-person claims at SSA field offices and found that claimants were not consistently provided key information that people may need to make well-informed decisions. For example, in 8 of 26 claims interviews in which the claimant could have received higher monthly benefits by waiting until a later age, the claims specialist did not discuss the advantages and disadvantages of delaying claiming. Further, only 7 of the 18 claimants for whom the retirement earnings test could potentially apply were given complete information about how the test worked. SSA's Program Operations Manual System (POMS) states that claims specialists should explain the advantages and disadvantages of filing an application so that the individual can make an informed filing decision. The problems we observed during the claims interviews occurred in part because the questions included in the claims process did not specifically cover some key information. Online applicants have more access to key information on the screen or through tabs and pop-up boxes as they complete an application. However, similar to in-person interviews, the online application process does not inform claimants that benefits are based on the highest 35 years of earnings or that life expectancy is an important consideration in deciding when to claim. GAO is making six recommendations to SSA, including that SSA take steps to ensure that claims specialists provide information on delayed benefits that is consistent with POMS, and that the claims process provides claimants better information on the retirement earnings test. SSA generally agreed with our recommendations. recommendations.ns.ommendations. |
Located just north of the equator in the Pacific Ocean are the two island nations of the FSM and the RMI (see fig. 1). The FSM is a grouping of 607 small islands—including 65 of which are inhabited—in the western Pacific totaling 270 square miles. The country, which is comprised of four states— Pohnpei, Chuuk, Yap, and Kosrae, was home to an estimated 107,000 people in 2000. The RMI, which is made up of more than 1,200 islands, islets, and atolls, has a total land area of about 70 square miles and a population that numbered 50,840 in 1999. The islands of both of these countries are spread out over vast stretches of the Pacific Ocean. In 1986, after 17 years of negotiations, the United States and the FSM and the RMI entered into the Compact of Free Association. This Compact represented a new phase of the unique and special relationship that has existed between the United States and these island areas since World War II. The three main U.S. goals for the Compact—(1) to secure self- government for the FSM and the RMI, (2) to assure certain national security rights for all the parties, and (3) to assist the FSM and the RMI in their efforts to advance economic development and self-sufficiency— represent a continuation of U.S. rights and obligations first embodied in the U.N. trusteeship agreement that made the United States the Administering Authority of the Trust Territory of the Pacific Islands. The Trust Territory included the area that currently comprises the FSM and the RMI, as well as other Pacific islands liberated from Japan during World War II. The Compact of Free Association provided a framework for the United States to work toward achieving its three main goals. Two goals have been met through the Compact and its related agreements: (1) the FSM and the RMI became Freely Associated States, independent in all respects except for defense and security matters; and (2) national security rights for all the parties have been assured. Through the Compact and related agreements, the United States assumed full authority and responsibility for security and defense matters in the FSM and the RMI. The third objective of the Compact, promoting economic development and self-sufficiency, was to be accomplished primarily through direct financial payments from the United States to the FSM and the RMI. The provisions governing the amount and distribution of this economic assistance are due to expire, unless renegotiated and subsequently reauthorized by the Congress, in late 2003. The Department of the Interior’s Office of Insular Affairs has the responsibility for disbursing and monitoring this assistance, which includes a requirement to work with the Department of State to consult annually with both countries. Another aspect of the special relationship between the FSM and the RMI and the United States involves the unique immigration rights that the Compact granted. Through the Compact, citizens of both nations are allowed to live and work in the United States as non-immigrants, without limitations on their length of stay. Further, the Compact exempts FSM and RMI migrating citizens from meeting U.S. passport, visa, and labor certification requirements. Unlike economic assistance provisions, the Compact’s migration provisions are not scheduled to expire in 2003. In recognition of the potential adverse impacts that Hawaii and nearby U.S. commonwealths and territories could face as result of an influx in migrants, the Congress authorized Compact impact payments to address the financial impact of migrants on Guam, Hawaii, and the CNMI. Finally, the Compact served as the vehicle to reach a full settlement of all compensation claims (past, present, and future) related to U.S. nuclear tests conducted on Marshallese atolls between 1946 and 1958. In a Compact-related agreement, the U.S. government agreed to provide $150 million to create a trust fund, targeted to produce at least $18 million in annual income to be disbursed in specified amounts over 15 years to persons displaced from the four affected RMI atolls—Bikini, Enewetak, Rongelap, and Utirik—and to the RMI government for health care for the population of the four RMI atolls and to fund a Nuclear Claims Tribunal.While the Compact and its related agreements represented the full settlement of all nuclear claims, it provided the RMI the right to submit a petition of changed circumstance to the U.S. Congress requesting additional compensation. Such a petition has recently been prepared and submitted. While the FSM and the RMI spent nearly $1.6 billion in Compact direct funding during 1987 through 1998, these funds have contributed little to improving economic development. The FSM and the RMI used the funds mainly for government operations, physical and social infrastructure, and business ventures. However, many business ventures and infrastructure investments did not succeed. They failed mainly because of poor planning, construction and maintenance problems, and misuse of funds. Despite some growth in economic self-sufficiency, the FSM and the RMI remain dependent on U.S. assistance. In addition, the FSM, the RMI, and the United States have not complied with accountability requirements specified in the Compact for all three countries. As a result, the U.S. government’s ability to oversee the use of Compact funds and ensure that they are used effectively has been limited. From 1987 through 1998, during the first 12 years of the Compact, the FSM spent about $1.08 billion in Compact direct funding provided by the U.S. Department of the Interior, while the RMI spent about $510 million. Nevertheless, these expenditures contributed little to advancing economic development in those two countries. The FSM and the RMI spent the nearly $1.6 billion on government operations, physical and social infrastructure, and business ventures. The FSM spent $510 million for general government operations, while the RMI spent $107 million. This spending generally helped to maintain high levels of public sector employment and wages but acted as a disincentive to private sector growth. However, in response to scheduled reductions in U.S. assistance under the Compact, the FSM and the RMI have begun economic reform efforts. These efforts are aimed at, among other things, decreasing their large public sectors through reductions in government personnel and wage freezes. In addition, the Compact did not preclude the FSM or the RMI from borrowing funds in anticipation of U.S. assistance. Using this flexibility, from the late 1980s to the mid-1990s, the FSM and the RMI issued nearly $389 million in Compact revenue-backed bonds in order to obtain greater funding in the earlier years of the Compact. Repayments on bond debt have limited the availability of Compact funds for other uses in the RMI, particularly in recent years. For example, in 1998, the RMI spent $39 million in Compact funds. Of this total amount, $25 million went to service debt. The RMI was also required to spend an additional $8 million to compensate landowners for U.S. military use of Kwajalein Atoll. This left only $6 million (15 percent) in Compact expenditures to support new capital investment, general government operations, or other areas. The FSM and the RMI have spent at least $256 million in Compact funds for physical infrastructure improvements and operations. Both nations viewed this area as critical to improving the quality of life and creating an environment attractive to private businesses. While these improvements have enhanced the quality of life, they have not contributed to significant economic growth in the two countries. Expenditures in this area for the years 1987 through 1998 included (1) over $122 million in both countries to operate and improve energy and communications; (2) about $5.9 million in the FSM to maintain ships that haul cargo between islands and $27 million for the RMI national airline (through fiscal year 1997); and (3) $114 million in both countries to invest in social institutions, including schools and hospitals. Compact funds spent in the two countries for business ventures amounted to $188 million, according to our analysis. These funds were invested in fisheries, agriculture, aquaculture, livestock, business advisory services, handicrafts, tourism, and manufacturing. When we visited the FSM and the RMI, government officials reported that few Compact-funded business ventures were operating at a profit, if at all. Government officials from both countries told us that investing in business ventures has been a bad strategy, and using Compact funds for this purpose had been a failure. Some examples of failed business ventures include (1) $60 million in the FSM spent on fish processing plants that were inactive when we visited in March 2000 (see fig. 2) and (2) a garment factory in the RMI that received almost $2.4 million in Compact funds but was never operated and is closed (see fig. 3). During our visit to the FSM and the RMI in March 2000, we determined that many Compact-funded projects (both infrastructure and business ventures) experienced problems as a result of poor planning and management, construction and maintenance difficulties, and misuse of funds. These problems reduced the effectiveness of Compact expenditures. A few examples of such problems included the following: Poor planning and management: The RMI government spent $9.2 million in Compact funds to build a road, or “causeway,” from Ebeye, an extremely crowded island in the Kwajalein Atoll, to a planned development on a nearby island. The causeway was meant to relieve population problems on Ebeye by allowing residents to move to additional islands connected by the road. However, the causeway remains unfinished. Ebeye officials told us that the causeway is covered with water in places during high tide. Construction and maintenance difficulties: The capitol building in the RMI, built during the 1990s using $8.3 million in Compact funding, had visible signs of deterioration when we visited. Stairs were rusting, elevators were inoperable, and roof leaks were evident throughout the building. In addition, we found inadequate or nonexistent maintenance in numerous FSM schools and hospitals we visited, despite the government’s spending $80 million in Compact funding designated for health and education. We visited schools in the FSM states of Pohnpei and Chuuk where sections of ceilings were missing, bathrooms were in disrepair, and electricity had been disconnected. At the Pohnpei hospital, the Director told us the hospital lacked adequate funding, drugs, and supplies. As a cost-cutting measure, the hospital no longer provided sheets to patients. Misuse of funds: As an example of what appeared to be a misuse of funds, the FSM used funds in what the U.S. embassy described as “cars and boats for votes.” The FSM Public Auditor reported that $1.5 million was spent on cars and boats that were simply given away to individuals for their personal use (see fig. 4). Although the procurement documents for purchasing boats stated that they were to be used for economic purposes, we learned in interviews with two different recipients that they had received the boats with no restriction placed on their use. Furthermore, the embassy reported that another 187 cars had arrived in May 1999 and were used for “re-election assistance.” Since 1987, the FSM and the RMI have reduced their dependence on Compact funds. Total U.S. funding (Compact direct funding as well as U.S. program funds) as a percentage of total government revenue has fallen in both countries, particularly in the FSM. However, both countries remain highly dependent on U.S. assistance, which still provides more than half of total government revenues in each country. In 1998, U.S. funding accounted for 54 percent and 68 percent of total FSM and RMI total government revenues, respectively. This assistance has maintained standards of living that are artificially higher than could be achieved in the absence of Compact funding, according to our analysis. Although the Compact established accountability requirements for all three countries, none of them has fully complied with the requirements. The FSM and the RMI are required to submit 5-year economic development plans and annual reports. Both countries have, for the most part, submitted the required development plans and annual reports, but these documents fell short of meeting their intended purposes. For example, 5-year FSM and RMI economic development plans gave inadequate attention to broad development goals and plan implementation, as the Compact required. Further, the RMI submitted only 7 of the 13 required annual reports on development plan implementation and Compact fund expenditures. These plans inadequately described how Compact funds were used to achieve development goals and were submitted too late to be relevant for timely U.S. oversight. In addition, the FSM and the RMI have not demonstrated adequate control over the use of Compact funds. According to their annual financial audits, the FSM and the RMI did not maintain or provide sufficient financial records to allow for effective auditing of Compact funds. Further, program audits by the FSM Public Auditor found inappropriate use of Compact funds and extensive management weaknesses in accounting for Compact funds. The U.S. government also did not meet its oversight requirements. For example, the United States did not initiate required annual consultations with the two countries until 1994—7 years after the Compact went into effect. U.S. agencies took little action to address questioned costs identified in the annual independent audits of the FSM and the RMI. Moreover, Interior resources devoted to Compact oversight were minimal. At the time of our report, Interior had one person in Washington, D.C., who worked with the two Compact nations, as well as one person in the FSM and no one in the RMI. Interior officials have claimed that interagency disagreements between the Departments of State and the Interior concerning the level of and responsibility for oversight, and a Compact provision guaranteeing payment of Compact funds (“full faith and credit”), have limited the U.S. government’s ability to oversee the use of Compact funds and ensure that they are used effectively. The migration of citizens from the FSM and the RMI has had a significant impact on three U.S. island areas: Guam, Hawaii, and the CNMI. As of 1998, about 14,000 Compact migrants were living in these areas. Migrants were working mainly in low-skill, low-wage jobs and costing the islands’ governments an estimated $371 million to $399 million mainly in health care and education costs. In addition, the migrants have raised public health concerns in Guam, Hawaii, and the CNMI. The Compact provided for two options to address the impact of migrants from the FSM and the RMI—compensation for Guam, Hawaii, and the CNMI and limitations on the amount of time migrants can stay in U.S. territories without being self- supporting. However, government officials in Guam, Hawaii, and the CNMI have expressed dissatisfaction with the options’ use. Finally, changes in U.S. assistance to the FSM and the RMI might affect the rate of migration. For example, a significant reduction in aid that also led to a decline in government employment would be expected to increase migration. Conversely, if funds were targeted for health and education, migration and migrant impact might decrease. According to Department of the Interior surveys, almost 14,000 Compact migrants (i.e., those migrants who came to a U.S. area after Compact implementation in 1986) were living in Guam and Hawaii in 1997 and the CNMI in 1998. Guam had the largest number of Compact migrants at 6,550, followed by Hawaii at 5,500 and the CNMI at 1,755. Migrants from Compact nations (regardless of when they migrated) accounted for 5 percent of Guam’s total population and around 4 percent of the CNMI’s total population. In contrast, they accounted for only 0.5 percent of Hawaii’s total population. For those migrants surveyed, employment opportunities were the primary reason for moving to U.S. areas, while those pursuing education and dependents of those employed also were living in the U.S. areas. The majority of Compact migrants were living in poverty in all three U.S. areas, with the CNMI having the lowest poverty rate (51 percent of all migrants living below the poverty level) and Guam having the highest (67 percent). In all three areas, many Compact migrants were working in jobs that required few skills and paid low wages, such as cleaning or food services. U.S. island government officials and migrant community members told us that Compact migrants often accept jobs that local workers refuse to take. Compact migrants surveyed were not highly educated, with few having college degrees and just over 50 percent of adults having graduated from high school. The Guam, Hawaii, and CNMI governments have identified significant costs for services provided to Micronesian nation migrants. For 1986 through 2000, these three governments have estimated a collective impact of between $371 million and $399 million (see table 1). Guam’s impact estimate for that period totaled $180 million, while the CNMI’s estimate was $105 million to $133 million. The government of Hawaii, which prepared impact estimates from 1996 through 2000 but only had partial data for 1986 through 1995, estimated a total impact of $86 million. Costs for the three areas have been focused in the areas of health care and education, though government officials identified public safety and welfare costs as well. While the reported impact costs of Guam and Hawaii have been increasing over time, the CNMI’s impact estimates decreased by almost 40 percent from fiscal year 1998 to fiscal year 2000. This reduction was reportedly due to a decreasing presence of Micronesian migrants in the CNMI. The 2000 impact estimates that the three areas prepared showed that impact amounts represented about 7 percent, 0.5 percent, and 4 percent of the budget revenues of Guam, Hawaii, and the CNMI, respectively, for that year. The health care systems of the FSM and the RMI are viewed by U.S. island area government officials as inadequate to meet the needs of the population, providing incentives to travel or move to the United States in order to receive appropriate health care. Health costs were the greatest area of impact for the CNMI in 2000, accounting for 43 percent of all identified impact costs. According to a CNMI Department of Public Health Services official, neonatal intensive care is a key issue for Compact migrants. This official noted that expectant mothers often have no insurance and receive no prenatal care at all until they arrive at the government’s Community Health Center, ready to deliver. Guam officials also noted that expectant mothers arrive at Guam Memorial Hospital (which receives government funding) close to delivery and with no prior prenatal care. Officials from the Guam hospital also expressed frustration that Compact migrants often rely on the hospital’s emergency room for primary health care and that many conditions treated are not urgent. Hawaii’s health care costs in 2000 went to support migrants who, as of April 2000, no longer received federal health benefits (Medicaid), due to U.S. welfare reform legislation. A Hawaii Department of Health official noted that it is illogical for the United States to make migration to the United States easily accessible for poor FSM and RMI citizens but then make health care difficult to obtain. As with all other non-immigrant groups, health screenings are not required of Compact migrants prior to entering the United States. Inadequate school systems in the FSM and the RMI are another reason for migration. According to Guam and CNMI education officials, there is an incentive for FSM students to come to those two U.S. locations for public education, as teachers in the FSM do not have 4-year university degrees, and the education infrastructure is inadequate. Guam and Hawaii’s costs in 2000 for the migrants were primarily in education, accounting for 54 percent and 58 percent, respectively, of total impact. In their most recent impact reports, students from Compact nations accounted for about 11 percent, 1 percent, and 9 percent of the total student population in Guam, Hawaii, and the CNMI, respectively. Officials from the Departments of Education in Guam and Hawaii noted that these students have a tendency to be transient, entering and leaving school a few times each year. Moreover, education officials in Guam and the CNMI said that some students have never been in a school classroom prior to moving to a U.S. area. This makes their integration into the school system difficult. In addition to financial costs, public health concerns have been raised as migrant impacts, particularly by Hawaii, due to the number of Compact migrants with communicable diseases entering U.S. island areas. For example, in its 1997 impact assessment, Hawaii stated that public health was the state’s most pressing concern and noted a recent outbreak of Hansen’s Disease (leprosy) on the island of Hawaii among Compact migrants. A CNMI Department of Public Health Services official told us that the number of cases of tuberculosis and Hansen’s Disease diagnosed for citizens of Compact countries is increasing. Also, a Guam Department of Public Health and Social Services official reported that concerns exist regarding these migrants and communicable diseases, low immunization rates, and noncompliance with treatment regimens. The Compact and its enabling legislation include two options to address the impact of migrants. The extent to which these two options have been used has not met with the satisfaction of any of the three U.S. island area governments who believe, among other things, that additional funding for impact costs is necessary. The law states that the Congress will act “sympathetically and expeditiously” to redress adverse consequences of Compact implementation. It provided authorization for appropriation of funds to cover the costs incurred, if any, by Guam, Hawaii, and the CNMI resulting from any increased demands placed on educational and social services by migrants from the FSM and the RMI. Guam has received about $41 million in compensation (about 23 percent of total estimated impact costs) since the Compact went into effect, and the CNMI has received almost $3.8 million (between about 3 to 4 percent of total estimated impact costs). Hawaii received no compensation through fiscal year 2001. Further, the Compact states that nondiscriminatory limitations may be placed on the rights of Compact migrants to establish “habitual residence” (continuing residence) in a territory or possession of the United States. The “habitual residence” restriction is only applicable to Guam, as the CNMI is a commonwealth that controls its own immigration, and Hawaii is a state. Such limitations went into effect in September 2000 and provide that, in part, migrants who have been in the U.S. territory for a total of 365 cumulative days are subject to removal if they are not, and have not been, self-supporting for a period exceeding 60 consecutive days or have received unauthorized public benefits by fraud or willful misrepresentation. Immigration and Naturalization Service officials we interviewed viewed the regulations as difficult to enforce and, therefore, unlikely to have much impact. Changes in U.S. economic assistance to the FSM and the RMI may alter the rate of migration. For example, significant reductions in aid to the FSM and the RMI that reduce government employment would be expected to spur migration. On the other hand, targeting future U.S. assistance to the FSM and the RMI for health and education purposes could reduce some of the motivation to migrate (although migration will continue as long as employment opportunities in both countries remain limited). Furthermore, improvements in migrant health and education status would be expected to reduce migrant impact on U.S. destinations. Additionally, changes in Compact provisions, such as requiring health screening, could reduce the impact of migrants on U.S. areas, though government officials from the two Pacific Island nations do not view migration provisions as subject to renegotiation. Major donors to Pacific Island nations, including Australia, Japan, New Zealand, the United Kingdom, the United States, the Asian Development Bank (ADB), and the European Union, expect that most of these countries will need assistance for the foreseeable future in order to achieve improvements in development. In addition, they have stated that one of their primary goals—promoting economic self-sufficiency—is a difficult challenge for many of these island nations and an unrealistic goal for others. Further, their experiences have shown that providing aid involves significant trade-offs, such as dealing with multiple policy objectives, historical ties, and administrative costs. In an attempt to improve the effectiveness and efficiency of their assistance, these donors have tried a variety of strategies, some of which may provide useful examples for future U.S. aid. Major donors to Pacific Island nations have provided about $11 billion to this region from 1987 through 1999. Two of the main objectives of this assistance, according to planning documents and interviews with officials, were to promote economic self-sufficiency and alleviate poverty. However, the donors realize that achieving economic self-sufficiency will be a difficult goal for some and an unrealistic goal for others. For instance, according to an ADB report, “t is widely understood that the smallest and least-endowed states will need to be assisted by free transfers of resources indefinitely, if they are to maintain standards of welfare that the donors of the aid can bear to look at….” One measure that illustrates the degree to which countries are dependent on aid to maintain standards of living is aid as a percentage of gross domestic product (GDP). In 1998, the FSM and the RMI were two of three most aid-dependent places in the Pacific region, with economic assistance making up over 50 percent and 70 percent of their respective GDPs, according to our analysis. In addition, the FSM and the RMI received a high level of aid per capita compared to most other Pacific Island nations. The major donors (including the United States) to the Pacific Island nations are aware that providing assistance for economic development often involves trade-offs among policy issues and other interests. For example, Australia, New Zealand, and the United States initially chose to provide unrestricted budget support to their former territories or administrative “districts” as a means of helping them to separate themselves from “colonialist” administration. This choice required a trade- off between political goals and oversight concerns. In the case of the Compact, the U.S. Department of State counseled the Department of the Interior to be lenient in reviewing the use of Compact funds by the FSM and the RMI during the early years of the Compact. In those years, State placed a high priority on maintaining friendly relations with the FSM and the RMI. As a result, a trade-off was made between the foreign policy goals and the need for providing accountability. Trade-offs also exist between the administrative costs associated with aid disbursement and oversight and accountability and effectiveness goals. Again, in the current Compact, the United States chose a strategy of providing relatively unrestricted cash transfers to the FSM and the RMI. This low-cost approach has contributed to some of the problems related to effectiveness and accountability that we have identified today. Based on their experiences, major donors have used a range of assistance strategies in striving to reach the desired balance of aid effectiveness, accountability, and efficiency. Taking into account the trade-offs involved in various approaches, the major Pacific donors have adopted the following strategies to improve the effectiveness and efficiency of their assistance: Five of the major donors have supported projects to improve governance in recipient countries, such as developing a rule of law, as a foundation for effective development. ADB has adopted an approach to development that tailors aid to the individual characteristics of recipients rather than applying the same strategy to all island nations. ADB has advocated a trust fund for the RMI, based on its assessment of the country’s growth potential, while it has put forth a different strategy for the FSM. Two donors have built flexibility into their assistance strategies, which enables them to provide incentives for positive achievements or to stop assistance to recipients under undesirable conditions, such as political instability. For example, New Zealand suspended funding to the governments of Fiji, in response to a coup, and to the Solomon Islands, in response to civil unrest, while maintaining the assistance to community organizations, such as nongovernmental health providers, so that aid for basic human services could continue. Australia is trying a sectorwide approach to assistance. This approach consists of a pilot project in the health sector in Papua New Guinea in an effort to encourage the recipient country to take ownership of the development process on a limited basis. To reduce its administrative costs while trying to maintain aid effectiveness, Australia began moving from a portfolio of 16 individual health projects to cofunding (with other donors) sectorwide projects and programs identified in Papua New Guinea’s national health plan. In exchange for giving up control over the projects, Australia gained a voice in developing the national strategy and allocating resources for health projects. Six of the major donors have relied on trust funds in Pacific Islands, such as Tuvalu, Kiribati, and Nauru, as a means of providing recipients with a self-sustaining source of future revenue. According to ADB, the Tuvalu and Kiribati trust funds have been successful because they were designed to protect the investment capital from misuse. The United Kingdom was able to discontinue its annual budget support for Tuvalu because the trust fund provided the means to balance the budget. Our review of major donors’ experiences in the Pacific could provide some guidance to the United States as it negotiates further economic assistance to the FSM and the RMI. These lessons include the following: Assistance strategies involve trade-offs between cost, effectiveness, and accountability. In the current Compact, the United States chose a low administrative cost strategy of providing relatively unrestricted cash transfers, which led to problems with the effectiveness of and accountability over the assistance. State and Interior officials have said that the United States will need significantly more staff to administer an assistance program to the FSM and the RMI that has increased accountability as an objective. Strategies tailored to specific island conditions may be more effective by better adapting to the recipient’s needs, resources, and capacities. The current structure of the Compact, which generally applies the same objectives and strategies for both the FSM and the RMI, does not account for these differences. Flexible strategies are important to adapt assistance to changing circumstances and needs. The U.S. assistance to the FSM and the RMI through the first 15 years of the Compact was distributed according to a negotiated formula that did not allow changes in the distribution of the funds. Moreover, Interior officials believed that the provision of assistance backed by the “full faith and credit” of the United States, combined with a lack of controls typically available with domestic grant assistance, severely limited its ability to withhold funds, even in cases of misuse. Well-designed trust funds can provide a sustainable source of assistance and reduce long-term aid dependence. Such a trust fund may provide the United States with the opportunity to end its annual assistance. Compact funds spent on economic development have been largely ineffective in promoting economic growth. Many development efforts have been unsuccessful because of poor planning and management and the apparent misuse of funds. Bad investments in business ventures and the maintenance of a large public sector also limited improvements in economic development. Both the FSM and the RMI remain highly dependent on U.S. assistance and, thus, economic self-sufficiency at current living standards remains a distant goal for those countries. Compact migration has clearly had a significant impact on Guam, Hawaii, and the CNMI and has required government services in key areas. Compact migrants have required local expenditures in areas such as health and education and, further, have particularly affected the budgetary resources of Guam and the CNMI—U.S. island locations that have relatively small populations and budgets. The budgetary impact on Hawaii can be expected to grow as Hawaii begins to absorb health care costs that the U.S. government once covered. Public health problems are also an important concern for all three U.S. island areas. The negotiation of new economic assistance presents an opportunity for the United States to benefit from its 15-year experience under the Compact and the experiences of other aid donors to Pacific region, in order to potentially increase the effectiveness of the assistance it provides. The United States can strengthen accountability over funds, introduce flexibility into how assistance is provided, and consider different approaches for the FSM and the RMI, such as the use of trust funds. Providing increased accountability requires additional investment, on the part of the U.S. government, in administrating Compact assistance. In order to help determine the extent and nature of future assistance to the FSM and the RMI, we have previously recommended that the Secretary of State, in consultation with the Congress, develop guidelines regarding U.S. policy objectives for such assistance and its level, duration, and composition as well as U.S. oversight. Further, in order to provide greater control over and effectiveness of any future U.S. assistance, we have made certain recommendations to the Secretary of State regarding the negotiation of Compact provisions. For example, we have recommended that funds be provided primarily through specific grants that, among other things, direct the money to mutually agreed-upon priority areas and projects and that funds, either Compact or from local revenues, be set aside for capital project maintenance; annual reporting requirements for the FSM and the RMI be expanded and the consultation process with the United States strengthened; “full faith and credit” provisions be excluded from any future economic assistance agreement; and provisions be included that will provide that funds can be withheld from the FSM or the RMI for noncompliance with spending and oversight requirements. | The Compact of Free Association between the United States and the Federated States of Micronesia and the Republic of the Marshall Islands provides direct U.S. economic assistance and extends U.S. domestic programs and federal services to these two Pacific Island nations. The Compact also allows for migration from Micronesia and the Marshall Islands to the United States and establishes U.S. defense rights and obligations in the region. The Compact's economic assistance provisions were scheduled to expire in late 2001. However, the provisions will remain in effect for two more months while the United States and the two Pacific Island nations renegotiate them. Congress must renegotiate and reauthorize the expiring provisions by late 2003 for economic assistance to continue uninterrupted. The $1.6 billion provided under the Compact through 1998 has had little impact on economic development in Micronesia and the Marshall Islands and was subject to limited accountability. U.S. oversight was limited by interagency disagreements between the Departments of Interior and State, a lack of resources devoted to Compact oversight, and Interior's belief that Compact provisions restricted its ability to require accountability and withhold funds. Because of the lack of opportunities in the region, thousands of citizens in Micronesia and the Marshall Islands have migrated to the United States. Migrants to Guam, Hawaii, and the commonwealth of the Northern Mariana Islands generally work in unskilled, low-paying jobs. Between 1996 and 2000, the local governments have spent at least $371 million on assistance--primarily health care and education. Since 1987, several multilateral organizations and donor nations, including the United States, have given nearly $12 billion to the two Pacific island nations to promote economic self-sufficiency and alleviate poverty. The major donors believe that many Pacific Island nations will not be able to improve development without continued assistance. |
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